Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_____________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year fiscal year ended December 31, 1999
( ) 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
19807 North Creek Parkway
Bothell, WA 98011-8214
(425) 951-1200
(Address and telephone number of registrant's principal executive offices)
_____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.01 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing sale price of the registrant's Common Stock on
March 23, 2000, as reported on the Nasdaq National Market, was $290,107,597.
As of March 23, 2000, there were 9,320,726 shares of the registrant's Common
Stock outstanding.
Portions of the registrant's Proxy Statement relating to its 2000 annual meeting
of stockholders are incorporated by reference into Part III hereof. Such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after the registrant's fiscal year ended December 31, 1999.
SONOSITE, INC.
ANNUAL REPORT ON FORM 10-K
CONTENTS
Page No.
--------
PART I.................................................................. 1
Item 1. Business............................................ 1
Factors Affecting our Operating Results, Our
Business and Our Stock Price........................ 14
Item 2. Properties.......................................... 24
Item 3. Legal Proceedings................................... 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
PART II................................................................. 25
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 25
Item 6. Selected Financial Data............................. 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 27
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 30
Item 8. Financial Statements and Supplementary Data......... 31
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............... 51
PART III................................................................ 52
Item 10. Directors and Executive Officers of the Registrant.. 52
Item 11. Executive Compensation.............................. 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 52
Item 13. Certain Relationships and Related Transactions...... 52
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................... 53
-i-
PART I
Item 1. Business
Our disclosure and analysis in this report contain some forward-looking
statements. When used in the discussion, the words "believes," "expects,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements, but the absence of such statements does not mean
that a statement is not forward-looking. Such statements include, but are not
limited to, statements about our plans objectives, expectations and intentions
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those expected or implied by these forward-
looking statements. See "Factors Affecting our Operating Results, Our Business
and Our Stock Price." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. SonoSite undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrences of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports we file from time to time with the Securities and Exchange
Commission.
Overview
SonoSite is a leader in the design, development and commercialization of
miniaturized, high-performance, digital ultrasound imaging devices. We received
Section 510(k) clearance to market our first products, the SonoSite 180/TM/
highly portable ultrasound machine, the C60 curved-array abdominal transducer
and the ICT intra-cavital transvaginal transducer, in May 1999, and began
commercial shipments in September 1999. The SonoSite 180/TM/, together with one
transducer, weighs only 5.4 pounds and generates high-quality images comparable
to those produced by larger, more expensive ultrasound machines. We believe our
products expand access to high-quality ultrasound imaging by targeting the
replacement market for lower-priced ultrasound machines characterized by low-
quality images. In addition, the SonoSite 180/TM/ makes high-quality ultrasound
imaging available as a diagnostic tool to physicians at the point of care,
enabling physicians to bring ultrasound directly to the patient, instead of
requiring referral to an ultrasound specialist. Our initial products target
obstetricians and gynecologists who currently use ultrasound imaging within a
well-established reimbursement framework as well as radiologists and emergency
medicine physicians for whom the use of ultrasound is a recognized clinical
advantage. We intend to introduce subsequent products, based on the SonoSite 180
platform, which will be designed to target markets for ultrasound in clinical
specialties such as cardiology, emergency medicine, vascular medicine and
internal medicine.
Physicians utilize ultrasound imaging as an effective tool for the
noninvasive visual examination of soft tissue. However, they do not have
immediate point-of-care access to high-quality ultrasound imaging due to the
cost, size and complexity of existing high-quality ultrasound machines. These
machines are typically operated in centralized locations by specialists who
produce ultrasound images on a referral basis. We believe that our products put
the power of high-quality ultrasound imaging directly in the hands of the front-
line physicians who have utilized ultrasound as part of their diagnostic
procedures but either outsourced ultrasound imaging or have been required to
rely on lower-quality ultrasound imaging performed at the point of care. We
believe our products offer the following advantages:
1
. easy-to-use, affordable, highly portable, high-quality ultrasound
imaging at the point of care;
. physicians can use ultrasound imaging more frequently to identify
earlier those patients requiring more comprehensive diagnostic
procedures or specialist intervention;
. physicians can improve patient healthcare by beginning any required
treatments earlier;
. patients will not experience the "waiting trauma" associated with the
delay in obtaining ultrasound image results conducted on a referral
basis; and
. for symptomatic patients, physicians can utilize existing reimbursement
codes.
Just as personal computers enabled the effective use of computing power
beyond the mainframe computer and computer technicians, we believe our devices
will enable the expanded use of high-quality ultrasound imaging by front-line
physicians and in new clinical settings.
According to industry sources, the annual worldwide market for all
ultrasound imaging devices is approximately $2.7 billion and growing between 4%
and 6% annually. Initially, we are targeting our products at current users of
ultrasound imaging who purchase lower-end ultrasound machines and are attracted
to the high image quality and low cost of our products. We estimate that this
segment represents approximately 22% of the existing market or $590 million
annually. In addition, we are finding that our products are attractive to
physicians, such as cardiologists and emergency medicine physicians who seek
portable ultrasound imaging with high image quality. We believe that our
products are also attractive to physicians such as gynecologists, internists and
pediatricians who currently outsource ultrasound imaging because existing high-
performance devices are too costly and difficult to use.
We entered into distribution agreements covering the United States and more
than 50 other countries. In late 1999, to more effectively address the large
institutional buyers of medical products in the United States, we decided to
utilize a direct sales force by contracting with a third party. These large
institutional buyers include large hospitals, managed care organizations and the
various departments of the military. We expect to utilize this direct sales
force of more than 25 trained sonographers at least through 2000.
We were formerly the handheld ultrasound device division of ATL Ultrasound,
Inc., a leader in high-end, digital ultrasound machines. We were spun off as a
separate Washington corporation in April 1998 to focus on further development
and commercialization of high-performance, miniaturized ultrasound devices. Our
products are based on research and development begun at ATL Ultrasound twelve
years ago. Most of the key engineers responsible for the development of our
technology at ATL Ultrasound joined SonoSite. Under an agreement with ATL
Ultrasound, we have exclusive rights through 2003 to use all applicable ATL
Ultrasound technology in the area of miniaturized digital ultrasound imaging. In
addition, ATL Ultrasound agreed to manufacture our products through 2003;
however, we intend to transfer some of the manufacturing of our products to
other third parties and assume some of the manufacturing ourselves during that
time.
2
Industry Background
The Use of Ultrasound Imaging
Medical imaging has been an important element of medical diagnosis since
the introduction of X-ray technology. As imaging technology advanced in recent
decades, applications of medical imaging expanded to address increasingly
complex disease states and conditions involving soft tissues and internal body
organs. While X-ray technology is the dominant method used for visual analysis
of hard tissue such as bone material, the most widely used imaging methods for
visual analysis of soft tissues and organs include computed tomography (CT),
magnetic resonance imaging (MRI), nuclear medicine, X-ray angiography and
ultrasound. Each method of soft tissue imaging requires specialized equipment
and has different patterns of use and applications. A physician selects the
soft tissue imaging method to be used based on a variety of factors, including:
. the particular disease state or condition to be studied;
. the status of the patient;
. image quality; and
. the cost of the procedure.
Ultrasound was introduced for medical imaging purposes in the late 1950s as
a safe and noninvasive method to provide real-time, dynamic images of most major
soft tissues and organs. Initially, physicians used ultrasound imaging to
assess the general shape, size and structure of internal soft tissues and
organs. Obstetricians were among the first physicians outside of radiologists
to adopt widespread use of ultrasound imaging. As advances in technology
improved the image quality of ultrasound devices, the use of ultrasound imaging
expanded to other clinical applications, including examinations for
gynecological abnormalities.
Ultrasound systems use low-power, high-frequency sound waves emitted by a
transducer to produce soft tissue images. The physician places the transducer
on the skin or in a body cavity near the targeted area. Tissues and fluids
reflect these sound waves and the transducer detects these reflections. Based
on these reflections, the ultrasound system's beamformer organizes the sound
waves and produces an image for visual examination, using digital or analog
signal processing or a combination of the two. Digital signal processing
technology allows an ultrasound device to process greater amounts of
information. As such, digital ultrasound machines produce higher resolution
images than analog and analog/digital ultrasound machines.
Standard ultrasound imaging produces a two-dimensional image that
physicians use to diagnose and monitor disease states and conditions by
analyzing the relative shading of tissues or organs. This is known as grayscale
imaging, or two-dimensional imaging when used in cardiology applications. Color
power Doppler ultrasound imaging expands standard ultrasound imaging to enable
physicians to image the direction and velocity of blood flow through the body,
including the chambers and valves of the heart.
Physicians currently use ultrasound imaging in a variety of clinical
applications. In addition to obstetric and gynecological applications,
ultrasound imaging is increasingly used in cardiac imaging. Ultrasound imaging
for cardiac function indications, otherwise known as echocardiography, provides
the physician an enhanced real-time image of the internal heart structure,
including the valves and chambers. The physician uses this image to diagnose
3
coronary artery disease, valvular disease and congenital heart defects. In
vascular medicine, physicians determine the presence of a disease state or
condition using color power Doppler ultrasound to image blood flow in soft
tissues, organs and the vascular system.
Limitations of Current Ultrasound Technology
Users of ultrasound imaging have traditionally faced a tradeoff between
image quality on the one hand and price and portability on the other. High-
performance machines are based on digital signal processing technology and
provide a high-quality image, but they require a large capital investment of
greater than $100,000 plus significant operating costs. These ultrasound
machines typically weigh approximately 200-300 pounds and require specially
trained technologists to operate them. Ultrasound machines based on the less
precise analog/digital hybrid imaging technology are less expensive, but they
suffer from poorer image quality. They are not easily portable and cost from
$30,000 to $100,000. "Luggable" analog ultrasound machines have even lower
prices, but they suffer from poor image quality that limits their diagnostic
utility.
Advances in technology have greatly improved the image quality of
ultrasound systems and substantially increased their diagnostic utility,
resulting in the growth in the use of ultrasound. However, prior to our
products being available, high-quality images have only been able to be produced
by large, high-performance, digital ultrasound systems. Because of the high
cost, size and complexity of these systems, ultrasound imaging is generally
performed in diagnostic imaging centers and radiology departments in hospitals.
These imaging centers typically have several high-performance ultrasound systems
operated by a team of specially trained technologists and radiology specialists
who interpret the ultrasound images. Patients requiring ultrasound imaging are
generally referred to these centers. This traditional referral model for
ultrasound imaging results in significant disadvantages for physicians and their
patients. The physicians who make these referrals lose reimbursement income and
relinquish control of their patients during primary diagnosis. The patient must
schedule a separate appointment for the ultrasound imaging procedure, travel to
the diagnostic center and experience the inconvenience and uncertainty of a
delayed primary diagnosis.
We believe patient care is significantly improved if high-quality
ultrasound imaging is readily available at the point of care. We believe that
early diagnosis will prove to be beneficial clinically and economically. In
addition, physicians can easily and more frequently monitor patient progress
during subsequent office visits, readily obtaining the information necessary to
enable more timely adjustments to treatment. Patient care also can be improved
significantly if high-quality ultrasound imaging is available in settings where
the use of high-end ultrasound systems generally is not feasible due to their
high cost, complexity of operation and limited portability. These unserved or
underserved settings have included emergency rooms and vehicles, athletic
arenas, battlefields and even the patient's bedside.
The SonoSite Solution
In much the same way that today's personal computers provide the computing
power of earlier-generation mainframe computers, we believe our products achieve
the high-quality imaging performance of existing, larger ultrasound machines on
a highly portable, generally more affordable platform. Our products feature
high-quality, digitally formed imaging comparable to that generated by larger,
significantly more expensive ultrasound machines in a handheld device that is
easy to use. We believe our products offer the following advantages to
physicians and their patients:
4
High-Quality Our products break out of the traditional continuum of ultrasound systems
Ultrasound where cost and size are directly related to image quality. We possess
Imaging in an proprietary technology in three important areas: (1) custom-designed
Affordable computer chips that achieve high performance while enabling reduced size and
Handheld Device power consumption, (2) process technology that allows the production of
transducers with performance comparable to high-performance devices at
significantly reduced costs, and (3) ergonomic and design-engineering
advances that enable physicians to use our products with little effort and
training and to integrate our products into their existing workflow.
Substantial Value for For current diagnostic ultrasound procedures with established third-party
Existing Users of reimbursement codes, our products provide a low-cost, high-quality
Ultrasound Imaging alternative. For example, our first product, the SonoSite 180/TM/, includes in
its target markets the gynecologists and obstetricians who together currently
perform 12.3 million ultrasound procedures annually in the United States,
typically using large, more expensive ultrasound machines.
Substantial The combination of the portability, ease of use and quality of our products
Opportunity to Expand allows physicians to perform established ultrasound examinations more
Uses of Ultrasound routinely. The SonoSite 180/TM/ can be used in the gynecology market, where we
Imaging believe ultrasound imaging has been traditionally underutilized due to the
high cost and low availability of high-quality imaging. For example,
gynecologists are now able to perform a transvaginal ultrasound procedure as
part of a patient's routine pelvic examination to obtain valuable visual
information. Our products also facilitate the use of ultrasound in other
clinical settings that benefit from point-of-care imaging, such as
cardiology, emergency medicine and internal medicine.
Improved Patient Care Our products enable physicians to deliver immediate primary diagnosis by
Through Earlier avoiding the delay associated with the referral of ultrasound imaging
Diagnosis procedures. The immediate primary diagnosis results in earlier detection and
treatment cycles when appropriate. In addition, the reduced time to
diagnosis can substantially reduce the inconvenience and uncertainty
resulting from the delay in obtaining ultrasound imaging results.
Superior Efficiency Our products enable physicians and healthcare providers to (1) reduce the use
for Healthcare of downstream ultrasound referral services, (2) shorten patient care cycle
Providers times, and (3) increase the quality of patient care. Front-line physicians
can use our products to reduce the number of patients unnecessarily referred
for additional testing. In addition, healthcare organizations can use our
products to increase their diagnostic imaging capacity at low incremental
cost, without expanding existing facilities and personnel. As a result,
these organizations are able to more efficiently use their existing labor
pools related to the delivery of ultrasound services.
5
Strategy
Our objective is to maintain our position as a leader in the design,
development and successful commercialization of miniaturized, high-performance,
digital ultrasound imaging devices. To achieve this objective, we developed a
strategy with the following key elements:
Capitalize on Our We intend to build on the significant technological lead we achieved in
Technology developing miniaturized, high-performance, digital ultrasound devices. Our
Advantage proprietary technology is the subject of three issued and several pending
patents. We intend to utilize our advantage in blending ultrasound
performance, size and cost to develop additional, innovative products for new
and existing markets and applications.
Position Our Products Our strategy is to penetrate existing markets by positioning our products as
as a Superior Value a superior value alternative to both lower-priced machines that lack high
Alternative to image quality and higher-priced machines that lack portability and ease of
Existing Ultrasound use. To facilitate early and rapid market acceptance, we targeted our
Products initial products for traditional use within existing clinical applications
for ultrasound imaging, including:
. gynecology and obstetrics;
. cardiology; and
. radiology.
Offer Customized We offer customized education programs to help teach physicians not currently
Education to Increase utilizing ultrasound imaging various clinical applications of our products.
Number of Users of We are working with clinical opinion leaders to demonstrate and communicate
Ultrasound Imaging the efficacy and cost-effectiveness of our ultrasound technology. We are
targeting physicians that can benefit from our products, including:
. emergency medicine physicians;
. general practitioners;
. sports orthopedists;
. general and specialty surgeons; and
. gastroenterologists.
Establish Strategic We formed strategic partnerships with companies in established positions and
Partnerships in Key with distribution channels in clinical segments where our products and
Clinical Segments proprietary technology may benefit new users. These clinical segments
currently include cardiology and may in the future include surgery, emergency
medicine and gastroenterology.
6
Utilize Outside We are using ATL Ultrasound to initially manufacture our products. This
Manufacturing relationship enables us to benefit from ATL Ultrasound's ultrasound
Expertise production expertise and manufacturing facilities that comply with
International Standards Organization (ISO) requirements. This arrangement
also reduced risks and capital costs in 1999 during the start-up phase of our
first products. We intend to continue to outsource selected manufacturing
functions to recognized leaders in those functions and focus our operational
activities on a limited number of customer service and order management
functions.
Expand Domestic Sales We are beginning to use a direct, contracted sales force to target the large
Effort With Direct hospital, managed care and military markets in the United States. The sales
Presence representatives are trained sonographers who are able to effectively
demonstrate our product performance to this large and important market.
Leverage Third-Party We established alliances with leading independent medical equipment
Distribution distributors. We are utilizing their expertise to reach both customary
Capabilities purchasers of ultrasound systems and a wide variety of medical practitioners
who do not currently use ultrasound imaging.
Our Products
SonoSite 180/TM/, SonoHeart/TM/, C60 transducer, ICT transducer and C15
transducer
General Specifications. These products consist of a handheld display unit
comprised of an integrated color display and control panel, the SonoSite 180/TM/
or the SonoHeart/TM/, together with the application-specific transducer, either
the C60 for abdominal imaging, the ICT for intra-cavital imaging or the C15
transducer for cardiac imaging. The SonoSite 180/TM/ and the SonoHeart/TM/
display units are comprised of the same hardware platform. These display units
are able to store 50 images in memory and allow cine storage of a limited number
of motion images, a diagnostic capability that is used in many ultrasound exams,
including obstetrics and cardiology. The SonoSite 180/TM/ and SonoHeart/TM/
contain numerous clinically useful diagnostic capabilities including two
dimensional and color power Doppler imaging and a proprietary auto-focus
capability that enables the user to quickly complete the ultrasound exam. These
products can be powered by conventional alternating current or by an 11.1-volt
rechargeable lithium ion battery, which will operate the machine for two to four
hours of normal clinical use.
SonoSite 180/TM/ and SonoHeart/TM/. Our handheld display units weigh less
than five pounds and measure 13 inches long, 7.5 inches wide and 2.5 inches
thick. The display unit houses circuitry built around four custom Application
Specific Integrated Circuit ("ASIC") designs and circuitry with digital signal
processing that can generate up to 100 image frames per second. These real-time
images can be transmitted to industry-standard monitors and printers or shown on
the five-inch articulated high-resolution liquid crystal display panel that is
integrated in the display unit. Imaging functions are controlled through a small
alphanumeric keyboard immediately below the display panel and a navigational
'trackball.' We use injection-molded plastic for the outer shell of the display
unit and its built-in handle. We designed the display unit to be durable,
visually appealing and easy to handle.
7
Transducers. We offer a variety of transducers that are specific to
particular clinical applications, including the C60 abdominal
transducer, the ICT intra-cavital transducer and the C15 cardiac transducer.
The C60 is a 60-millimeter 2-5 megaHertz curved array broadband transducer for
general abdominal and obstetrics applications. The ICT is an 11 millimeter 4-7
megaHertz broadband transducer for gynecological ultrasound scanning. The C15
is a 15 millimeter 2-4 megaHertz broadband transducer for transthoracic
scanning. ATL ultrasound manufactures the C60 and ICT on our behalf using a
SonoSite proprietary manufacturing process that lowers manufacturing costs
compared to traditional transducer-production techniques. We believe that this
new process also increases the acoustic capability of the transducer in the
important area of contrast resolution. The C15 is outsourced to another
independent OEM transducer-manufacturing company. Each transducer is attached to
the display unit by a cable with an innovative, compact, pinless connecting
device. This connecting device reduces the weight of the transducer and cable
assembly and allows the physician to make a rapid connection between the display
unit and transducer. We continue to develop transducers for additional clinical
applications. Within the next twelve months, we anticipate releasing a linear
array unit that will have utility for the radiologist and internist in shallow
ultrasound imaging applications and a neonatal cranial transducer for use in
ultrasound scanning on newly born infants.
SiteStand/TM/. To enhance the utility and efficiency of our products, we
offer the SiteStand/TM/, which provides the following customer benefits:
. interface capabilities between our products and third-party output
devices, such as printers and storage devices;
. recharging of the battery in the base unit;
. storage of our products when not in use and a stand for our products
when they are in use; and
. portability and minimal space requirements.
Customized Education and Training - SonoKnowledge/TM/
We are providing product training and clinical education to help enable
physicians who do not currently use ultrasound imaging to be competent in both
the fundamental operation of our products and in the clinical skills required to
use them responsibly and efficiently. Renowned ultrasound clinicians
collaborated in the production of an educational package, the SonoKnowledge/TM/
package, consisting of six CDs, video tapes in multiple languages and selected
information on course work. Utilizing leading-edge multimedia technology, we are
delivering innovative programs in multiple languages for
. ultrasound knowledge assessments,
. product operation training, and
. Continuing Medical Education (CME) accredited clinical education.
The SonoKnowledge/TM/ package is included in every SonoSite 180/TM/ and
SonoHeart/TM/ shipment and is focused on delivering clinically specific and
relevant information to our customers.
8
Additional Product Development
We continue to invest heavily in further research and development. We are
focused on
. enhancement of the existing products, including products that we expect
will be targeted at additional clinical applications, such as general
and specialty surgery;
. further enhancing image quality; and
. further reducing the size, weight and manufacturing costs of our
products.
By accomplishing these objectives, we hope to both extend the effective
product lives of our current products and develop other, potentially smaller,
less costly product platforms for our ultrasound imaging technology and expand
the use of ultrasound imaging and our products.
Technology
Our product development efforts enabled us to achieve the performance of a
large, high-quality ultrasound imaging system in a smaller, less expensive
device that is simple to use. Our proprietary technology is the subject of
three issued and several pending patents. The key components in our technology
platform include the following:
Custom-Designed Computer Chips. We built on extensive ATL Ultrasound
experience in high-end digital ultrasound and ASIC technology to develop four
proprietary custom-designed computer chips that implement most of the functions
required in a completely digital ultrasound imaging system. We made significant
advances in the integration of ultrasound functions onto customized chip
designs, including the integration of a complete ultrasound beamformer onto a
single computer chip. Our proprietary chip technology allows our products to
share many of the architectural and signal-processing attributes of a high-end
ultrasound imaging system in a significantly smaller device.
Transducers. Using proprietary technology, we developed high-performance
transducers and advanced pinless cable connections. We designed our display
units to also utilize transducers manufactured by a variety of third-party
suppliers, increasing the versatility of our platform.
Modular Design. Our products are developed in a building-block fashion,
which allows us to develop future products based on a single platform, with each
product possessing specific attributes for particular clinical applications.
This modular design enables us to integrate new technological advances into our
platform by modifying only a part of the platform, rather than the entire
platform itself.
Human Factors Engineering. We conducted research regarding the utility of
our products and their use in clinical settings. Based on these observations,
we designed our products to be compatible with a variety of printing, recording
and support devices. We developed the SiteStand/TM/ in response to the
particular needs of physicians who use our products.
Development Infrastructure. We possess a sophisticated infrastructure to
facilitate rapid development of new high-performance products and features.
Specific features of this infrastructure include:
. Advanced acoustic beam simulation. We developed the ability to simulate
the emission, propagation, reflection and reception of simulated
acoustic waves in a Computer Aided Design (CAD) environment. This allows
us to evaluate the characteristics of acoustic waveforms and to test
various product configurations and transducer geometrics without having
to produce physical prototypes.
9
. Transducer finite element modeling. We use sophisticated finite element
modeling techniques to model the detailed physical characteristics and
acoustic performance of selected transducer designs. This enables rapid
product development, changes and improvements without having to produce
hardware prototypes.
. Fully integrated system simulation. We use state-of-the-art engineering
CAD tools to assess the performance of a proposed ultrasound system
solution relative to its design targets. Based on this assessment, we
can rapidly simulate design revisions to attain targeted performance
levels.
. High-speed ASIC behavioral modeling. We developed sophisticated,
proprietary engineering design software to simulate the architecture and
performance of our custom computer chip designs. We are able to test and
debug our computer chip designs before committing to their manufacture.
This reduces development time and the cost of materials.
. Object-oriented system and software. We utilize sophisticated system
and software development practices that include the use of object-
oriented building blocks to eliminate time and cost during software
development and to allow for more robust and reusable software designs.
Research and Development
Product development activities comprised the majority of our activities and
expenditures since we were formed as a division within ATL Ultrasound. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations." We continue to conduct extensive research, development and
engineering activities although we expect that, as a percentage of our total
expenditures, spending on these activities will decline in the future.
We currently have 50 engineers and support staff members that are dedicated
to the technical support of the SonoSite180/TM/ and SonoHeart/TM/ and the
development of new generations of handheld ultrasound products. The majority of
these individuals joined our Company from ATL Ultrasound. We expect research
and development expenditures to increase moderately during 2000, at a rate
slower than the 1999 increase as compared to 1998, due to a decrease in final
product verification and validation activities and a reduction in manufacturing
development expenditures in 2000 as compared to 1999. We invested $14.5
million, $9.5 million and $7.1 million in research and development for the years
ended December 31, 1999, 1998 and 1997, respectively.
Sales and Marketing, Clinical Training and Customer Education
We utilize a worldwide distribution network for our products. As of
December 31, 1999, there were approximately 50 such distribution agreements
executed. In addition, we are deploying a team of direct sales contractors in
the United States to target large institutional customers, including hospitals,
managed care organizations and government organizations. We expect to field a
force of at least 25 direct sales contractors during 2000. We anticipate the
combination of distribution partners and direct sales contractors to reach the
hospitals, clinics and medical practices that customarily purchase
10
ultrasound equipment. We also expect our distribution network to reach a wide
variety of medical practitioners who do not presently use ultrasonic imaging.
We believe that maintaining product and Company awareness on the part of
our customers and distributors is critical to market acceptance and product
adoption rates and, consequently product sales. We employ professional public
relations organizations and advertising and corporate communications firms to
assist in the preparation of materials designed to raise awareness about our
Company and our products. We also established an education and training program
to teach basic ultrasound techniques to those unfamiliar with ultrasonic
imaging. We believe our delivery of this customer education and training service
is unique, giving us a competitive advantage compared to commonly available
industry training programs. Additionally, we are supporting customers through
ongoing training and clinical support.
Service and Warranty
A one-year warranty is included with the original purchase of SonoSite
products. Additional warranty protection is available for a fee. All returned
products are diagnosed for cause of failure and, if applicable and if possible,
design improvements to incorporate into future products. We do not have
significant warranty or service business at this time and we do not expect
significant warranty or service businesses in the next year.
Manufacturing
ATL Ultrasound manufactures the SonoSite 180/TM/, the SonoHeart/TM/, the
C60 transducer and the ICT transducer; another third party OEM transducer
manufacturing company manufactures the C15 transducer. We plan to maintain the
current supply arrangements for our transducers. During 2000, we expect to add a
second source for the manufacture of the SonoSite 180/TM/ and the SonoHeart/TM/
ultrasound machines.
Patents, Trademarks and Licenses
We are committed to developing and protecting our intellectual property.
We file patent applications to protect innovative technology, inventions and
innovative improvements that are significant to the development of our business.
As of December 31, 1999, we filed a number of patent applications in the
United States and other countries on our handheld ultrasound device. We
received our first U.S. patent, No. 5,722,412, in March 1998, our second U.S.
patent, No. 5,817,024, in November 1998 and our third U.S. patent, No. 5,893,363
in April 1999. U.S. Pat. No. 5,722,412 has a term extending to June 28, 2016
and covers handheld ultrasound systems with digital beamformers weighing less
than ten pounds, including those that we are developing. U.S. Pat. No. 5,817,024
has a term extending to December 31, 2017 and covers integrated circuits that
incorporate analog to digital conversion circuitry and ultrasound beamforming
capability on the same integrated circuit. This technology also pertains to the
products that we are developing. U.S. patent, No. 5,893,363 has a term
extending to April 13, 2017 and covers handheld systems with integrated
transducer transceiver circuits, including those that we are developing. We also
have a license from ATL Ultrasound to use ATL Ultrasound technology in existence
at the time of our formation, such as ASIC technology, in our handheld products
and to continue to have access to ATL Ultrasound's technological developments up
to April 5, 2001.
11
We intend to register the trademarks and trade names through which we will
conduct our business in the United States and abroad. We also intend to seek
protection for the software contained in our ultrasound products under patent,
copyright and trade-secret laws where, in our judgment, significant advantages
may be obtained from such protection. Patent, copyright and trade secret
protection is subject to limitations and uncertainties and may not provide
significant competitive advantages to us. See "Factors Affecting our Operating
Results, Our Business and Our Stock Price."
We do not know of any infringement by our products of any intellectual
property rights of others, nor have we received notice from any third party of
any claimed infringement. We are unaware of any competitive products that
infringe on our intellectual property rights.
Competition
We know of no current direct competition in the marketplace for handheld
ultrasound imaging products. A number of companies today offer portable
ultrasound systems, which are low-performance desktop units often resembling
portable black and white televisions.
Other companies are planning to develop highly portable devices to address
the market opportunity that we believe exists for hand-carried ultrasound
imaging products. We expect Acuson Corporation to introduce, by mid-2000, a
small, 20 pounds in weight, ultrasound machine that we believe will be targeted
at the echocardiography markets. Medison Co., Ltd, Agilent Technologies, Inc.
and Esaote S.p.A. announced that they are developing highly portable ultrasound
machines that may be introduced in 2000. A number of other groups are being, or
have been, funded by government grants to develop small ultrasound devices or
select components of such a system.
Competition in the marketplace for hand-carried ultrasound imaging products
is based on several factors. We believe we can successfully compete with other
companies based on our products' certain unique advantages. First, we have a
head start in the development of hand-carried ultrasound imaging products and
were first to commercialize a product. We also believe we possess fundamental
technological advantages including the broadband transducer and digital ASIC
expertise we brought with us from ATL Ultrasound, both of which provide a
proprietary foundation for high-quality image performance and ongoing cost
reduction. Competitors may gain market advantage over us if their products are
more inexpensive or have a more widely known brand name.
Government Regulation
Our ultrasound products are subject to extensive regulation by numerous
governmental authorities, principally the U.S. Food and Drug Administration
("FDA"), as well as numerous other state and foreign agencies. Our products are
also subject to various domestic and foreign electrical safety and emission
standards. The U.S. FDA has broad regulatory powers with respect to preclinical
and clinical testing of new medical products and the manufacturing, marketing
and advertising of medical products. The manufacture of our products is subject
to U.S. FDA regulations governing registration of manufacturing facilities and
compliance with the U.S. FDA's Quality System Regulations. We are subject to
periodic on-site inspection from the U.S. FDA for compliance with such
regulations. As of December 31, 1999, we have not had an on-site inspection
from the U.S. FDA.
The U.S. FDA requires that all medical devices introduced to the market be
preceded either by a premarket notification clearance order under Section 510(k)
of the Federal Food, Drug & Cosmetic Acts Act, or an approved premarket approval
12
application. A 510(k) premarket notification clearance order indicates U.S. FDA
agreement with an applicant's determination that the product for which clearance
has been sought is substantially equivalent to medical devices that were on the
market prior to 1976 or have subsequently received clearance. A premarket
approval indicates that the U.S. FDA has determined the Company must submit
clinical trial data and manufacturing quality assurance information, to prove it
is safe and effective for its labeled indications. The process of obtaining
510(k) clearance typically takes approximately six to nine months, while a
premarket approval process typically takes more than a year.
We received 510(k) clearance on our initial product in May 1998 based upon
substantial equivalence to current ultrasound products being marketed by ATL
Ultrasound. We received additional 510(k) clearance on the SonoSite 180/TM/
for ten clinical applications in April 1999 and 510(k) clearance on our latest
product, the SonoHeart/TM/, in December 1999. We believe that our future
generation handheld ultrasound devices will also require only 510(k) clearance.
On September 15, 1999, we received Conformite Europeene (CE) Marking
approval, signifying European Certification to the international quality system
standards and to the Medical Device Directive. The Certification allows us to
distribute the SonoSite 180/TM/ system to the 19 countries of the European Union
and the European Free Trade Association.
Our products are designed to comply generally with applicable electrical
safety standards, such as those of Underwriters Laboratories and non-U.S. safety
standards authorities. Several countries have, in recent years, changed the
electronic emission requirement that must be met by ultrasound equipment. There
can be no assurances that we will be able to continue to respond to these
continually changing regulatory requirements in a timely manner.
Our regulatory compliance programs encompass verification of our compliance
with international standards for medical device design, manufacture,
installation, and servicing. These international standards are known as ISO
9001 standards. The Medical Device Directives, which encompass ISO 9001
standards, became mandatory in Europe in 1998. The U.S. FDA has adopted the ISO
9001 standards as the basis for its Quality System Regulations for the United
States, and these standards went into full effect for U.S. manufacturers of
medical devices in June 1998.
Reimbursement
Our products are used as diagnostic ultrasound imaging tools for healthcare
providers. These providers may seek reimbursement from third-party payors for
the services they provide while using our products. In the United States, the
third-party payors include Medicare, Medicaid and private health insurance
plans. Reimbursement from these organizations is subject to the regulations and
policies of governmental agencies and other third-party payors. For example, the
Medicare program, which reimburses hospitals and physicians for services
provided to a significant percentage of hospital patients, places certain
limitations on the methods and levels of reimbursement of hospitals for
procedure costs and for capital expenditures made to purchase equipment such as
ours. The Medicare program also limits the level of reimbursement to physicians
for diagnostic tests. The state-administered Medicaid programs and private
payors also place limitations on the reimbursement of both facilities and
physicians for services provided in connection with diagnostic and clinical
procedures. Reduced governmental expenditures in the United States and many
other countries continue to put pressure on diagnostic procedure reimbursement.
We cannot predict what changes may be forthcoming in these policies and
procedures, or the effect of any such changes on our business.
13
Third-party payors worldwide, including governmental agencies, are under
increasing pressure to contain medical costs. Limits on reimbursement or other
cost containment measures imposed by third-party payors may adversely affect the
financial condition and ability of hospitals and other users to purchase
products, such as ours, by reducing funds available for capital expenditures or
otherwise. We cannot forecast what additional legislation or regulation, if
any, relating to the healthcare industry or third-party reimbursement may be
enacted in the future or what effect such legislation or regulation would have
on us.
Employees
As of December 31, 1999, we had 100 full-time employees, 50 of these who
were engaged in research and product development activities, 24 in sales and
marketing activities, 14 in administrative capacities and 12 in manufacturing
and regulatory activities. We have never had a work stoppage and no employees
are covered by collective bargaining agreements. We believe our employee
relations are good.
Facilities
Our principal offices are in approximately 22,000 square feet of leased
space in Bothell, Washington. These facilities contain approximately 5,000
square feet used for research and lab space with the remainder comprising
administrative offices. The facilities are leased through mid-year 2000. We also
lease approximately 3,000 square feet of warehouse space in another facility
that is used for finished goods storage. This warehouse space is leased through
August 2000. Our space requirements, as expected, exceeded our current
facilities by the end of 1999. Consequently, in December 1999, we entered into a
lease for a new, larger facility also in Bothell, Washington. The new facility
has approximately 65,000 square feet of space. Our current plans will utilize
approximately 40,000 square feet for administrative offices and the remaining
25,000 for engineering labs, manufacturing and warehouse space.
We expect to take occupancy of our new building by mid-2000. We believe
that these facilities will be adequate to meet our needs through 2002 and that
we will be able to find additional space for manufacturing and research and
administrative offices as needed, without an adverse impact on our operations.
Factors Affecting Our Operating Results, Our Business 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 have only recently begun to
ship our first products. 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 evaluating whether to invest in 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;
14
. 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 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 December 31, 1999, we had an
accumulated deficit of approximately $42.5 million, including approximately
$10.3 million that was accumulated prior to our commencing operations as a
separate company in April 1998. We expect to incur substantial additional
expenses in the future as we 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 ultrasound imaging procedures and
we have only sold our products in limited quantities. The market for hand
carried, high-performance ultrasound 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.
15
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 payors 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 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 many
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 after December 31, 2000
or sooner if for cause.
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 two years, 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 manufacturing of
our products. 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 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.
16
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 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
high-quality products and deliver them in a timely manner. We only recently
began 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.
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.
17
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 intend to have our products manufactured based on forecasts
of sales in future periods. Our forecast in any particular period may prove
inaccurate, which could cause fluctuations in our manufacturing costs and our
operating results. Our future operating results could fall below the
expectations of securities analysts or investors and reduce the market price of
our stock. We believe that there may be some fluctuations caused by year-end
budgetary pressures on our customers, customer buying patterns and the efforts
of our indirect sales and distribution network to meet or exceed annual sales
quotas. These factors make it difficult to forecast our revenues and operating
results.
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. 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.
18
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 established an indirect sales and distribution network to sell our
products domestically and internationally and we established a direct contract
sales group to augment sales efforts in the United States. Our future revenue
growth will depend in large part on our success in maintaining and expanding
these indirect and limited direct, sales and distribution channels. We depend
on these distributors to help promote market acceptance and demand for our
products. In the United States, our indirect sales and distribution network
include agreements with each of PSS World Medical, Inc. and its subsidiary,
Diagnostic Imaging, Inc. In the future, we may elect to expand our own direct
sales and distribution capabilities domestically or internationally or we may be
required to do so if our existing third-party distribution network fails to
produce satisfactory results. Efforts to expand our own direct sales and
distribution capabilities will be expensive and time-consuming, particularly if
we undertake such activities outside of the United States. We may be unable to
expand 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. In particular, in
the important ultrasound markets of Italy, France and Germany, our distribution
partner, Esaote S.p.A., manufactures and sells ultrasound products similarly
priced to ours. As a result, our products may not receive the resources and
support required within these countries to meet our sales objectives.
We manage our third-party distribution network and direct sales contractors
with several sales directors. These sales directors possess 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 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.
19
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 that our technology or products infringe upon the technology covered by
these patents or patent applications. Any such claims, with or without merit,
could
. be time-consuming to defend;
. result in costly litigation;
. divert management's attention and resources;
. cause product shipment delays;
. require us to enter into royalty or licensing agreements;
. prevent us from manufacturing or selling some or all of our products; or
. result in our liability to one or more of these competitors.
If a third party makes a successful claim of patent infringement against
us, we may be unable to license the infringed or similar technology on
acceptable terms, if at all.
Our products may become obsolete
Our competitors may develop and market ultrasound products that render our
products obsolete or noncompetitive. In addition, although diagnostic ultrasound
imaging products may have price and/or performance advantages over competing
medical imaging equipment, such as computed tomography and magnetic resonance
imaging, any price or performance advantages may not continue. Our products
could become obsolete or unmarketable if other products utilizing new
technologies are introduced or new industry standards emerge. As a result, the
life cycles of our products are difficult to estimate. To be successful, we will
need to continually enhance our products and to design, develop and market new
products that successfully respond to any competitive developments. 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 spin-off from ATL Ultrasound
Our spin-off was treated by ATL Ultrasound as a tax-free spin-off under
Section 355 of the Internal Revenue Code of 1986. However, if ATL Ultrasound
20
were to recognize taxable gain from the spin-off, the Internal Revenue Service
could impose that liability on any member of the ATL Ultrasound consolidated
group as constituted prior to the spinoff, including us. ATL Ultrasound agreed
to cover 85% of any such liability (unless the tax is imposed due to the actions
by ATL Ultrasound solely or SonoSite solely, in which case we and ATL Ultrasound
agreed that the party who is solely at fault shall bear all of the tax
liability). We cannot guarantee that ATL Ultrasound would indemnify us or agree
that it caused the liability to be imposed. If we were required to pay all or a
portion of any taxes related to the spin-off, our business would be adversely
affected.
Governmental regulation of our business could prevent us from introducing new
products in a timely manner
All of our planned products and our manufacturing activities and the
manufacturing activities of our third-party medical device manufacturers are
subject to extensive regulation by a number of governmental agencies, including
the U.S. FDA 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;
. 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.
21
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 face warranty exposure, which could adversely affect our
operating results. Our products carry a one-year warranty against defects in
materials and workmanship. We are 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 accruals for the costs 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 spin-off and by grant revenue from the U.S. Office of Naval
Research under a U.S. Government Defense Advanced Research Projects Agency
grant. ATL Ultrasound's funding obligations have been met and any future grant
revenue is not expected. 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;
22
. 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 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 Ultrasound requiring a
significant cash payment to ATL Ultrasound upon a change in our control;
. a shareholder rights agreement; and
. acceleration provisions in benefit plans and change-in-control
agreements with all of our employees.
23
Item 2. Properties
The Company leases approximately 22,000 square feet in Bothell, Washington.
These facilities contain approximately 5,000 square feet used for research and
lab space with the remainder comprising administrative offices. The facilities
are leased through mid-year 2000. As anticipated, the space is no longer
adequate for our needs. Consequently, we negotiated a termination to our
existing lease and entered into a new lease in another facility. The terms of
the lease termination have no adverse impact on our operations.
Our new facility comprises approximately 65,000 square feet, also in
Bothell, Washington. We anticipate occupying the new building by mid-year 2000.
The new facility is leased through 2007. We believe that these facilities will
be adequate to meet our needs through the foreseeable future.
Item 3. Legal Proceedings
There are no suits or claims pending against us, nor are we aware of any
threatened suits or claims.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1999.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol
SONO. As of March 15, 2000, there were 5,625 holders of record of the common
stock. This figure does not include the number of shareholders whose shares are
held of record by a broker or clearing agency, but does include each such a
brokerage house or clearing agency as one holder of record.
The high and low sales prices for the our common stock for each of the
second, third and fourth quarters of 1998 and each quarter of 1999 are as
follows. These prices reflect interdealer prices, without retail mark-up or
commission, and may not necessarily represent actual transactions.
Year High Low
- --------------------------------------------------------------------------------
1998
Second quarter (from April 7, 1998) $10.50 $ 6.13
Third quarter $ 8.13 $ 4.50
Fourth quarter $13.75 $ 5.88
1999
First quarter $14.50 $ 9.75
Second quarter $22.63 $12.63
Third quarter $30.88 $15.50
Fourth quarter $37.75 $25.31
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all earnings, if any, for future growth
and, therefore, does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
On November 30, 1999, the Company issued 1,250,000 shares of unregistered
Common Stock to fifteen investors, generating gross proceeds to the Company of
$31,250,000. Prudential Vector Healthcare Group, a unit of Prudential
Securities Incorporated, served as placement agent and received a commission of
$1,875,000 in connection with the transaction. The shares of common stock were
sold pursuant to Regulation D promulgated under the 1933 Securities Act and the
investors represented to SonoSite that they were accredited investors as the
term is defined in Regulation D. The offer and sale of the securities were not
made by any formal general solicitation or general advertising. Concurrent with
the completion of the sale, SonoSite filed a registration statement covering the
resale of the Common Stock sold in the financing.
25
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
Years Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- ------- --------
(in thousands, except per share data)
Statement of Operations Data
Grant revenues $ 125 $ 973 $ 2,948 $ 1,029 $ --
Sales revenues 10,132 -- -- -- --
Cost of sales 6,445 -- -- -- --
-------- -------- ------- ------- ------
Gross margin on sales revenue 3,687 -- -- -- --
Operating expenses:
Research and development 14,533 9,474 7,064 2,576 75
Sales and marketing 9,767 3,120 1,268 -- --
General and administrative 2,637 1,904 610 217 9
-------- -------- ------- ------- ------
26,937 14,498 8,942 2,793 84
Interest income 1,600 541
Interest expense 117 41
Other income 30 --
-------- -------- ------- ------- ------
Net loss $(21,612) $(13,025) $(5,994) $(1,764) $ (84)
Net loss per share (1) $(3.08) $(2.72) $(1.28) $(0.38) $(0.02)
Shares used in computation of
net loss per share (1) 7,025 4,796 4,684 4,633 4,409
As of December 31,
----------------------------------------------------------------
1999 1998 1997 1996
----------- ----------- ---------- ----------
(in thousands)
Balance Sheet Data (2)
Cash and cash equivalents $33,252 $ 7,526 $ -- $ --
Working capital (deficiency) (3) 55,323 16,934 (170) (53)
Total assets 69,726 23,290 410 157
Long-term obligations, less
current portion 135 481 -- --
Total shareholders' equity 63,709 19,833 240 104
- ------------------------
(1) Net loss per share amounts are computed on the basis described in Note 2 of
Notes to the Financial Statements.
(2) Balance sheet data prior to 1996 is not meaningful, as it was incorporated
into the books and records of ATL Ultrasound and is not considered
material.
(3) The amount reported for December 31, 1998 includes a receivable from ATL
Ultrasound of $12.0 million, which was paid on January 15, 1999.
26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations Overview
Our company, 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 our company following the spin-
off.
We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales in September 1999. At December 31,
1999, our products comprised a highly portable ultrasound machine, the SonoSite
180/TM/, and two 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.
Results of Operations - Comparison of Years Ended December 31, 1999, 1998 and
1997
Revenues
Product sales
Initial shipments of our products commenced in the third quarter of 1999.
Product sales in 1999 totaled $10.1 million. There were no product sales in any
prior periods. Product sales revenues are generally recognized at the time of
shipment. At the end of the year, our products included the SonoSite 180/TM/ in
6 language configurations, a curved array transducer for abdominal imaging and
an intra-cavital transducer for transvaginal imaging. In 2000, we have expanded
our product offering to include the SonoHeart/TM/, an ultrasound machine and
transducer designed for cardiac imaging. We also expect to release additional
transducers for other clinical applications. We anticipate that product sales
in 2000 will increase as compared to 1999.
Grant revenues
Grant revenue was recognized per the terms of our contract with the Defense
Department and has been generally tied to achieving technological milestones.
Grant revenues in 1999 were $125,000 as compared to $973,000 in 1998 and $2.9
million in 1997. These varying levels of grant revenues were anticipated. As
of the end of March 1999, we completed the project work and achieved the
27
technical milestones under the contract. As a result, we received all of the
payments agreed to in the contract. There will be no future grant revenues under
existing or past contracts or agreements. Our future revenues will therefore
depend on product sales.
Gross margin
The gross margin on product sales was 36.4% for 1999. We had no product
sales and therefore no reported gross margin in any prior period. We anticipate
that the gross margin on our product sales will improve in 2000 due primarily
to increasing sales of transducers which we expect will become available during
the year, the higher realized price of sales achieved by our direct sales
consultants and reductions in product costs.
Research and development expense
Research and development expense for 1999 was $14.5 million as compared to
$9.5 million for 1998 and $7.1 million for 1997. The 1998 to 1999 increase in
expense was the result of:
. a planned increase in basic research and development activities on our
current and future products, which was partially offset by a decrease in
engineering services procured from ATL Ultrasound, and
. a significant increase in manufacturing development and production
start-up expenses associated with design finalization, verification and
validation of our first generation of products.
The increase in research and development expense from 1997 to 1998 was due
primarily to additional personnel and personnel related expenses and product
development expenses, including increases in engineering services payments to
ATL Ultrasound. We anticipate that spending levels in research and development
will increase in 2000 as compared to 1999 but at a lower rate than the increase
in 1999 as compared to 1998.
Sales and marketing expense
Sales and marketing expenses for 1999 were $9.8 million, up significantly
from $3.1 million in 1998 and $1.3 million in 1997. The rapid rise in expenses
in sales and marketing in 1999 as compared to 1998 was anticipated due to an
increase in personnel as well as activities associated with the worldwide
introduction and promotion of our first products. Specific expenses included
professional service fees, print media, customer training, customer travel,
trade show fees and expenses and travel expenses for our staff. The increase in
sales and marketing expenses in 1998 as compared to 1997 is a result of
increases in sales and marketing personnel and increases in consulting and
travel expenditures. In 2000, we are hiring additional sales and marketing
personnel and we are incurring increased professional service fees in support of
our direct selling efforts in the United States. We plan to continue to utilize
significant outside promotional and communications agency resources in support
of our current products as well as new product introductions periodically
throughout 2000. We expect that selling and marketing expenses will again
increase significantly in 2000 as a result of the planned increase in domestic
sales activities.
General and administrative expense
General and administrative expenses in 1999 were $2.6 million, as compared
to $1.9 million in 1998 and $610,000 in 1997. The increase in 1999 as compared
to 1998 was the result of a full year of a higher level of expenses and
28
continued growth in general management, administration, finance, accounting,
information service and human resource departments. The increase in general and
administrative expenses in 1998 as compared to 1997 was a result of an increase
in personnel when we became a stand-alone public company in April 1998. We
expect to add administrative personnel and infrastructure in 2000 and we plan to
move to a larger facility in the middle of the year. Consequently, we anticipate
that general and administrative expenses will increase in 2000.
Net loss
The net loss for 1999 was $21.6 million, increasing from $13.0 million in
1998 and $6.0 million in 1997. These increases were expected and are due
primarily to the increases in operating expenses and decreases in grant revenues
as noted above. These factors were partially offset in 1999 by an increase in
interest income from invested proceeds of equity financings and $3.7 million in
gross margins as a result of the commencement of product shipments. We expect
to continue to incur quarterly net losses in the near term.
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 $5.1 million from the
Department of Defense through an award via the Advanced Research Projects
Agency.
On April 6, 1998, the day we became an independent public company, our
former parent, 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 December 31, 1999, cash and cash equivalents totaled $33.3 million.
This excludes $16.6 million of short-term investment securities and also
excludes $3.2 million of investment securities with terms longer than one year.
While recent quarterly losses have been reduced as described in "Results of
Operations", our cash requirements have increased due primarily to increases in
accounts receivable and inventories. We expect cash requirements in 2000 to be
significantly 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 capital which are
available through lease financing and other sources of debt financing should be
sufficient to fund our operations through 2001. As a result, we are not
expecting to seek additional equity capital in 2000. 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, such as lower
than anticipated adoption rates or revenues on the existing and new products,
technical obstacles, cost overruns in research and development programs or
manufacturing activities and greater than anticipated administrative expenses.
29
If additional capital is required, there can be no assurance that adequate
financing will be available on a timely basis, on favorable terms, or at all.
Year 2000 Information Systems Review and Status
We did not detect or experience any material failures as a result of the
date change from 1999 to 2000. We completed all of our planned readiness
reviews by mid October 1999. We also monitored the status of our internal
systems throughout the month of December and around the clock on the December
31, 1999 and January 1, 2000. No problems were observed with our internal
systems nor have any occurred up to the time of this filing. Further, there
have been no reported failures with date recognition or calculations with any of
our products in the field nor do we have any knowledge of problems with any of
our vendors or customers.
We continue to monitor the situation. We do not anticipate any problems
with the Year 2000 or related potential computer-date driven problems.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". FAS 133, effective for fiscal years
beginning after June 15, 2000, requires that all derivatives be recognized at
their fair value and that corresponding gains or losses be recognized in the
operating statements or as a component of comprehensive income depending on the
specifics of the derivative instrument. We have no derivative instruments and
expect that adoption of FAS 133 will not have a material impact on our financial
statements.
In 1999, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", which
we must apply in 2000. We do not believe that SAB 101 will have a material
impact on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk. Our exposure to market rate risk, as a result of
changes in interest rates, relates primarily to debt securities held in our
investment portfolio. At December 31, 1999, we held $33.3 million in cash and
cash equivalents and debt securities of $19.8 million, of which $16.6 million
mature within one year and the remainder within two years. Although we hold
both fixed and floating rate securities and each carry a certain degree of
interest rate risk, we do not consider this risk to be material to our financial
statements given their relatively short terms.
30
Item 8. Financial Statements and Supplementary Data
INDEX TO THE FINANCIAL STATEMENTS
SonoSite, Inc.
Page
----
Independent Auditors' Report 32
Balance Sheets 33
Statements of Operations 34
Statements of Cash Flows 35
Statements of Shareholders' Equity and Comprehensive Loss 36
Notes to the Financial Statements 37
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SonoSite, Inc.
We have audited the accompanying balance sheets of SonoSite, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, cash flows
and shareholders' equity and comprehensive loss for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
financial statements, we also have audited the financial statement schedule
listed in the Index at Item 14(a) for the year ended December 31, 1999. These
financial statements and the financial statement schedule are the responsibility
of SonoSite, Inc.'s management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SonoSite, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Seattle, Washington
January 29, 2000
32
SonoSite, Inc.
Balance Sheets
As of December 31,
---------------------------
1999 1998
------------ ------------
Assets
Current Assets
Cash and cash equivalents $ 33,252,112 $ 7,525,762
Short-term investment securities 16,594,050 --
Accounts receivable, less allowance for doubtful 7,856,547 --
accounts of $96,344
Receivable from affiliate 400,009 --
Accrued interest receivable 484,684 --
Receivable from ATL Ultrasound -- 12,000,000
Inventories 1,925,977 --
Prepaid expenses 692,489 304,599
------------ ------------
Total current assets $ 61,205,868 $ 19,830,361
Property and equipment, net 4,845,860 3,379,815
Long-term investment securities 3,163,501 --
Investment in affiliate 429,843 --
Other assets 81,157 80,057
------------ ------------
Total assets $ 69,726,229 $ 23,290,233
============ ============
Liabilities
Current Liabilities
Checks drawn in excess of bank balances $ -- $ 601,629
Accounts payable 2,718,276 781,999
Accrued expenses 2,483,754 1,123,948
Current portion of long-term obligations 387,577 388,795
Deferred liabilities 292,787 --
------------ ------------
Total current liabilities 5,882,394 2,896,371
Deferred rent -- 79,923
Long-term obligations, less current portion 134,696 480,964
------------ ------------
Total Liabilities 6,017,090 3,457,258
Commitments and contingencies
Shareholders' Equity
Preferred stock, $1.00 par value
Authorized shares - 6,000,000
Issued and outstanding shares - none -- --
Common stock, $0.01 par value
Shares authorized - 50,000,000
Issued and outstanding shares --
As of December 31, 1999 - 9,209,633
As of December 31, 1998 - 4,872,193 96,096 48,722
Additional paid-in capital 106,227,784 40,784,377
Deferred stock compensation (29,393) (91,182)
Accumulated deficit (42,520,588) (20,908,942)
Accumulated other comprehensive loss (60,760) --
------------ ------------
Total shareholders' equity 63,709,139 19,832,975
------------ ------------
Total liabilities and shareholders' equity $ 69,726,229 $ 23,290,233
============ ============
See accompanying notes to the financial statements
33
SonoSite, Inc.
Statements of Operations
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997
------------ ------------ -----------
Grant revenue $ 124,506 $ 973,107 $ 2,947,700
Sales revenue 10,131,767 -- --
Cost of sales 6,445,101 -- --
------------ ------------ -----------
Gross margin on sales revenue 3,686,666 -- --
Operating expenses
Research and development 14,532,697 9,474,074 7,063,842
Sales and marketing 9,767,299 3,120,238 1,268,272
General and administrative 2,637,466 1,903,883 610,037
------------ ------------ -----------
Total operating expenses 26,937,462 14,498,195 8,942,151
Other income (expense)
Equity in income of affiliate 29,843 -- --
Interest income 1,600,811 541,100 --
Interest expense (116,010) (41,064) --
------------ ------------ -----------
Total other income 1,514,644 500,036 --
Net loss $(21,611,646) $(13,025,052) $(5,994,451)
============ ============ ===========
Basic and diluted net loss per share $ (3.08) $ (2.72) $ (1.28)
============ ============ ===========
Shares used in computing net loss per share 7,024,800 4,796,264 4,683,667
============ ============ ===========
See accompanying notes to the financial statements
34
SonoSite, Inc.
Statements of Cash Flows
For the Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating activities:
Net loss $(21,611,646) $(13,025,052) $(5,994,451)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,390,109 410,613 110,698
Undistributed equity in income of affiliate (29,843) -- --
Amortization of premium/discount on investment securities (69,081) -- --
Amortization of deferred compensation 197,374 58,914 --
Changes in operating assets and liabilities:
Increase in accounts receivable (7,856,547) -- --
Increase in receivables from affiliate (400,009) -- --
Increase in interest receivable (484,684) -- --
Increase in inventories (2,325,977) -- --
Increase in prepaid expenses (387,890) (304,599) --
Increase in accounts payable 1,936,277 781,999 --
Increase in accrued expenses 1,359,806 954,109 116,985
Increase in deferred liabilities 212,864 79,923 --
------------ ------------ ------------
Net cash used in operating activities (28,069,247) (11,044,093) (5,766,768)
Investing activities:
Purchase of investments (64,844,230) -- --
Proceeds from maturities of investments 45,095,000 -- --
Purchase of equipment (2,856,154) (2,320,468) (363,962)
Increase in other assets (1,100) (80,057) --
------------ ------------ ------------
Net cash used in investing activities (22,606,484) (2,400,525) (363,962)
Financing activities:
(Decrease) increase in bank overdraft (601,629) 601,629 --
Repayment of long-term obligations (347,486) (190,234) --
Proceeds from the sale of common shares 64,734,485 -- --
Exercise of stock options 616,711 6,728 --
Contributions from ATL Ultrasound 12,000,000 20,552,257 6,130,730
------------ ------------ ------------
Net cash provided by financing activities 76,402,081 20,970,380 6,130,730
Net change in cash 25,726,350 7,525,762 --
Cash and cash equivalents at beginning of period 7,525,762 -- --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 33,252,112 $ 7,525,762 $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 116,010 $ 41,064 $ --
============ ============ ============
Supplemental disclosure of non-cash investing and financing
activities:
Investment in affiliate made through inventory shipments $ 400,000 $ -- $ --
============ ============ ============
Equipment acquired through long-term obligations $ -- $ 1,059,993 $ --
============ ============ ============
Contribution from ATL Ultrasound recorded as receivable $ -- $ 12,000,000 $ --
============ ============ ============
See accompanying notes to the financial statements
35
SonoSite, Inc.
Statements of Shareholders' Equity and Comprehensive Loss
Common Stock Deferred
-------------------- Additional Stock Accumulated
Shares Amount paid-in capital compensation deficit
----