SONOSITE INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

	X	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
			For the quarterly period ended March 31, 2004

		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
			For the transition period from to to

Commission file number 0-23791

SONOSITE, INC.

(Exact name of registrant as specified in its charter)


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

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

(425) 951-1200
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $0.01 par value
(Class)

14,723,823
(Outstanding as of May 4, 2004)

Table of Contents

SonoSite, Inc.

Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2004
Table of Contents

	< /p>	Page
		No.
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets--March 31, 2004 and December 31, 2003	3

	Condensed Consolidated Statements of Operations--Three Months Ended March 31, 2004 and 2003	4

	Condensed Consolidated Statements of Cash Flows--Three Months Ended March 31, 2004 and 2003	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	28

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 6.	Exhibits and Reports on Form 8-K	29

SIGNATURE		30

Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

SonoSite, Inc.

Condensed Consolidated Balance Sheets
(unaudited)

(In thousands, except share data)	March 31,				December 31,
Assets	2004				2003

Current assets:
Cash and cash equivalents	$		14,203		$		13,683
Short-term investment securities			5,770				13,094
Accounts receivable, less allowance for doubtful accounts of $1,110 and $933			22,799				25,849
Inventories			13,137				14,148
Prepaid expenses and other current assets			1,811				1,520


Total current assets			57,720				68,294

Property and equipment, net			5,997				5,564
Investment securities			44,102				34,239
Other assets			1,915				993

Total assets	$		109,734		$		109,090

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$		3,290		$		3,054
Accrued expenses			6,806				6,503
Current portion of long-term obligations			51				88
Deferred revenue			3,835				3,840

Total current liabilities			13,982				13,485

Deferred rent			263				275

Total liabilities			14,245				13,760

Commitments and contingencies

Shareholders' equity:
Preferred stock, $1.00 par value
Authorized shares--6,000,000
Issued and outstanding shares--none			--				--
Common stock, $.01 par value
Authorized shares--50,000,000
Issued and outstanding shares:
As of March 31, 2004--14,701,813
As of December 31, 2003--14,572,524			147				146
Additional paid-in-capital			182,547				180,839
Accumulated deficit		(	88,816	)		(	87,416	)
Accumulated other comprehensive income			1,611				1,761

Total shareholders' equity			95,489				95,330

Total liabilities and shareholders' equity	$		109,734		$		109,090

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SonoSite, Inc.

Condensed Consolidated Statements of Operations
(unaudited)

			Three Months Ended
(In thousands, except loss per share)			March 31,
			2004				2003

Revenue	$		23,514		$		17,158
Cost of revenue			8,285				6,367

Gross margin			15,229				10,791

Operating expenses:
Research and development			3,073				2,833
Sales and marketing			11,585				8,890
General and administrative			2,232				2,005

Total operating expenses			16,890				13,728

Other income (loss):
Interest income			218				270
Interest expense		(	1	)		(	7	)
Other			44				110

Total other income			261				373

Net loss	$	(	1,400	)	$	(	2,564	)


Basic and diluted net loss per share	$	(	0.10	)	$	(	0.18	)


Weighted average common shares used in computing net loss per share			14,631				14,206

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SonoSite, Inc.

Condensed Consolidated Statements of Cash Flows
(unaudited)

			Three Months Ended
(In thousands)			March 31,
	2004				2003

Operating activities:
Net loss	$	(	1,400	)	$	(	2,564	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			670				601
Equity in losses of affiliates			57				--
Net gain on investments		(	52	)		(	17	)
Amortization of premiums on investment securities			148				176
Stock-based compensation to non-employees			19				--
Changes in operating assets and liabilities:
Accounts receivable			3,025				3,438
Inventories			1,044			(	1,563	)
Prepaid expenses and other assets		(	1,269	)			380
Accounts payable			239			(	1,511	)
Accrued expenses			309			(	27	)
Deferred liabilities		(	26	)			266

Net cash provided by (used in) operating activities			2,764			(	821	)

Investing activities:
Purchase of investments		(	16,868	)		(	6,115	)
Proceeds from sales/maturities of investments			14,248				6,095
Purchase of property and equipment		(	1,106	)		(	236	)

Net cash used in investing activities		(	3,726	)		(	256	)

Financing activities:
Exercise of stock options			1,690				144
Repayment of long-term obligations		(	37	)		(	32	)

Net cash provided by financing activities			1,653				112

Effect of exchange rate changes on cash and cash equivalents		(	171	)			20

Net change in cash and cash equivalents			520			(	745	)
Cash and cash equivalents at beginning of period			13,683				26,381

Cash and cash equivalents at end of period	$		14,203		$		25,636

Supplemental disclosure of cash flow information:
Cash paid for interest	$		1		$		7

Supplemental disclosure of non-cash investing and financing activities:
Unrealized gain (loss) on investments	$		67		$	(	4	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SonoSite, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)

Interim Financial Information

Basis of Presentation

The information contained herein has been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X. The information furnished reflects, in the opinion of SonoSite, Inc. management, all adjustments necessary (which are of a normal and recurring nature) for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of our expected results for the entire year ending December 31, 2004 or for any other fiscal period. These financial statements do not include all disclosures required by generally accepted accounting principles. For a presentation including all disclosures required by generally accepted accounting principles, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003, included in our Annual Report on Form 10-K.

Stock-based compensation

At March 31, 2004, we had five stock-based employee compensation plans. We account for those plans under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost related to stock option grants to employees has been recognized only to the extent that the fair market value of the stock exceeds the exercise price of the stock option at the date of the grant. There was no compensation expense related to stock option grants to employees for the three month periods ended March 31, 2004 or 2003. The following table illustrates the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation (in thousands, except per share data):

		Three Months Ended
		March 31,
	2004				2003

Net loss, as reported	$	(	1,400	)	$	(	2,564	)
Less: Stock-based employee compensation expense determined under fair value based method		(	1,133	)		(	1,400	)

Pro forma net loss	$	(	2,533