Aspect Medical Systems, Inc. Reports Operating Results for Second Quarter Ended June 30, 2007.Highlights of Q2 2007 Compared with Q2 2006 * Product revenue increased 9% to $23.1 million * Sensor revenue increased 17% to $18.6 million * Installed base of BIS monitors and modules exceeded 43,300 units, which represents an increase of 20% from the end of Q2 2006 * GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). income before taxes was $3.4 million, or $0.15 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share in Q2 2007, compared with $2.2 million, or $0.09 per diluted share in Q2 2006 * Non-GAAP income before taxes (which is exclusive of stock-based compensation) was $5.5 million in Q2 2007, or $0.24 per diluted share, compared with $3.8 million, or $0.16 per diluted share in Q2 2006 NORWOOD, Mass. -- Aspect Medical Systems, Inc. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on : ASPM ASPM Abnormal Spindle-Like Microcephaly Associated ASPM Asociación del Secretariado Profesional de Madrid (Spanish: Association of the Professional Secretaryship of Madrid) ASPM Armed Services Procurement Regulation Manual ), reported today that revenue was $26.6 million for Q2 2007, an increase of 18% over revenue of $22.6 million in Q2 2006. Product revenue was $23.1 million, a 9% increase from $21.2 million in Q2 2006. Our financial results for Q2 2007 were significantly influenced by the conclusion of the Boston Scientific The Boston Scientific Corporation (NYSE: BSX) (abbreviated BSC), is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a range of interventional medical specialties, including interventional cardiology, peripheral interventions, alliances, the purchases of Aspect shares from Boston Scientific, and the issuance of $125 million of convertible debt. With the adoption of Statement of Financial Accounting Standards No.123R (SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System No.123R) as of January 1, 2006, Aspect began reporting non-GAAP financial results that exclude the impact of stock-based compensation. See below under the heading "Use of Non-GAAP Financial Measures" for a discussion of the Company's use of such measures. The reconciliation of GAAP (U.S. generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ) to non-GAAP measures is contained in an attached table. Key GAAP operating results for Q2 2007 include: * Gross profit margin Gross profit margin Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold. gross profit margin A measure calculated by dividing gross profit by net sales. was 78.4% compared with 76.1% in Q2 2006; * Operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. were $18.4 million, an increase of 16% compared with $15.8 million in Q2 2006; * Income before taxes per diluted share was $0.15 in Q2 2007 compared with $0.09 in Q2 2006; * The provision for income taxes was $1.9 million for Q2 2007 compared with $33,000 for Q2 2006; and * Net income was $1.5 million, or $0.07 per diluted share, compared with $2.1 million, or $0.09 per diluted share, in Q2 2006. Key non-GAAP operating results for Q2 2007 include: * Gross profit margin was 78.9% compared with 76.6% in Q2 2006; * Operating expenses were $16.4 million, an increase of 15% compared with $14.3 million in Q2 2006; * Income before taxes per diluted share was $0.24 in Q2 2007 compared with $0.16 in Q2 2006; * The provision for income taxes was $2.0 million for Q2 2007 compared with $33,000 for Q2 2006; and * Net income was $3.5 million, or $0.15 per diluted share, compared with $3.8 million, or $0.16, in Q2 2006. "Beyond the financial results of the quarter, the important story of Q2 was the opportunity to recapture recapture n. in income tax, the requirement that the taxpayer pay the amount of tax savings from past years due to accelerated depreciation or deferred capital gains upon sale of property. (See: income tax) RECAPTURE, war. full commercial rights to our neuroscience neu·ro·sci·ence n. Any of the sciences, such as neuroanatomy and neurobiology, that deal with the nervous system. neuroscience the embryology, anatomy, physiology, biochemistry and pharmacology of the nervous system. program, conclude the alliance with Boston Scientific, and complete a very successful convertible debt financing Debt Financing When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay . The financing permitted us to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. a total of 5.5 million shares while retaining our financial flexibility," said Nassib Chamoun, Aspect's president and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. . "In our core business, Aspect remains in a transitional period. We are shifting our focus from acquiring new customers to increasing sensor utilization within our existing customer base. We are also investing strategically in clinical education, product enhancements, and long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. outcomes research, because we believe these have the potential to become significant catalysts. Although it is difficult to predict when growth will reaccelerate, we are confident that these are the right steps to strengthen the business and create long-term shareholder value." Revenue Analysis - (see attached unaudited consolidated revenue data) Domestic revenue was $20.7 million for the second quarter and $39.1 million for the six months ended June 30, 2007, an increase of 16% and 13%, respectively, over comparable periods in 2006. Domestic sensor revenue increased 13% for the second quarter of 2007 as compared with the second quarter of 2006. The increase resulted from a 12% increase in sensor unit volume combined with a 1% increase in sensor average unit price. Domestic equipment revenue declined by 28% due to a decline of 40% in monitor and module units sold, partially offset by an increase of 15% in the average unit prices of monitors. Domestic strategic alliance revenue increased to $3.6 million in Q2 2007 compared with $1.5 million in Q2 2006. This was due to the recognition in Q2 2007 of approximately $3.6 million of previously deferred strategic alliance revenue in connection with the Company's termination and repurchase agreement Repurchase agreement An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. entered into with Boston Scientific in Q2 2007. This agreement terminated all of the rights and obligations of the Company and Boston Scientific under the 2002 OEM (Original Equipment Manufacturer) The rebranding of equipment and selling it. The term initially referred to the company that made the products (the "original" manufacturer), but eventually became widely used to refer to the organization that buys the products and Product Development agreement and the 2005 neurosciences strategic alliance. International revenue was $5.9 million for the second quarter and $11.7 million for the six months ended June 30, 2007, an increase of 24% and 18%, respectively, over comparable periods in 2006. International sensor revenue increased by 34% compared with Q2 2006 due mostly to an increase in sensor units sold. International equipment revenue increased by 8% in Q2 2007 due to an increase of 23% in the average unit selling prices for monitors and an increase in other equipment revenues of 98% but was partially offset by an 8% decline in combined monitor and module unit sales unit sales Sales measured in terms of physical units rather than dollars. Unit sales data are often used by financial analysts when evaluating the health of a company. . Gross Profit Margin and Operating Expenses GAAP and non-GAAP gross profit margin increased to 78.4% and 78.9%, respectively, in Q2 2007 compared with Q2 2006 principally as the result of the recognition of $3.6 million of previously deferred revenue in connection with the termination of the OEM Product Development agreement with Boston Scientific. GAAP and non-GAAP product margin increased to 75.0% and 75.6%, respectively, in Q2 2007 compared with Q2 2006 as the result of favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. changes in the mix of sensors
Total GAAP and non-GAAP operating expenses increased by 16% and 15%, respectively, in Q2 2007 compared with Q2 2006. The increases included costs associated with the Boston Scientific alliance, the launch of our View monitor and changes to research and development and grant programs. Interest Income and Expense Interest income was $1.0 million in Q2 2007, an increase of 31% compared with Q2 2006, due to increased cash, cash equivalents and marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has as the result of the $125 million in proceeds received from the convertible debt issued during June 2007. Interest expense was $115,000 in Q2 2007 due to the convertible debt issued in June 2007. There was no interest expense in Q2 2006. Income Taxes In Q2 2007, the Company recognized income tax expense of approximately $1.9 million on a GAAP basis and $2.0 million on a non-GAAP basis. This translates to an effective tax rate of 56% for GAAP and 36% for non-GAAP. The GAAP effective tax rate is higher because of the tax treatment of incentive stock options (or ISO's). The expense associated with these options is recorded as they vest, but a tax benefit is only recognized when they are exercised and sold under specific circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Liquidity and Capital Resources At June 30, 2007, the Company had cash, cash equivalents, restricted cash and marketable securities of $140.2 million compared with $63.5 million at December 31, 2006. The 2007 increase is due to the proceeds received from the Company's $125 million convertible debt offering in Q2 2007 offset by approximately $47.4 million used for the repurchase of 3,000,000 shares of the Company's common stock during June 2007. The Company had debt in the form of long term convertible notes of $125 million at June 30, 2007, and no debt at December 31, 2006. As previously announced, in July 2007, the Company repurchased an additional 2,500,000 shares of its common stock from Boston Scientific for approximately $37.7 million. Outlook for the Third Quarter of 2007 For Q3 2007, the Company is forecasting that total revenue and product revenue will be within a range of $21.6 million to $22.6 million, and net loss per fully-diluted share will be within a range of $0.01 to $0.02 on a GAAP basis, and on a non-GAAP basis, exclusive of stock-based compensation, net income per fully-diluted share will be within a range of $0.05 to $0.07. On a pre-tax basis, GAAP net loss per fully-diluted share will be within a range of $0.01 to $0.03, and on a non-GAAP basis, exclusive of stock-based compensation, net income per fully-diluted share will be within a range of $0.09 to $0.11. See below under the heading "Use of Non-GAAP Financial Measures" for a discussion of the Company's use of such measures. See attached table for the reconciliation of GAAP to non-GAAP items for Q2 2007. Use of Non-GAAP Financial Measures In addition to disclosing financial results calculated in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with U.S. generally accepted accounting principles (GAAP), this earnings release contains non-GAAP financial measures that exclude the effects of share-based compensation and the requirements of Statement of Financial Accounting Standards No. 123(R), or "SFAS No. 123R". Stock-based compensation related to stock options, restricted stock and stock awards is excluded from our Non-GAAP costs of revenue, Non-GAAP gross profit, Non-GAAP gross profit margin percent, Non-GAAP product margin percent, Non-GAAP total operating expenses (research and development, sales and marketing and general and administrative), Non-GAAP income from operations, Non-GAAP income before income taxes, Non-GAAP income before income taxes per diluted share, Non-GAAP income tax expense, Non-GAAP effective income tax rate, Non-GAAP net income, Non-GAAP diluted earnings per share diluted earnings per share An earnings measure calculated by dividing net income less preferred stock dividends for a period by the average number of shares of common stock that would be outstanding if all convertible securities were converted into shares of : Stock-based compensation expenses consist of expenses for stock options, restricted stock and stock awards under SFAS No.123R. The Company excludes these stock-based compensation expenses and the related tax effects from non-GAAP measures primarily because they are non-cash expenses Noun 1. non-cash expense - an expense (such as depreciation) that is not paid for in cash disbursal, disbursement, expense - amounts paid for goods and services that may be currently tax deductible (as opposed to capital expenditures) , the complexity and considerable judgment involved in calculating their values, and that they have in the past and are expected in the future to be driven by a different set of factors than other expenses in this category. * The manner in which management uses the Non-GAAP financial measure to conduct or evaluate its business: The non-GAAP financial measures used by management and disclosed by the Company exclude the income statement effects of all forms of share-based compensation. Reconciliations of the GAAP to non-GAAP income statement financial measures for the three and six months ended June 30, 2007 and July 1, 2006 and expected net income before taxes per diluted share and net income per diluted share for the third quarter of 2007 are set forth in the financial tables attached to this earnings release and the reconciliations to those GAAP financial measures should be carefully considered. The Company applied the modified prospective method of adoption of SFAS No. 123R, under which the effects of SFAS No. 123R are reflected in the Company's GAAP financial statement presentations for the three and six months ended June 30, 2007 and July 1, 2006. Gross profit, gross profit margin, product margin, costs of revenue, total operating expenses (research and development, sales and marketing, general and administrative), operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. , net income before taxes per share, net income and net income per share (referred to as earnings per share, or EPS (Encapsulated PostScript) A PostScript file format used to transfer a graphic image between applications and platforms. EPS files contain PostScript code as well as an optional preview image in TIFF, WMF, PICT or EPSI, the latter being an ASCII-only format. ) are the primary financial measures management uses for planning and forecasting future periods that are affected by shared-based compensation. Because management reviews these financial measures calculated without taking into account the effects of SFAS No.123R, these financial measures are treated as "non-GAAP financial measures" under Securities and Exchange Commission rules Securities and Exchange Commission Rules Rules enacted by the SEC to assist in the regulation of US financial markets. . Management uses the non-GAAP financial measures for internal managerial purposes, including as a means to compare period-to-period results on a consolidated basis and as a means to evaluate the Company's results on a consolidated basis compared to those of other companies. In addition, management uses certain of these measures when publicly providing forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. on expectations regarding future consolidated financial results. Management and the Board of Directors will continue to compare the Company's historical consolidated results of operations (revenue, costs of revenue, gross profit, gross profit margin percent, product margin percent, research and development expenses, sales and marketing expenses, general and administrative expenses, total operating expenses, operating margin Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: , income before income taxes, income before income taxes per share, operating income as well as net income and EPS), excluding stock-based compensation, to financial information prepared on the same basis during the Company's budget and planning process, to assess the business, make resource allocation resource allocation Managed care The constellation of activities and decisions which form the basis for prioritizing health care needs decisions and to compare consolidated results to the objectives identified for the Company. The Company's budget and planning process culminates with the preparation of a consolidated annual budget that includes these non-GAAP financial measures. This budget, once finalized See finalization. and approved, serves as the basis for allocation of resources allocation of resources Apportionment of productive assets among different uses. The issue of resource allocation arises as societies seek to balance limited resources (capital, labour, land) against the various and often unlimited wants of their members. and management of operations. While share-based compensation is a significant expense affecting the Company's results of operations, management excludes share-based compensation from the Company's consolidated budget and planning process to facilitate period to period comparisons and to assess changes in gross margin, net income and earnings per share targets in relation to changes in forecasted revenue. Profit-dependent cash incentive pay to employees, including senior management, also is calculated using formulae that incorporate the Company's annual results excluding share-based compensation expense. * The economic substance behind management's decision to use such Non-GAAP financial measures: The Company discloses non-GAAP information to the public to enable investors to more easily assess the Company's performance on the same basis applied by management and to ease comparison on both a GAAP and non-GAAP basis among other companies that separately identify share-based compensation expenses. In particular, the Company believes that it is useful to investors to understand how the expenses and other adjustments associated with the application of SFAS No. 123R are being reflected on the Company's income statements. * Why management believes the Non-GAAP financial measure provides useful information to investors: Management believes that each of the non-GAAP measures reveals important information about the economic model of the Company and we discuss each of these items with investors on a regular basis on both a GAAP and non-GAAP basis. The Company discloses this information to the public to enable investors to more easily assess the Company's past performance and estimate future performance on the same basis applied by management and to ease comparison on both a GAAP and non-GAAP basis among other companies that separately identify share-based compensation expense. In particular, the Company believes that it is useful to investors to understand how the expenses and other adjustments associated with the application of SFAS No. 123R are being reflected on the Company's income statements. * The material limitations associated with use of Non-GAAP financial measure as compared to the use of the most directly comparable GAAP financial measures: The non-GAAP financial measures disclosed by the Company are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. The non-GAAP financial measures disclosed by the Company may be different from, and therefore may not be comparable to, similar measures used by other companies. Although these non-GAAP financial measures adjust expense, and diluted share items to exclude the accounting treatment of share-based compensation, they should not be viewed as a pro-forma presentation reflecting the elimination of the underlying share-based compensation programs, as those programs are an important element of the Company's compensation structure and generally accepted accounting principles indicate that all forms of share-based payments should be valued and included as appropriate in results of operations. * The manner in which management compensates for these limitations when using Non-GAAP financial measures: Management takes into consideration this aspect of the non-GAAP financial measures by evaluating the dilutive effect Dilutive effect Result of a transaction that decreases earnings per common share (EPS). of the Company's share-based compensation arrangements on the Company's basic and diluted earnings per share calculations and by reviewing other quantitative and qualitative information regarding the Company's share-based compensation arrangements. Management also uses these non-GAAP measures in conjunction with GAAP measures to assess the impact of share based compensation. Conference Call Scheduled for 10:00 a.m. ET Today Aspect will hold a conference call to discuss the results of the second fiscal quarter of 2007 and management's outlook for the third fiscal quarter of 2007 at 10:00 a.m. Eastern Time today, Wednesday, July 25, 2007. The call can be accessed live by dialing 1-866-293-8970 (domestic), 1-913-312-1230 (international), or via the webcast at http://www.aspectmedical.com on the Investor page, or http://www.earnings.com. It also will be available for replay until August 2, 2007, by dialing 1-888-203-1112 (domestic), or 1-719-457-0820 international), access code 2325864. The webcast replay will also be available on Aspect's website at http://www.aspectmedical.com on the investor page. About the Company Aspect Medical Systems, Inc. (NASDAQ: ASPM) is a global market leader in brain monitoring technology. To date, the Company's Bispectral Index A Bispectral index (BIS) monitor is a modern neurophysiological monitoring device which continually analyses a patient's electroencephalograms during general anaesthesia to assess the level of consciousness during anaesthesia. (BIS) technology has been used to assess approximately 21 million patients and has been the subject of more than 2,800 published articles and abstracts. BIS technology is installed in approximately 80 percent of hospitals listed in the July 2007 U.S News and World Report ranking of America's Best Hospitals America's Best Hospitals Media & health An annual 'report card' on the quality of care received in US hospitals published by US News & World Report, that is either proudly quoted by those who are rated or dismissed by those who are not and in approximately 58 percent of all domestic operating rooms operating room n. Abbr. OR A room equipped for performing surgical operations. . In the last twelve months BIS technology was used in approximately 17 percent of all U.S. surgical procedures Surgical procedures have long and possibly daunting names. The meaning of many surgical procedure names can often be understood if the name is broken into parts. For example in splenectomy, "ectomy" is a suffix meaning the removal of a part of the body. "Splene-" means spleen. requiring general anesthesia Anesthesia, General Definition General anesthesia is the induction of a state of unconsciousness with the absence of pain sensation over the entire body, through the administration of anesthetic drugs. or deep sedation Sedation Definition Sedation is the act of calming by administration of a sedative. A sedative is a medication that commonly induces the nervous system to calm. Purpose The process of sedation has two primary intentions. . BIS technology is available in more than 160 countries. Aspect Medical Systems has OEM agreements with seven leading manufacturers of patient monitoring systems. Safe Harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. Statement Certain statements in this release are forward-looking and may involve risks and uncertainties, including without limitation statements with respect to the expected benefits of the Company's investments in clinical education, product enhancements and outcomes research; the expected benefits of the Company's stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. and strategic alliance termination transactions with Boston Scientific; and its guidance with respect to total revenue, product revenue and net income and income before taxes for the third quarter of 2007 on both a GAAP and non-GAAP basis. There are a number of factors that could cause actual results to differ materially from those indicated by these forward-looking statements. For example, the Company may not be able to control expenses or grow its sales force. The Company may also not be able to achieve widespread market acceptance of its BIS monitoring technology, or to compete with new products or alternative techniques that may be developed by others, including third-party anesthesia anesthesia (ănĭsthē`zhə) [Gr.,=insensibility], loss of sensation, especially that of pain, induced by drugs, especially as a means of facilitating safe surgical procedures. monitoring products approved by the FDA FDA abbr. Food and Drug Administration FDA, n.pr See Food and Drug Administration. FDA, n.pr the abbreviation for the Food and Drug Administration. . The Company also faces competitive and regulatory risks relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc its ability to successfully develop and introduce enhancements and new products including the BIS VISTA Vista (vĭs`tə), uninc. city (1990 pop. 71,872), San Diego co., SW Calif., near the Pacific coast, in an agricultural and resort area; inc. 1963. monitor and products based upon its neuroscience technology. In addition, the Company's ability to remain profitable will depend upon its ability to promote frequent use of the BIS system so that sales of its BIS sensors increase. The Company will not remain profitable if hospitals and anesthesia providers do not buy and use its BIS systems in sufficient quantities. Cases of awareness with recall during monitoring with the BIS system and significant product liability claims are among the factors that could limit market acceptance. The Company has incurred substantial indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. in connection with the issuance of convertible notes in June 2007 and a substantial portion of its cash flows from operations may be dedicated to interest and principal payments on such notes. There are other factors that could cause the Company's actual results to vary from its forward-looking statements, including without limitation those set forth under the heading "Risk Factors" in the Company's Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December 31, 2006 and the Company's Quarterly Report on Form 10-Q Form 10-Q See 10-Q. for the fiscal quarter ended March 31, 2007, each as filed with the Securities and Exchange Commission. In addition, the statements in this press release represent the Company's expectations and beliefs as of the date of this press release. The Company anticipates that subsequent events and developments may cause these expectations and beliefs to change. However, while the Company may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company's expectations or beliefs as of any date subsequent to the date of this press release. For further information regarding Aspect Medical Systems, Inc., visit the Aspect Medical Systems, Inc. website at www.aspectmedical.com. 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