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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2004OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File No. 0-22166 AETRIUM INCORPORATED  Minnesota
    
    41-1439182(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2350 Helen Street
North St. Paul, Minnesota 55109
(Address of principal executive offices) (Zip code) Registrants telephone number, including area code: (651) 770-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 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 þ NO o 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 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 o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES o NO þ The aggregate market value of the Registrants Common Stock held by non-affiliates, computed
by reference to the price at which the Common Stock was last sold as of June 30, 2004, which is the
last business day of the Registrants most recently completed second fiscal quarter, as reported by
The Nasdaq Stock Market was $68,161,000. As of March 16, 2005, 9,629,123 shares of Common Stock of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference information (to the
extent specific sections are referred to herein) from the Registrants definitive Proxy Statement
for its 2005 Annual Meeting of Stockholders to be held May 25, 2005 (the 2005 Proxy Statement).




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Form 10-K For the fiscal year ended December 31, 2004 TABLE OF CONTENTS PART IITEM 1. BUSINESS
    
    
    1ITEM 2. PROPERTIES
    
    
    11ITEM 3. LEGAL PROCEEDINGS
    
    
    12ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    12ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    13PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    15ITEM 6. SELECTED FINANCIAL DATA
    
    
    16ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    18ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    29ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    30ITEM 9A. CONTROLS AND PROCEDURES
    
    
    30ITEM 9B. OTHER INFORMATION
    
    
    30PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    31ITEM 11. EXECUTIVE COMPENSATION
    
    
    31ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    31ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    31ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    32PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    33EXHIBIT INDEX
    
    
    E-1Executive Officer Profit Sharing ProgramIndependent Registered Public Accounting Firm's ConsentCertification of Chief Executive OfficerCertification of Chief Administrative OfficerCertification of TreasurerCertification Pursuant to 18 U.S.C. Section 1350
  (i)




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PART I This Form 10-K contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form
10-K that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as may, will, expect, believe, anticipate,
estimate or continue or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors, including those set forth
under the heading Business Risks and Uncertainties located in Managements Discussion and
Analysis of Financial Condition and Results of Operations under Item 7 below. We undertake no
obligation to correct or update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult any future
disclosures we may make on related subjects in future filings with the SEC. References in this
Form 10-K to Aetrium, the company, we and our, unless the context otherwise requires, refer
to Aetrium Incorporated and its consolidated subsidiaries and their respective predecessors. 
 ITEM 1. BUSINESS. Overview We design, manufacture and market a variety of electromechanical equipment used in the
handling and testing of semiconductor and passive electronic devices, such as integrated circuits,
or ICs, and discrete electronic components. Our primary focus is on high volume IC device types
and on the latest device package designs. Our products are purchased primarily by semiconductor
manufacturers and their assembly and test subcontractors. Our products are used in the test,
assembly and packaging, or TAP, segment of semiconductor manufacturing (in which we include the
manufacture of both semiconductor and passive electronic devices). Our products automate critical
functions to improve manufacturing yield, raise quality levels, increase product reliability and
reduce manufacturing costs. We have three principal equipment product lines:  
    Test Handler Products. In terms of revenue, this is our largest product line. Our
broad line of test handler products incorporates thermal conditioning, contacting and
automated handling technologies to provide automated handling of ICs and discrete
electronic components during production test cycles. We also offer change kits to
adapt our test handlers to different device package configurations or to upgrade
installed equipment for enhanced performance. Change kits represent a significant part
of our revenue.
    Semiconductor Automation Products. Most of our semiconductor automation products
are sold to semiconductor manufacturers and their subcontractors, and are used to
automate the loading and unloading of burn-in boards. The rest of our semiconductor
automation products are sold to original equipment manufacturers, or OEMs, to be
incorporated as the automated handling components of such OEMs own proprietary
equipment for a variety of other IC processing requirements, such as marking, lead
scanning, and lead trim and form.
    Reliability Test Equipment. The primary focus of our reliability test products is
to provide IC manufacturers with structural performance data to aid in the evaluation
and improvement of IC designs and manufacturing processes to increase IC yield and
reliability.




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Test handler products accounted for 56%, 52% and 51% of our net sales in 2004, 2003 and 2002,
respectively. Semiconductor automation products accounted for 6%, 11% and 8% of our net sales in
2004, 2003 and 2002, respectively. Reliability test equipment accounted for 21%, 20% and 18% of our
net sales in 2004, 2003 and 2002, respectively. Change kits and spare parts accounted for 17%, 17%
and 23% of our net sales in 2004, 2003 and 2002, respectively. 2004 was a year of transitions in the TAP segment of the semiconductor equipment industry. In
the first half of 2004, fueled by increasing demand for semiconductors, revenue for the TAP segment
of the semiconductor equipment industry increased approximately 80% over that of the same period in
2003, according to Semiconductor Equipment and Materials International, or SEMI, reporting on North
American semiconductor equipment manufacturers. However, the semiconductor industry and its
distribution channels took quick and strong action in the second half of 2004 to address growing
and excess inventories. As a result, revenue for the TAP segment of the semiconductor equipment
industry decreased in the second half of 2004, although revenue for the year was approximately 45%
higher than for 2003, as reported by SEMI on the same companies. Our results were similar in
pattern, although more pronounced. Our revenues for the first half of 2004 increased approximately
140% over that of the same period in 2003, as we enjoyed strong demand across our product lines.
Demand for our products lessened considerably, however, in the second half of 2004, as our
customers experienced the same market conditions as the rest of the semiconductor industry.
Nevertheless, our revenue for all of 2004 increased 97% over that of 2003, our operations were
profitable in each quarter of 2004, and our ending cash position for 2004 increased by more than
$3,000,000 over 2003. In addition, we continued our product development efforts throughout 2004,
which were focused on the newest and fastest growing IC package types and the latest semiconductor
processes. We ended the year having made substantial progress on pivotal customer evaluations of
our newest product introductions. There are many and varied projections offered by analysts of the semiconductor and
semiconductor equipment industries as to how 2005 will proceed for those industries. Our customers
offer us little visibility into the demand for our products in 2005 as they continue to react very
conservatively to the flattened semiconductor industry market conditions. We believe we are
positioned to take full advantage of the industry conditions however they develop because of our
cost structure, our newer product introductions that led our strong growth in the first half of
2004, our newest product introductions that we believe will open new markets for us, and our strong
working capital position. All of our product development and manufacturing activities are conducted at either our North
St. Paul, Minnesota or Dallas, Texas facilities. We manufacture products within each of our
principal product lines at both of these facilities. Background Our strategy has focused on revenue growth through product line expansion, by both internally
developing and acquiring complementary technologies, businesses, or product lines. In 1998, we acquired the equipment business of WEB Technology, Inc. The primary products we
acquired were semiconductor automation products used to automate the loading and unloading of
burn-in boards. This equipment can be configured to accommodate any burn-in board currently being
manufactured. We manufacture this equipment at our Dallas operations. In 1997, we completed two acquisitions that expanded our test handler product lines. In
November 1997, we acquired a product line of pick-and-place test handlers from Advantek Inc. This
acquisition extended our product line of pick-and-place test handlers for non-memory analog and
logic IC devices. We manufacture the product line acquired from Advantek at our North St. Paul
operations. 2




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In April 1997, we acquired a line of turret based test handler products through our purchase
of the assets of Forward Systems Automation, Inc., which we have since expanded and advanced
through internal product development. This line of test handlers addresses discrete electronic
components and small ICs, including the fastest growing and newest IC package types. We manufacture
this product line at our Dallas operations. In December 1995, we acquired the assets of E.J. Systems, Inc. Through this acquisition, we
obtained some early stage conductive thermal core technology that we have further developed and
transferred to our North St. Paul operations. In November 1994, we acquired the assets of Sym-Tek Systems, Inc., which expanded our presence
in the memory IC market, and also extended our line of gravity feed test handlers for non-memory IC
test handler applications. We have since discontinued the products for non-memory applications. In
the fourth quarter of 2000, we also decided to exit the highly volatile handler market for memory
applications. However, through this acquisition we obtained core pick-and-place and in-tray
handling technologies, which we further developed and transferred to our North St. Paul operations. In December 1993, we originated our reliability test systems product line through the purchase
of the assets of Sienna Technologies, Inc. Since the acquisition, we have developed and introduced
a new generation product line that has been well received by a growing customer base. Our
reliability test products are primarily manufactured at our North St. Paul operations. In April 1988, we acquired the core products of our 5050 series of gravity feed test handlers
through our acquisition of Electro-Mechanical Systems, Inc. Since then, through internal
development we have expanded this series of products and developed and introduced the 55V6 and 55V8
series of gravity feed test handlers. All of these series of test handlers include a full range of
thermal conditioning capabilities, contactors and change kits for a wide range of IC package types.
We sell these products into the largest and fastest growing IC market segments. We manufacture our
gravity feed test handlers at our North St. Paul operations. We were incorporated in Minnesota in December 1982. Our executive offices are located at 2350
Helen Street, North St. Paul, Minnesota 55109. Our telephone number is (651) 770-2000. Our web
site address is www.aetrium.com. We make available free of charge through our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports, as soon as is reasonably practicable after such material is
electronically filed with or furnished to the SEC. Our website is not intended to be a part of, nor
are we incorporating it by reference into, this Annual Report on Form 10-K. Financial Information About Segments Since our inception, we have operated in the single industry segment of supplying
electromechanical equipment to the semiconductor industry. Our financial results are set forth in
Items 6 and 15 of this Annual Report on Form 10-K. Test Handler Products Test handlers are electromechanical systems interfaced with a tester to form a test system
designed to handle, thermally condition, contact and sort ICs and discrete electronic components
automatically during the final test stage of the manufacturing process. The devices are loaded
into the handler from bowls, tubes or trays and then, if required, transported to a temperature
chamber within the test handler where they are 3




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thermally conditioned and controlled to
the required
testing temperature. The devices are then placed into a contactor, which provides an electrical
connection between the
device and the tester. After testing, the test handler sorts the devices according to test
performance as provided by the tester. In some cases, additional process steps are completed by
the test handler system. These include marking or inspection of the device packages, and automatic
placement of the devices into a tube, tray or tape for shipment to the end user. Test handlers
must meet industry criteria for thermal conditioning, contactor integrity and minimization of
damage to the device during the test handling cycle. ICs are multi-function semiconductor devices that may contain millions of individual
transistors, and include microprocessors, microcontrollers, digital signal processors and memory
devices. ICs come in a wide range of sizes and package types, depending upon their application.
Discrete electronic components are single function semiconductor devices, such as transistors and
diodes, and passive electronic devices, such as resistors and capacitors. They are typically very
small and are manufactured in several package types. In the testing of ICs and discrete electronic components, the device package type being tested
often dictates the type of test handler used. Small outline packages, or SOPs, constituting the
largest IC package segment, have leads, or electrical contacts, extending from two sides and are
typically tested with gravity feed test handlers. Micro leadless packages, or MLPs and sometimes
referred to as MLF TMs, SONs or QFNs, have electrical contact pads flush with
the sides and bottoms of the ICs and are typically tested with gravity feed or turret based test
handlers. MLPs constitute one of the fastest growing new IC package types. More complex ICs are sometimes packaged in the IC package families more easily damaged in
handling. These package families are typically tested with pick-and-place test handlers. More
fragile IC package types include QFPs, BGAs, PGAs, some CSPs and the most fragile SOP packages.
QFPs, or quad flat packs, have leads extending from all four sides. BGAs, or ball grid array
packages, have bumped leads on the bottom of the package. PGAs, or pin grid arrays, have pin type
leads extending from the bottom of the package. CSPs, or chip scale packages, are a category of
some of the smallest IC packages, with package sizes being no more than 1.2 times the size of the
IC die within. Discrete electronic component package types include small outline transistor packages, or
SOTs, which are also sometimes used for the smallest ICs. Discrete electronic component package
types are typically tested with turret based test handlers. Our primary focus continues to be on the newest device and package types, and the largest
volume and fastest growing markets, in the IC side of the semiconductor industry. We believe we
offer the broadest line of test handling products to the semiconductor industry, addressing the
full spectrum of non-memory device types, device package types and media transport types. Our test
handler products are complementary with minimal overlap of application, and we distribute and
service them through a common organization for efficiency. Gravity Feed Test Handlers Traditionally, test handlers have used gravity to move ICs from tubes through the handler
system and back into tubes. Typically, in gravity feed systems ICs are halted at necessary points
in the handling process by colliding against other ICs or other stopping mechanisms, which can
result in lead damage to more fragile IC packages. Accordingly, gravity feed handlers are best
suited for more rugged IC packages, which include MLPs and most SOPs. 4




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Our
gravity feed test handlers compete most favorably in
high-volume applications and their high throughput rates are an added advantage
in relatively short test time applications. These
handlers adapt to plunge-to-board-type contacting and third party contactors,
as well as our internally
developed proprietary contactors, providing cost-effective solutions to a wide range of customer
test requirements. In plunge-to-board-type contacting, the IC is placed directly against the test
head with no intermediary sockets or connections, which is particularly well suited for high
performance ICs. Our gravity feed test handlers can heat or cool the ICs being tested to any test
temperature from -55 degrees C to +155 degrees C. They use mechanical refrigeration to cool ICs,
which is more economical than liquid nitrogen, commonly used as a refrigerant in competing
handlers. Our dual and quad site gravity feed test handlers can simultaneously test devices in each
of their sites to increase productivity and reduce testing costs in certain applications. Our
principal gravity feed test handlers include:  
    55V6 Series.First introduced in 2002, our 55V6 Series of single and dual
site gravity feed test handlers for analog and logic IC applications addresses a wide
range of IC packages, including SOPs and MLPs. The 55V6 Series offers a small
footprint, a vertical backplane that can accommodate any size of test head, and our
high speed test site actuator that we believe offers significant throughput advantages
over our competition, depending upon device test times and thermal conditioning
requirements.
    55V8 Series.Our newly developed 55V8 Series of quad site gravity feed
test handlers for analog and logic IC applications addresses a wide range of IC
packages, including SOPs and MLPs. The 55V8 Series offers the advantages of the 55V6
Series, including our high speed test site actuator. We completed our first sales of
the 55V8 Series in the fourth quarter of 2004.
    5050 Series. Our 5050 Series of gravity feed test handlers for analog and
logic IC applications addresses a wide range of SOP package types. In addition to
single test site capability, we offer dual test site and quad test site capability
within our 5050 Series of handlers. Turret Based Test Handlers Turret based test handlers have a series of pickup heads that rotate around a fixed axis and
move devices from station to station. They are typically configured for bowl feed input and tape
and reel output, although they can be configured for tube or tray input and tube or tray output.
One or more stations on turret based handlers are used for testing ICs and discrete electronic
components. Stations on turret based handlers can also be used for additional process steps such as
marking and inspection. Turret based handlers are well suited for discrete electronic components
and smaller ICs that are difficult to handle in gravity feed handlers because of their size and
small mass, and are well suited for MLPs because MLPs can be handled in bulk. Turret based handlers
are typically more costly than gravity feed handlers, but typically offer higher throughput rates
than gravity feed handlers. Our turret based test handlers are designed for high volume testing of discrete electronic
component packages and ICs in MLP, CSP and SOT packages. These test handlers can integrate several
functions, including test, laser marking, mark inspection, lead inspection, and tape and reel
output. They can be configured for a variety of options for contacting, including
plunge-to-board-type contacting. These test handlers are typically configured for bowl feed input
and tape and reel output. Our principal turret based handlers include:  
    Model 5800.We introduced the Model 5800 Small Component Integrated Test
Handler in 2000. It has eight stations, and can be configured for up to four test
sites. It operates at temperatures ranging from ambient to +150 degrees C, and can be
configured for tube input and tube output. The Model 5800 can achieve throughputs of up
to 16,000 devices per hour. 5




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
    Model 8832.We introduced the Model 8832 Small Component Integrated Test
Handler in 2000. It has 32 stations, which provide a high degree of flexibility in
integrating additional device process functions into the handler. It can be configured
for up to eight test sites and, optionally, for tube or tray input and tube or tray
output. The Model 8832 is capable of throughputs of up to 24,000 devices per hour. Pick-and-Place Test Handlers Pick-and-place test handlers move ICs by picking up each device and placing the device to
the appropriate position, similar to a robot. The motions avoid sliding contact and jarring stops
that can potentially result in lead damage to some package types. Thus, pick-and-place test
handlers can handle a wide variety of packages, including the IC package families most easily
damaged in handling. Our pick-and-place test handlers can be configured for a wide variety of analog and logic ICs
in SOP, QFP, BGA, CSP and PGA packages. Using a conventional thermal chamber technique, these
handlers can heat or cool the devices being tested to any test temperature from -55 degrees C to
+155 degrees C. These handlers are configured and equipped to safely and reliably handle the most
fragile IC packages. Devices are transported with their leads up, virtually eliminating the
possibility of lead damage. These handlers feature plunge-to-board-type contacting, and can be
modified with change kits, typically within 15 minutes, to accommodate nearly every IC package
configuration being manufactured in volume today.Our principal pick-and-place handlers include:  
    Model 3000.The Model 3000 test handler is a dual site pick-and-place
test handler, which allows for significantly increased throughput for dual site
applications, as compared to single site test handlers.
    Model 1400.The Model 1400 is a single site pick-and-place test handler. Change
Kits, Upgrades and Spare Parts We have an ongoing demand for IC and discrete electronic component package change kits for our
installed test handler products, including test handlers no longer in our active product lines. We
sell a variety of change kits to accommodate the growing variety of device packages used in the
semiconductor industry. The demand for change kits is driven by the introduction of new device
package types and increased production volumes experienced by our end customers. Also included in
change kits are upgrade kits to enhance the performance of installed equipment. We sell spare
parts with new orders as kits or separately as piece parts or in kit form as required. Semiconductor Automation Products We have applied our core automation technologies to extend our product lines to other
applications of automation of the handling of ICs and discrete electronic components. 4800 Series Burn-in Board Loaders/Unloaders Our 4800 Series is a line of products used to automate the loading and unloading of burn-in
boards. Burn-in boards vary in size and density, and are used to place individual ICs into a
convection oven for an extensive reliability screening and stress testing procedure known as
burn-in. Our burn-in board automation products take untested ICs out of trays or other media and
place them into sockets on a burn-in board. After the burn-in test is complete, the 4800 Series
system unloads and removes ICs that have completed the burn-in cycle from the burn-in board 6




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sockets
and sorts the ICs according to the results of the test as provided by the burn-in system. The burn-in process screens for early failures
by operating the IC at elevated voltages and temperatures, usually at 125 degrees C, for periods
typically ranging from 12 to 96 hours. Burn-in systems can process thousands of ICs
simultaneously, utilizing multiple boards. Most leading-edge microprocessors, digital signal
processors, and memory ICs undergo burn-in testing. Our 4800 Series comes in single pick-up head, dual-head, five-head, ten-head and our newly
introduced sixteen-head versions. The single and dual head models are best suited for large IC
packages or for those applications requiring a quick conversion of the 4800 Series system to handle
a different IC package. The five-head, ten-head and sixteen-head systems are best suited to very
high volume memory applications. Our new sixteen-head version offers
significant throughput
advantage over other versions and is currently in evaluation and verification process at a key
customer. All versions are available with a variety of input and output options, including tubes
and trays. Package positioning stations ensure device alignment into sockets and output media. An
optional stacked burn-in board elevator and trolley allows the system to process up to 32 burn-in
boards without any operator intervention. Automation Modules Product Line for OEMs We market our Automation Modules product line to a limited number of other semiconductor
equipment manufacturers to provide automation for their semiconductor process equipment
for a variety of other IC processing requirements, such as marking, lead scanning, and lead
trim and form. Our revenues from our Automation Modules product line were severely impacted by the
record industry downturn in 2001-2003 as our OEM customers experienced the same business conditions
that we were experiencing. As products incorporating our Automation Modules continue to age, we
expect that future revenues from this product line will be increasingly dependent upon our success
in our OEM customers incorporating Automation Modules into their new product introductions. Sales
of Automation Modules represented less than 3% of our revenue in 2004. Currently we are not engaged
in any material efforts to develop new applications for our Automation Modules. As a result, we do
not expect revenue growth from this product line. Reliability Test Equipment The IC industrys demand for higher performance devices through smaller circuit geometries has
led to significant technological changes in the materials and processes used to manufacture ICs,
including a continuing migration to copper materials for the increasingly minute circuitry of
devices. These changes in technology, along with IC user demand for increased reliability, have
created a need for increasingly sophisticated reliability testing of IC designs and manufacturing
processes. Our reliability test equipment product line enables IC manufacturers to force and
measure precise levels of voltage and current through ICs, collect and analyze relevant data, and
predict lifetime performance of ICs. This equipment can be utilized to perform reliability testing
of packaged and unpackaged ICs. In 1998, we introduced our 1164 Series of reliability test equipment, including a suite of
applications for customers to perform a variety of tests. We have since added many new features,
including the full reliability test functionality necessary for testing an IC manufacturers entire
copper process. The 1164 Series features a modular design that allows for great flexibility in
performing reliability tests, and can test up to 4,096 devices at a time and perform numerous
simultaneous tests on batches of ICs. 14 of the top 20 semiconductor manufacturers in the world are
using our 1164 Series of reliability test equipment for copper and related advanced process
technologies. Our reliability test products also include a line of products designed to test over-voltage
protection devices for telecommunications applications. 7




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Competition The semiconductor capital equipment market is highly competitive. In the market for test
handler products, we compete with a number of companies ranging from very small businesses to large
companies, some of which have substantially greater financial, manufacturing, marketing and product
development resources than we have. Some of these companies manufacture and sell both testers and
test handlers. The particular companies with which we compete vary with our different test handler
product lines, with no one company dominating the overall test handler market. The companies with
which we compete most directly in the test handler market include Multitest Electronic Systems
GmbH, Rasco AG, Ismeca S.A., SRM Technology (M) Sdn Bhd, Tesec Corporation and Cohu, Inc. We compete for test handler sales primarily on the basis of effective handler throughput, cost
of ownership, temperature accuracy and other performance characteristics of our products, the
breadth of our product lines, the effectiveness of our sales and distribution channels and our
customer relationships. We believe we compete favorably on all of these factors. The market for burn-in board automation products is highly competitive. We compete with a
number of companies ranging from very small businesses to large companies, some of which have
substantially greater financial, manufacturing, marketing and product development resources than we
have. The companies with which we compete most directly in this market include Cohu, Inc., Racal
Instruments and Todo Seisakusho, Ltd. We compete for burn-in board automation product sales primarily on the basis of effective
throughput, cost of ownership, versatility, and other performance characteristics of our products,
the breadth of our product line, the effectiveness of our sales and distribution channels and our
customer service. We believe we compete favorably on all of these factors. We believe that the market for our Automation Modules sold on an OEM basis has no clearly
defined commercial competitors offering similar automated handling modules to the IC equipment
industry. Historically, OEMs supplying equipment for IC manufacturing processes have developed
custom or semi-custom handling components. Many of these OEMs have internal development capability
for automated handling and many engineering companies also have automated handling development
capability. The market for our reliability test equipment is also highly competitive and our competitors
include QualiTau, Ltd., Chiron Technology Pte. Ltd., ESPEC Corp. and Reedholm Instruments Co. We
compete for reliability test system sales on the basis of technology, price, delivery, system
flexibility and overall system performance. We believe we compete favorably on all of these
factors. Manufacturing and Supplies We manufacture test handlers, reliability test equipment and our Automation Modules product
line at our North St. Paul, Minnesota facility. We manufacture our turret based test handler
products, some of our reliability test equipment and our 4800 Series at our Dallas, Texas facility.
Our manufacturing operations consist of procurement and inspection of components and subassemblies,
assembly and extensive testing of finished products. We emphasize quality and reliability in both the design and manufacture of our products. We
or our suppliers inspect all components and subassemblies for mechanical and electrical compliance
to our specifications. We test all finished products against our specifications, and 8




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customer
specifications where applicable, and fully assembled test handler products are tested at all temperatures for which
they are designed and with all the device packages to be accommodated. A significant portion of the components and subassemblies used in our products, including
machined parts, PC boards, refrigeration systems, vacuum pumps and contactor elements, are
manufactured by third parties on a subcontract basis. As a part of our total quality management
program, we have an ongoing supplier quality program under which we select, monitor and rate our
suppliers, and recognize suppliers for outstanding performance. Certain components used in our products, including certain contactor components, printed
circuit boards and refrigeration systems, are currently available from only a limited number of
sources. We do not maintain long-term supply agreements with most of our suppliers, and we purchase
most of our components through individual purchase orders. We may not always be able to replace all
of our suppliers within a time period consistent with our business requirements. We attempt to
keep an adequate supply of critical components in our inventory to minimize any significant impact
the loss of a supplier may cause. Customers We rely on a limited number of customers for a substantial percentage of our net sales. In
2004, Maxim Integrated Products, Inc. and Samsung America, Inc. each accounted for more than 10% of
net sales. Maxim Integrated Products, Inc. also accounted for more than 10% of net sales in 2003
and 2002, and MB Electronique S.A. also accounted for more than 10% of net sales in 2003. The loss
of or a significant reduction in orders by these or other significant customers, including
reductions due to market, economic or competitive conditions in the semiconductor industry, would
likely have a negative impact on our financial condition and results of operations. Sales and Marketing We market our products through a combination of direct salespeople, domestic independent sales
representatives and international distributors. Our direct sales organization, comprised of seven
salespeople, is responsible for most domestic sales, and coordinates the activities of our domestic
independent sales representatives and international distributors and actively participates with
them in selling efforts. This enables us to establish strong direct ties with our customers. We maintain sales and service locations in North St. Paul, Minnesota, Santa Clara, California,
San Diego, California, Dallas, Texas, Boise, Idaho, and Saugus, Massachusetts. As of December 31,
2004, we had international distributors located in the United Kingdom, France, Germany, Italy,
Korea, Japan, Taiwan, Hong Kong, China, Thailand, Malaysia, Singapore and the Philippines. Our marketing efforts include participation in industry trade shows and production of product
literature and sales support tools. These efforts are designed to generate sales leads for our
domestic independent sales representatives, international distributors and direct salespeople. International shipments accounted for 52%, 54% and 59% of our net sales in 2004, 2003 and
2002, respectively. In addition, it is not uncommon for U.S. customers to take delivery of
products in the United States for subsequent shipment to international sites, particularly the
Automation Modules product line that is sold on an OEM basis. Most of our international shipments
are made to international sites of U.S. semiconductor manufacturers, although there is a growing
foreign customer base included in our international sales. 9




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We invoice all of our international sales in U.S. dollars and, accordingly, have not
historically been subject to fluctuating currency exchange rates. We establish credit limits from
time to time on our international distributors, who purchase products from us and resell to
end-users. We also often require irrevocable letters of credit from our end-user international
customers to minimize credit risk and to simplify the purchasing/payment cycle. Research and Development We believe we must continue to enhance, broaden and modify our existing product lines to meet
the constantly evolving needs of the semiconductor equipment market. To date, we have relied both
on internal development and acquisitions of technology and product lines to extend our product
lines, increase our customer base and avoid reliance on any single semiconductor equipment market
segment. Our research and development is conducted at both our North St. Paul, Minnesota and
Dallas, Texas facilities. We focus our new product development efforts on the most compelling
requirements in the largest and fastest growing segments of the IC side of the semiconductor
industry, with emphasis on near term revenue potential. In 2004, we concentrated our new product
development efforts on:  
    completing development of and beta testing the 55V8 Series quad test site
gravity feed handlers;
    developing alternative applications for our high speed test site actuator
for the 55V6 and 55V8 Series of test handlers;
    integrating laser mark capability on the Model 8832 test handler;
    developing and beta testing the sixteen-head model burn in board
loader/unloader for the 4800 Series; and
    developing additional test capabilities for our 1164 Series of reliability
test equipment for the latest generations of copper, gate oxide and transistor device
technologies. Product development expenses are typically divided approximately 50% for new product
development and 50% for continuation engineering. Our continuation engineering efforts include the
development of additional change kits to meet the expanding families of IC and discrete electronic
component package types, further advancement of contactor technologies, and the addition of
features and performance options for existing equipment. We expense all research and development costs, including costs for software development, as
incurred. In 2004, 2003 and 2002, our expenses relating to research and development were
approximately $3.6 million, $2.6 million and $2.3 million, respectively. Over time, our objective
is to invest approximately 12% to 15% of our net sales in research and development, and in 2004 our
research and development expense totaled about 13% of our revenue. However, the percentage may be
higher in periods of reduced sales, such as 2003 and 2002. We employed 27 engineering personnel as
of December 31, 2004. Intellectual Property We attempt to protect the proprietary aspects of our products with patents, copyrights, trade
secret law and internal nondisclosure safeguards. We currently hold several U.S. patents covering
certain features of our handling systems, reliability test systems and Automation Modules, the
contactor elements incorporated in certain of our test handlers, and elements of our proprietary
conductive thermal 10




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technology. The source code for the software contained in our products is considered
proprietary and we typically do not furnish source code to our customers. We have also entered
into confidentiality agreements with our employees. Despite these restrictions, it may be possible
for competitors or users to copy aspects of our products or to obtain information that we regard as
a trade secret. There is a rapid pace of technological change in the semiconductor industry, which in turn
compels us to continually enhance and extend our product lines. We believe that patent, trade
secret and copyright protection is less significant to our competitive position than factors such
as the knowledge, ability and experience of our personnel, new product development, frequent
product enhancements, name recognition and ongoing, reliable product maintenance and support. Backlog Our backlog was $2.8 million at the end of 2004 and $6.4 million at the end of 2003. Because
purchase orders are generally subject to cancellation or delay by customers with limited or no
penalty, our backlog is not necessarily indicative of future revenue or earnings. We expect to
ship in 2005 all of our backlog as of the end of 2004. Employees As of December 31, 2004, we had 90 employees, consisting of 35 in manufacturing, 27 in
engineering and product development, 17 in sales, marketing and customer service, and 11 in general
administration and finance. None of our employees is represented by a labor union or is subject to
any collective bargaining agreement. We have never experienced a work stoppage and we believe that
our employee relations are satisfactory. Financial Information About Geographic Areas See Note 16 to the Consolidated Financial Statements included in this Annual Report on Form
10-K for information about geographic areas. Certain Important Factors In addition to the factors identified above, there are several important factors that could
cause our actual results to differ materially from our results in the past and those we anticipate
as reflected in any forward-looking statements. Please refer to the heading Business Risks and
Uncertainties located in Managements Discussion and Analysis of Financial Condition and Results
of Operations under Item 7 of this Annual Report on Form 10-K for a discussion of these factors
and their potential impact on the success of our operations and our ability to achieve our goals. 
 ITEM 2. PROPERTIES. We conduct our corporate functions and manufacturing, product development, sales, marketing
and field service activities in North St. Paul, Minnesota. We currently occupy approximately
45,000 square feet in North St. Paul under a lease that expires in February 2006. We have an
option under the lease, exercisable at any time during the initial lease term, to require
construction of approximately 45,000 additional square feet for lease at the same rental rate. We
also conduct manufacturing, product development, sales, marketing and field service activities in
approximately 28,000 square feet in Dallas, Texas, under a lease that expires in April 2006. 11




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We also have the following continuing lease obligations:  
    We vacated a 30,000 square foot facility that is adjacent to our North St.
Paul facility in June 2001 when we consolidated our North St. Paul operations into a
single building. This facility is under a lease that expires in February 2006.
Approximately two-thirds of this space is currently subleased to third parties, and we
are actively seeking to sublease the remainder. We remain liable under the lease, on a
contingent basis, for the portion of this facility that is subleased.
    We vacated a 45,000 square foot facility in Poway, California in 2000.
This lease expires in January 2010. This space is currently subleased to third
parties. We remain liable for this facility under the lease, on a contingent basis. 
 ITEM 3. LEGAL PROCEEDINGS. We are not a party to, and none of our property is the subject of, any material pending legal,
governmental, administrative or other proceedings. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We did not submit any matter to a vote of our security holders during the fourth quarter of
fiscal year 2004. 12




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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. Our executive officers, their ages and the offices they held as of March 1, 2005 are as
follows: Name
    
    Age
    
    PositionJoseph C. Levesque
    
    
    60
    
    
    Chairman of the Board, President and Chief Executive
OfficerDouglas L. Hemer
    
    
    58
    
    
    Chief Administrative Officer, Secretary and DirectorDaniel M. Koch
    
    
    51
    
    
    Vice President  Worldwide SalesJohn J. Pollock
    
    
    45
    
    
    Vice President  General Manager, North St. Paul
OperationsKeith E. Williams
    
    
    61
    
    
    President  Dallas OperationsPaul H. Askegaard
    
    
    53
    
    
    TreasurerTimothy G. Foley
    
    
    45
    
    
    Vice President  Manufacturing, North St. Paul OperationsDean K. Hedstrom
    
    
    55
    
    
    Vice President  Engineering, North St. Paul Operations
 Mr. Levesquehas served as our President, Chief Executive Officer and Chairman of our
board since 1986. From 1973 to 1986, Mr. Levesque served in various capacities and most recently
as Executive Vice President of Micro Component Technology, Inc., a manufacturer of IC testers and
test handlers. Mr. Hemerhas served as one of our directors since 1986, and has served as our Secretary since
May 2000 and as our Chief Administrative Officer since March 2001. He served as our Group Vice
President from August 1998 to March 2001, as the President of our Poway, California operations from
February 1997 to August 1998 and as our Chief Administrative Officer from May 1996 until February
1997. Mr. Hemer was a partner in the law firm of Oppenheimer Wolff & Donnelly LLP for more than 15
years before joining Aetrium. Mr. Hemer is also a director of Versa Companies, a privately held
company. Mr. Kochhas served as our Vice President - Worldwide Sales since March 1991. From March 1990
to March 1991, Mr. Koch served as the Vice President of Sales of Summation, Inc., a company
involved with the testing of IC boards. From December 1973 to March 1990, Mr. Koch served in
various sales positions and most recently as Vice President of Sales of Micro Component Technology,
Inc. Mr. Pollockhas served as the Vice President and General Manager of our North St. Paul
operations since December 2001. From August 1998 to December 2001, Mr. Pollock served as our Vice
President of Product Development and Marketing. From April 1998 to August 1998, Mr. Pollock served
as interim general manager of our North St. Paul operations. From November 1997 to May 1998, Mr.
Pollock served as interim general manager of the handler group we acquired from Advantek Inc. From
September 1996 to August 1997, Mr. Pollock served as Business Unit Manager of our Automation
Modules product group. Mr. Williamshas served as the President of our Dallas operations since April 1998, when we
acquired the handler equipment business of WEB Technology, Inc. Mr. Williams co-founded WEB in
1982, and served as its President and CEO from its inception until we acquired it. 13




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Mr. Askegaardhas served as our Treasurer since February 1992. From October 1986 to February
1992, Mr. Askegaard served as our Corporate Controller. Mr. Foleyhas served as the Vice President  Manufacturing of our North St. Paul operations
since December 2001. Prior to that, he served at our North St. Paul Operations as Vice President 
Operations from August 1998 to December 2001, Vice President  Manufacturing from October 1996 to
August 1998, and in various other positions since joining us in 1988. Mr. Hedstromhas served as the Vice President  Engineering of our North St. Paul operations
since September 2004. From 1993 to 1998 Mr. Hedstrom was a co-founder, director, and later
President of CariTech, Inc., a manufacturer of carrier tape materials for the IC industry.
Following the acquisition of CariTech by Illinois Tool Works in August 1998, he served as
Engineering Manager  World Wide Operations for Illinois Tool Works until May 2001. Prior to
founding CariTech and subsequent to his retirement from Illinois Tool Works, Mr. Hedstrom served as
President and a Principal of Hedstrom Engineering Co., a consulting firm specializing in industrial
automation and controls. 14




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information Our common stock is quoted on The Nasdaq National Market under the symbol ATRM. The
following table summarizes the high and low closing sale prices per share of our common stock for
the periods indicated, as reported on The Nasdaq National Market. These prices do not include
adjustments for retail mark-ups, markdowns or commissions. First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterFiscal 2004
    
    High
    
    $5.82
    
    $9.55
    
    $7.43
    
    $5.69Low
    
    $2.94
    
    $4.72
    
    $4.11
    
    $3.40Fiscal 2003
    
    High
    
    $1.06
    
    $1.76
    
    $2.78
    
    $4.20Low
    
    $0.70
    
    $0.88
    
    $1.26
    
    $2.06
 Holders As of March 16, 2005, there were approximately 169 shareholders of record. We estimate that
an additional 4,200 shareholders own stock held for their accounts at brokerage firms and financial
institutions. Dividends We have never paid cash dividends on our common stock. We currently intend to retain any
earnings for use in our operations and do not anticipate paying cash dividends in the foreseeable
future. Securities Authorized for Issuance Under Equity Compensation Plans The information required to be disclosed by Item 201(d) of Regulation S-K, Securities
Authorized for Issuance Under Equity Compensation Plans, is included under Item 12 of Part III of
this Annual Report on Form 10-K. Recent Sale of Unregistered Securities We did not have any unregistered sales of equity securities during fiscal year 2004. 15




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ITEM 6. SELECTED FINANCIAL DATA. You should read the Selected Financial Data presented below in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on
Form 10-K, and in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Annual Report on Form 10-K. Five Year Summary
(in thousands, except per share data) Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of operations data:Net sales
    
    $
    27,789
    
    
    $
    14,089
    
    
    $
    12,688
    
    
    $
    20,014
    
    
    $
    46,052Income (loss) from operations
    
    
    3,468
    1
    
    
    (1,600
    )1,3
    
    
    (3,336
    )1,4
    
    
    (11,143
    )1,6
    
    
    (7,423
    ) 1,7Income (loss) before cumulative effect of
a change in accounting principle
    
    
    3,403
    1,2
    
    
    (1,559
    )1,3
    
    
    (2,806
    )1,4
    
    
    (10,669
    )1,6
    
    
    (21,705
    )1,7,8Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    (6,486
    ) 5
    
    
    
    
    
    
    (824
    ) 9Net income (loss)
    
    
    3,403
    1,2
    
    
    (1,559
    )1,3
    
    
    (9,292
    )1,4,5
    
    
    (10,669
    )1,6
    
    
    (22,529
    )1,7,8,9Income (loss) per share before cumulative
effect of a change in accounting principle:Basic
    
    $
    0.35
    
    
    $
    (0.16
    )
    
    $
    (0.30
    )
    
    $
    (1.13
    )
    
    $
    (2.29
    )Diluted
    
    $
    0.34
    
    
    $
    (0.16
    )
    
    $
    (0.30
    )
    
    $
    (1.13
    )
    
    $
    (2.29
    )Net income (loss) per share:Basic
    
    $
    0.35
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )
    
    $
    (1.13
    )
    
    $
    (2.38
    )Diluted
    
    $
    0.34
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )
    
    $
    (1.13
    )
    
    $
    (2.38
    )Weighted average common shares
outstanding:Basic
    
    
    9,589
    
    
    
    9,477
    
    
    
    9,476
    
    
    
    9,438
    
    
    
    9,466Diluted
    
    
    10,113
    
    
    
    9,477
    
    
    
    9,476
    
    
    
    9,438
    
    
    
    9,466December 31,
    
    
    2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2001
    
    
    
    2000Balance sheet data:Total assets
    
    $
    20,835
    
    
    $
    16,469
    
    
    $
    18,081
    
    
    $
    29,386
    
    
    $
    44,374Long-term debt, less current portion
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   1.
    
    As a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, we recorded no
goodwill amortization expense in 2004, 2003 and 2002. Goodwill amortization expense amounted to $0.7
million in 2001 and $0.7 million in 2000. See Note 5 to the Consolidated Financial Statements.2.
    
    Includes a $0.1 million gain on a claim settlement and a $0.2 million loss on the sale of marketable
securities. See Note 6 to the Consolidated Financial Statements.3.
    
    Includes a $0.1 million restructuring charge. See Note 7 to the Consolidated Financial Statements.4.
    
    Includes a $0.7 million goodwill impairment charge. See Note 5 to the Consolidated Financial Statements.5.
    
    Includes a $6.5 million goodwill impairment charge recorded as a cumulative effect of a change in
accounting principle. See Note 5 to the Consolidated Financial Statements.6.
    
    Includes pre-tax charges of $3.7 million for inventory excess and obsolescence charges and $2.2 million
for charges related to restructuring costs and asset write-downs.7.
    
    Includes pre-tax charges of $1.7 million for inventory excess and obsolescence charges and $4.1 million
for charges related to restructuring costs and asset write-downs. 16




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8.
    
    Includes a $17.3 million charge to record a valuation reserve against deferred tax assets. See Note 15
to the Consolidated Financial Statements.9.
    
    In 2000, we implemented a change in accounting for revenue for certain types of equipment sales. The
cumulative effect of the change in accounting principle was an after-tax charge of $0.8 million. Quarterly Financial Data (Unaudited)
(in thousands, except per share data) First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004 Net sales
    
    $
    6,141
    
    
    $
    9,107
    
    
    $
    7,073
    
    
    $
    5,468Gross profit
    
    
    3,437
    
    
    
    5,167
    
    
    
    4,230
    
    
    
    2,955Net income (loss)1
    
    
    713
    
    
    
    2,003
    
    
    
    821
    
    
    
    (134
    )Net income (loss) per share:Basic 2
    
    
    0.07
    
    
    
    0.21
    
    
    
    0.09
    
    
    
    (0.01
    )Diluted 2
    
    
    0.07
    
    
    
    0.19
    
    
    
    0.08
    
    
    
    (0.01
    )2003 Net sales
    
    $
    3,070
    
    
    $
    3,243
    
    
    $
    3,325
    
    
    $
    4,451Gross profit
    
    
    1,571
    
    
    
    1,665
    
    
    
    1,737
    
    
    
    2,467Net income (loss)3
    
    
    (630
    )
    
    
    (511
    )
    
    
    (516
    )
    
    
    98Net income (loss) per share (basic and diluted)
    
    
    (0.07
    )
    
    
    (0.05
    )
    
    
    (0.05
    )
    
    
    0.01
   1.
    
    Includes a $0.1 million gain on a claim settlement in the second quarter and a $0.2 million loss on the sale of marketable securities in the fourth
quarter. See Note 6 to the Consolidated Financial Statements.2.
    
    The sum of the four quarterly per share amounts do not equal the calculation for the full year due to rounding.3.
    
    Includes a $0.1 million restructuring charge in the first quarter related to a workforce reduction. See Note 7 to the Consolidated Financial
Statements. 17




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview: Aetrium designs, manufactures and markets a variety of electromechanical equipment used by the
semiconductor industry to handle and test semiconductor and passive electronic devices, such as
integrated circuits, or ICs, and discrete electronic components. Our primary emphasis is on the IC
segment of semiconductor manufacturing. The semiconductor equipment industry is often described as a cyclical growth industry
characterized by a long-term growth trend occasionally interrupted by periods of contraction and
significant declines in revenue. General industry conditions and the demand for Aetriums products
can fluctuate significantly from period to period as a result of numerous factors, including but
not limited to changes in U.S. and worldwide economic conditions, supply and demand for ICs and
discrete electronic components, changes in semiconductor manufacturing capacity, advancements in
industry technologies and competitive factors. For these and other reasons, our operating results
for 2002, 2003 and 2004 may not be indicative of future operating results. Following a very strong year in calendar 2000, the semiconductor equipment industry
experienced a deep and prolonged business downturn during the three-year period ended December 31,
2003. During most of this period, U.S. and global economic conditions were generally weak and many
semiconductor manufacturers experienced significantly reduced demand for their products, resulting
in elevated inventory levels and significant excess production capacity. These factors led to a
dramatic cutback in capital spending, resulting in the most severe downturn in the history of the
semiconductor equipment industry. In 2001, semiconductor manufacturers experienced a significant decrease in demand for their
products, which led to sharply reduced capital spending and rescheduling or cancellation of many
existing equipment orders. These generally weak industry conditions continued into early 2002, but
began to improve somewhat by mid-year as many semiconductor manufacturers began to experience
stronger demand for ICs and improvements in capacity utilization. However, the anticipated industry
recovery stalled in the second half of the year amid weakening economic conditions, concerns about
war and lower consumer demand for products containing ICs and discrete electronic components. As a
result, 2002 revenues for the test, assembly and packaging, or TAP, segment of the semiconductor
equipment industry dropped approximately 70% compared with 2000 levels, according to Semiconductor
Equipment and Materials International, reporting on North American semiconductor equipment
companies. Our 2002 revenues of $12.7 million were down 37% compared with 2001 and down 72%
compared with 2000. In 2003, semiconductor industry business conditions remained very weak although there were
signs of improvement as the year progressed, including increasing shipments of semiconductors,
decreasing inventory levels, improving capacity utilization rates and an improving economic
climate. As the end of the year approached, these factors led to increased capital spending at
levels that suggested the beginning of an industry recovery. Aetriums revenues remained
relatively flat through the first three quarters of 2003 and increased in the fourth quarter as
equipment orders increased significantly. As a result of the stronger fourth quarter, our 2003
revenues of $14.1 million were up 11% compared with 2002, which was comparable to the percentage
increase in capital spending by the worldwide semiconductor industry as a whole in 2003. 18




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In the
first half of 2004, business conditions improved
significantly as many semiconductor manufacturers increased capital spending in
response to increased demand for their products.
Aetriums revenues increased dramatically in this period and were more than double the
revenues for
the first half of 2003. However, industry conditions weakened again in the second half of 2004 as
semiconductor manufacturers addressed rising inventory levels. As a result, semiconductor
manufacturers decreased capital spending, particularly in the TAP segment of the semiconductor
equipment industry. Aetriums orders and revenues decreased sequentially in the third and fourth
quarters, and second half revenues were approximately 18% lower than the first half of the year.
Revenues for the year totaled $27.8 million compared with $14.1 million in 2003, an increase of
97%. Although the duration and severity of the current industry slowdown is unknown, we expect
industry conditions to remain weak through at least the first quarter of 2005. Critical Accounting Policies and Estimates: Managements discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that
we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. We believe the critical accounting policies
that require the most significant judgments and estimates used in the preparation of our
consolidated financial statements are those related to revenue recognition, accounts receivable,
inventories, identifiable intangible assets, goodwill, warranty obligations and income tax
accounting. Revenue Recognition Our policy is to recognize revenue on product sales upon shipment if contractual obligations
have been substantially met, collection of the proceeds is assessed as being reasonably assured,
and title and risk of loss have passed to the customer, which is generally the case for sales of
spare parts, accessories, change kits and some equipment and equipment upgrades. In instances
where title does not pass upon shipment, revenue is recognized upon delivery or customer acceptance
based upon the terms of the sales agreement. In instances where equipment or equipment upgrade
sales contracts include post-shipment obligations to be performed by Aetrium and/or contractual
terms that can only be satisfied after shipment, such as installation and meeting
customer-specified acceptance requirements at the customers site, revenue is not recognized until
such obligations have been completed and there is objective evidence that the applicable contract
terms have been met. Due to the high selling price of certain types of equipment, the timing of
revenue recognition of a relatively small number of transactions may have a significant impact on
our quarterly or annual results. Accounts Receivable We maintain an allowance for doubtful accounts that reflects our estimate of losses that may
result from the uncollectibility of accounts receivable. Our allowance for doubtful accounts is
based primarily on an analysis of individual accounts for which we have information indicating the
customer may not be able to pay amounts owed to us. In these cases, based on the available facts
and circumstances, we estimate the amount that will be collected from such customers. We also
evaluate the collectibility of our accounts receivable in the aggregate based on factors such as
the aging of receivable amounts, customer concentrations, historical experience, and current
economic trends and conditions. We adjust our allowance for doubtful accounts when additional information is received that
impacts the amount reserved. If circumstances change, our estimates of the recoverability of
accounts receivable could be reduced or increased by a material amount. Such a
change in estimated
recoverability would be accounted for in the period in which the facts that
give rise to the change
become known. As of December 31, 2004, our allowance for doubtful accounts
was $0.3 million. 19




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Inventories We establish valuation reserves on our inventories for estimated excess and obsolete inventory
equal to the difference between the cost of inventory and its estimated market value based upon
assumptions about future product demand and market conditions. If actual product demand or market
conditions are less favorable than those projected by management, additional inventory reserves may
be required. As of December 31, 2004, our inventory excess and obsolescence reserve was $2.8
million. Identifiable Intangible Assets We review our identifiable intangible assets and other long-lived assets whenever an event or
change in circumstances indicates that the carrying value of an asset may be impaired. If such an
event or change in circumstances occurs and potential impairment is indicated because the carrying
values exceed the estimated future undiscounted cash flows, we would measure the impairment loss as
the amount by which the carrying value of the asset exceeds its fair value. During 2002, as a
result of our identified impairment of the carrying value of goodwill, we reviewed our identifiable
intangible and other long-lived assets for potential impairment and concluded that the carrying
value of these assets was not impaired. As of December 31, 2004, the carrying value of our
identifiable intangible assets was $0.9 million. Goodwill Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 142 provides that goodwill is no longer amortized, but rather is reviewed for impairment at
the beginning of the fiscal year in which the standard is adopted and at least annually thereafter.
SFAS 142 requires a two-step process in the review of goodwill for impairment. Step one requires
that we compare the fair value of our single reporting unit (i.e., Aetrium) with the net carrying
value of our assets, including goodwill. If our fair value is less than our net asset carrying
value, we perform the second step of the impairment test. In step two, we compare the aggregate
fair values of our non-goodwill assets and liabilities with the fair value of Aetrium in order to
determine the implied fair value of goodwill. At January 1, 2002, we determined that the carrying
value of our goodwill exceeded its implied fair value by $6.5 million and recorded a goodwill
impairment charge in that amount. At December 31, 2002, we determined that the carrying value of
our goodwill exceeded its implied fair value by $0.7 million and recorded a goodwill impairment
charge in that amount. As of December 31, 2002, after recording the goodwill impairment charge at
that date, we had no remaining goodwill balance. Warranty Obligations We accrue estimated warranty costs in the period that the related revenue is recognized. Our
warranty cost estimates and warranty reserve requirements are determined based upon product
performance, historical warranty experience, and costs incurred in addressing product performance
issues. Should product performance or cost factors differ from our estimates, adjustments to our
warranty accrual may be required. As of December 31, 2004, our warranty reserve was $0.2 million. 20




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Income Tax Accounting We carry the benefit we will derive in future accounting periods from tax losses and credits
and deductible temporary differences as deferred tax assets on our balance sheet. In the fourth
quarter of 2000, however, we recorded a full valuation allowance against our deferred tax assets.
We recorded this valuation allowance because the cumulative losses we had incurred over the
previous three years made it questionable whether we would realize value from the deferred tax
assets. Since the fourth quarter of 2000, we have continued to maintain a valuation allowance to
fully reserve these assets. We assess the realizability of our deferred tax assets and the need for
this valuation allowance based on SFAS No. 109. We expect to continue to maintain a full valuation
allowance until we can sustain a level of profitability that demonstrates our ability to use these
assets. To the extent we determine that the realization of some or all of these benefits is more
likely than not based upon expected future taxable income, a portion or all of the valuation
allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for
some portion related to deductions for stock option exercises, an increase in shareholders equity.
As of December 31, 2004, our valuation allowance was $25.1 million. Results of Operations: Selected statements of operations data as a percentage of our net sales for 2004, 2003 and
2002 were as follows: 2004

    
    2003

    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    43.2
    
    
    
    47.2
    
    
    
    46.7Gross profit
    
    
    56.8
    
    
    
    52.8
    
    
    
    53.3Operating expenses:Selling, general and administrative
    
    
    31.4
    
    
    
    45.4
    
    
    
    55.9Research and development
    
    
    12.9
    
    
    
    18.8
    
    
    
    18.1Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    5.6Total operating expenses
    
    
    44.3
    
    
    
    64.2
    
    
    
    79.6Income (loss) from operations
    
    
    12.5
    
    
    
    (11.4
    )
    
    
    (26.3
    )Interest income (expense), net
    
    
    .2
    
    
    
    .3
    
    
    
    .7Other income (expense), net
    
    
    (.3
    )
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    12.4
    
    
    
    (11.1
    )
    
    
    (25.6
    )Income tax expense (benefit)
    
    
    .2
    
    
    
    
    
    
    
    (3.5
    )Net income (loss) before cumulative effect of a
change in accounting principle
    
    
    12.2
    
    
    
    (11.1
    )
    
    
    (22.1
    )Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (51.1
    )Net income (loss)
    
    
    12.2
    %
    
    
    (11.1
    )%
    
    
    (73.2
    )%
 Net Sales: Aetriums net sales by product line as a percentage of total sales for 2004, 2003 and 2002
were as follows: 2004

    
    2003

    
    2002Test handler products
    
    
    56
    %
    
    
    52
    %
    
    
    51
    %Reliability test equipment products
    
    
    21
    
    
    
    20
    
    
    
    18Semiconductor automation products
    
    
    6
    
    
    
    11
    
    
    
    8Change kits and spare parts
    
    
    17
    
    
    
    17
    
    
    
    23Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 21




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Our net sales increased to $27.8 million in 2004 compared with $14.1 million in 2003, a
97% increase. Semiconductor industry conditions began to improve in the fourth quarter of 2003 and
continued to strengthen in the first half of 2004, which resulted in an increase in the volume of
products we sold in 2004 when compared to 2003. Although industry conditions weakened again in the
second half of 2004, our net sales for the year increased across all our product lines compared to
2003. Net sales of test handlers, representing 56% of total net sales, was $15.7 million in 2004,
an increase of $8.4 million or 115% compared to 2003. Net sales of reliability test equipment,
representing 21% of total net sales, was $5.7 million in 2004, an increase of $2.9 million or
approximately 100% over 2003. Net sales of semiconductor automation equipment, representing 6% of
total net sales, was $1.6 million in 2004, an increase of $0.1 million or 3% over 2003. Net sales
of change kits and spare parts, representing 17% of total net sales, was $4.8 million in 2004, an
increase of $2.4 million or approximately 100% over 2003. Aetriums net sales increased to $14.1 million in 2003 compared with $12.7 million in 2002, an
increase of 11%. Quarterly revenue levels were relatively flat in the first three quarters of the
year, ranging from $3.1 to $3.3 million, and were comparable to revenue levels in each of the first
three quarters of 2002. Orders for new equipment increased significantly late in the year with net
sales amounting to $4.5 million in the fourth quarter. For the year, equipment net sales increased
across all product lines. Test handler net sales, representing 52% of total net sales, increased
12% compared to 2002. Net sales of our reliability test equipment, representing 20% of total net
sales, increased 26% in 2003 compared to 2002. Net sales of our semiconductor automation products,
representing 11% of total net sales, increased 61% with increases in sales of both burn-in board
loaders/unloaders and automation products to OEM customers. Net sales of change kits and spare
parts, representing 17% of total net sales, decreased 23% compared to 2002. Gross Profit: Gross profit, as a percentage of net sales, was 56.8% of net sales in 2004 compared with 52.8%
in 2003 and 53.3% in 2002. Gross margins improved in 2004 compared to 2003 primarily due to
efficiencies realized from significantly higher production volumes and revenue levels. Gross
margins decreased in 2003 compared to 2002 primarily due to a higher mix of automation equipment
sales and a lower mix of change kits and spare parts sales. Selling, General and Administrative Expenses: Selling, general and administrative, or SG&A, expenses were $8.7 million in 2004 compared with
$6.4 million in 2003 and $7.1 million in 2002. Commission expense increased $1.1 million in 2004
due to significantly higher net sales volume and a higher mix of commissionable foreign sales.
Incentive compensation expense increased $0.5 million based on profit levels achieved in 2004.
Employee wages increased approximately $0.4 million compared with the prior year primarily due to
wage increases, including the reversal of wage reductions implemented prior to 2004. SG&A expenses
decreased $0.7 million in 2003 compared with 2002. Wages decreased approximately $0.1 million due
to a workforce reduction early in the year. Commission expense decreased approximately $0.2
million in 2003 partially due to the termination of our U.S. independent sales representatives in
2002, although in the second half of 2003 we re-signed an independent representative in one
domestic territory. Warranty expense decreased approximately $0.3 million in 2003 due to reduced
warranty claims resulting from product improvements and the settlement of a warranty claim with a
customer. Research and Development Expenses: Research and development expenses were $3.6 million in 2004 compared with $2.6 million in 2003
and $2.3 million in 2002. The increase 22




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of $1.0 million in 2004 includes
an increase of $0.6 million in third-party contractor research and development costs related primarily to
the development
of our new Model 55V8 gravity feed test handler. Incentive compensation expense increased $0.1
million based on profit levels achieved in 2004. Wages increased $0.1 million due to the reversal
of wage reductions implemented prior to 2004, normal wage increases and the addition of two
engineering personnel during the year. The increase in research and development expenses in 2003
relative to 2002 was due to higher materials costs of $0.1 million and higher contract services of
$0.2 million primarily associated with the development of the 55V8 Series gravity feed test
handler. As a percentage of net sales, research and development expenses were 12.9%, 18.8%, and
18.1% in 2004, 2003, and 2002, respectively. New product development is an essential part of our
strategy to gain market share. Consistent with 2004, we expect to invest 12% to 15% of our revenues
in research and development during profitable periods. However, consistent with 2002 and 2003, we
expect that our investment in research and development may exceed these levels during down cycles. Goodwill Impairment Charges: Effective January 1, 2002, Aetrium adopted SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 142 provides that goodwill is no longer amortized, but rather is reviewed for
impairment at the beginning of the fiscal year in which the standard is adopted and at least
annually thereafter. The adoption of SFAS 142 required that we complete a transitional goodwill impairment test as
of January 1, 2002 using a two-step process. We completed step one of the impairment test by
comparing the fair value of our single reporting unit (i.e., Aetrium) with the net carrying value
of our assets, including goodwill. The fair value of Aetrium was determined based on quoted market
prices of our common stock, as adjusted for a control premium. Since the carrying value of our net
assets exceeded their fair value, we concluded that there was a potential impairment. Because
there was an indication of a potential impairment, we completed step two of the impairment test in
order to measure the amount of any impairment loss. In performing the second step of the impairment
test, we compared the aggregate fair values of our non-goodwill assets and liabilities with the
fair value of Aetrium in order to determine the implied fair value of goodwill. Step two of the
impairment test indicated that the carrying value of our goodwill exceeded its implied fair value
by $6.5 million. In accordance with SFAS 142, this impairment charge (net of income taxes of $0)
was recorded in our consolidated statement of operations as a change in accounting principle
effective January 1, 2002. Aetrium completed its annual goodwill impairment test at December 31, 2002, again using the
prescribed two-step process. The impairment test at December 31, 2002 indicated that the carrying
value of our goodwill exceeded its implied fair value by $0.7 million. This impairment charge is
included in operating expenses in our consolidated statement of operations for the year ended
December 31, 2002. Restructuring Activities: During the period 2000 through 2003, the semiconductor equipment industry experienced a
significant, prolonged downturn. As a result, we implemented a number of actions to better align
our cost structure with significantly reduced revenue levels. In 2000 and 2001, we recorded
restructuring charges related to various workforce reductions, consolidations of operations, and
facility closures. In the first quarter of 2003, we recorded severance and related costs of
$149,000 in connection with the terminations of six employees. As of December 31, 2004, we had the following lease obligations related to vacated
facilities: 23




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##### Table of Contents




    A 30,000 square-foot facility in North St. Paul, Minnesota is under a lease that
expires in February 2006. Approximately two-thirds of this facility is subleased to
third parties through the end of our lease term.
    A 45,000 square-foot facility in Poway, California is under a lease that expires in
January 2010. As of March 2005, this facility is subleased to three independent
parties with the sublease agreements expiring at various times between March and
December 2006. The following table summarizes severance and facility exit restructuring charges and the
associated accrual activity for the three years ended December 31, 2004 (in thousands): Severance &
    
    
    FacilityRelated Costs
    
    
    Exit Costs
    
    
    TotalAccrual balance, December 31, 2001
    
    $
    404
    
    
    $
    704
    
    
    $
    1,108Cash payments
    
    
    (404
    )
    
    
    (329
    )
    
    
    (733
    )Accrual balance, December 31, 2002
    
    
    
    
    
    
    375
    
    
    
    375Severance and related charges
    
    
    149
    
    
    
    
    
    
    
    149Cash payments
    
    
    (149
    )
    
    
    (151
    )
    
    
    (300
    )Accrual balance, December 31, 2003
    
    
    
    
    
    
    224
    
    
    
    224Cash payments
    
    
    
    
    
    
    (139
    )
    
    
    (139
    )Accrual balance, December 31, 2004
    
    $
    
    
    
    $
    85
    
    
    $
    85
 The $85,000 accrual for facility exit costs at December 31, 2004 is related to the
vacated facilities in North St. Paul, Minnesota and Poway, California. We estimate that the
accrual will be paid before the end of 2005 and that scheduled subtenant rental income, assuming a
continuation of the subleases in place, will fully offset the remainder of our lease obligations.
However, if one or more of our current subtenants were to default on their sublease agreements, or
if we are unsuccessful in extending subleases or locating replacement subtenants upon the
expiration of existing sublease agreements, we may have to record additional facility exit charges
in the future. Interest Income (Expense), Net: Interest income (expense), net, amounted to $61,000, $41,000 and $91,000 in 2004, 2003 and
2002, respectively. These amounts consisted primarily of interest income from the investment of
excess funds, partially offset by approximately $10,000 of interest expense in 2004 related to a
note payable to a bank. Interest income increased in 2004 as a result of higher average cash
balances and slightly higher interest rates. Interest income decreased in 2003 due to lower
average cash balances and generally lower interest rates compared with 2002. Other Income (Expense), Net: In the second quarter of 2004, we settled a claim against a customer for past-due invoices for
products we had delivered plus charges related to a purchase order cancelled by the customer in
2001. We accepted shares of the customers common stock with a market value of approximately
$233,000 in settlement of these claims. Of this amount, approximately $106,000 was applied to the
customers past-due accounts receivable amounts owed to us. The remaining $127,000, related to
purchase order cancellation charges, was recorded as a gain in the second quarter of 2004. Prior to
December 31, 2004, we sold the shares for approximately $31,000 and realized a loss of
approximately $202,000 in the fourth quarter of 2004. The net effect of these transactions was a
net loss of $74,000, which is presented as Other income (expense), net in our Consolidated
Statement of Operations. 24




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##### Table of Contents



Income Taxes: Our income tax expense of $52,000 for the year ended December 31, 2004 consisted primarily of
the Federal alternative minimum tax and certain state minimum fees. Since 2000, we have maintained
a valuation allowance to fully reserve our deferred tax assets. We recorded the valuation allowance
in 2000 because the cumulative losses we had incurred over the previous three years made it
questionable whether we would realize value from the deferred tax assets. We continue to monitor
the realizability of the benefits related to our net deferred tax assets. To the extent we
determine that the realization of some or all of these benefits is more likely than not based upon
expected future taxable income, a portion or all of the valuation allowance will be reversed. Such
a reversal would be recorded as an income tax benefit and, for some portion related to deductions
for stock option exercises, an increase in shareholders equity. In 2002, we recorded an income tax
benefit of $0.4 million related to a refund resulting from tax legislation enacted in 2002. Financial Condition, Liquidity and Capital Resources: Cash and cash equivalents increased by approximately $3.2 million in 2004 to $7.3 million at
December 31, 2004. We generated $2.9 million of cash from operating activities during the year.
The major components of cash flows generated from operating activities were net income of $3.4
million, $1.1 million in non-cash depreciation and amortization expense, and an increase of $0.5
million in deferred revenue and customer deposits. These sources of cash were partially offset by
increases in accounts receivable of $0.3 million and inventories of $1.8 million. Deferred revenue
increased due to the receipt of $0.3 million in progress payments related to shipped equipment that
had not met revenue recognition criteria at December 31, 2004 and customer deposits increased due
to the receipt of a $0.1 million deposit with a special equipment order from a new customer.
Inventories increased in 2004 due to increased production levels resulting from higher business
volumes. Accounts receivable increased because revenues in the fourth quarter of 2004 were
approximately 23% higher than in the fourth quarter of 2003. Although accounts receivable increased
in absolute dollars, average days sales outstanding improved from 68 days at December 31, 2003 to
59 days at December 31, 2004. Cash and cash equivalents decreased by approximately $1.7 million in 2003 to $4.1 million at
December 31, 2003. We used $1.5 million to fund operating activities during this period. The major
components of cash flows used in operating activities were a net loss of $1.6 million, a $1.7
million increase in accounts receivable and a $1.0 million decrease in accrued liabilities
partially offset by non-cash depreciation and amortization expense of $1.1 million, a $0.6 million
decrease in inventories, and a $0.9 million increase in accounts payable. Accounts receivable
increased $1.7 million primarily due to a 40% increase in net sales in the fourth quarter of 2003
compared with the fourth quarter of 2002 and also due to the timing of certain collections. We
received approximately $0.7 million in customer payments at the end of December 2002 that resulted
in a relatively low accounts receivable balance at December 31, 2002. Although we increased
inventory purchases in December 2003 to support increased order activity, inventory levels
decreased throughout 2003 as we continued inventory reduction initiatives first implemented during
fiscal 2001. Accounts payable increased primarily due to increased inventory purchases in the
fourth quarter of 2003 as discussed above. Accrued liabilities decreased primarily due to a
reduction in deferred revenue associated with two equipment sales for which a total of $0.6 million
in progress payments was received prior to December 31, 2002 and revenue was recognized in 2003
upon final acceptance of the equipment. Cash and cash equivalents decreased by $1.4 million in 2002 to $5.8 million at December 31,
2002. We used $1.3 million of cash in operating activities in 2002. The major components of cash
flows used in operating activities were a net loss of $9.3 million and decreases in other accrued
liabilities of $1.9 million, partially offset by $7.2 million in non-cash goodwill impairment
charges, $1.3 million in 25




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non-cash depreciation and amortization expense and a decrease in inventories of $1.5 million.
The decrease in other accrued liabilities reflects payments of accrued severance and other
restructuring costs during the year and a decrease in customer deposits and deferred revenue due
primarily to lower sales volumes. Inventories decreased throughout 2002 as a result of inventory
reduction initiatives implemented beginning in 2001. Our use of cash in investing activities in 2004, 2003, and 2002 related primarily to
expenditures for equipment, which amounted to $244,000, $163,000, and $41,000, respectively. The
capital expenditures in 2004 and 2003 were primarily related to upgrading our data processing
capabilities at both our North St. Paul, Minnesota and Dallas, Texas manufacturing facilities. In
2004, we received approximately $31,000 in cash from the sale of marketable securities originally
received in a claim settlement. In 2004, we generated $0.5 million in cash flows from financing activities. During the year,
we received approximately $360,000 in cash from the exercise of employee stock options. In
addition, in the first quarter of the year, we executed a bank loan for $190,000 to finance certain
data processing equipment purchases. The bank loan is payable in monthly installments of $3,637
through March 2009, is collateralized by the data processing equipment and bears interest at the
prime rate plus 1.5% with a minimum loan interest rate of 5.5% and maximum rate of 7.5%. The prime
interest rate was 5.25% at December 31, 2004. Historically we have supported our capital expenditure and working capital needs with cash
generated from operations and our existing cash and cash equivalents. We believe our cash and cash
equivalents of $7.3 million at December 31, 2004 will be sufficient to meet capital expenditure and
working capital needs at least through 2005. However, a prolonged continuation of the current
industry slowdown or future industry downturns could negatively impact the demand for and prices of
our products and adversely affect future cash flows. Also, we may acquire other companies, product
lines or technologies that are complementary to our business, and our working capital needs may
change as a result of such acquisitions. We do not presently have a bank line of credit or other working capital financing. Although
we believe we will be able to secure financing if needed, there can be no assurance that such
financing will be available with terms favorable to Aetrium or at all. Our contractual obligations as of December 31, 2004 are summarized below (in thousands): Payments Due By PeriodContractual Obligations
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Non-cancelable operating leases
    
    $
    3,215
    
    
    $
    1,054
    
    
    $
    588
    
    
    $
    497
    
    
    $
    509
    
    
    $
    522
    
    
    $
    45Bank loan payments (assuming
interest rate of 6.75%)
    
    
    194
    
    
    
    44
    
    
    
    44
    
    
    
    44
    
    
    
    44
    
    
    
    18
    
    
    
    Purchase order commitments
    
    
    752
    
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,161
    
    
    $
    1,850
    
    
    $
    632
    
    
    $
    541
    
    
    $
    553
    
    
    $
    540
    
    
    $
    45
 The above minimum operating lease payments have not been reduced by minimum sublease
rentals of $0.8 million due in the future under noncancellable subleases. Purchase order
commitments are related primarily to inventory purchases in the ordinary course of business. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,
Inventory Costs, an amendment of 26




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##### Table of Contents



Accounting Research Bulletin
No. 43, which is the result of the FASBs efforts to converge U.S. accounting standards for
inventories with International
Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs, and wasted
material (spoilage) costs to be recognized as current-period charges. It also requires that the
allocation of fixed production overheads be based on the normal capacity of the production
facilities. SFAS 151 will be effective for inventory costs incurred during 2006. We are currently
evaluating the impact of SFAS 151 on our consolidated financial statements. However, we do not
expect SFAS 151 to have a significant impact on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R addresses all forms of share-based payment awards, including shares issued under
employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS
123R will require Aetrium to expense share-based payment awards with compensation cost for
share-based payment transactions measured at fair value. SFAS 123R requires us to adopt the new
accounting provisions beginning in the third quarter of 2005. This standard, when adopted, will
result in a charge to our operations for all existing unvested stock options and any new stock
option grants over their vesting period. We are currently evaluating how we will adopt the standard
and the impact of adopting SFAS 123(R) on our financial position and results of operations. Business Risks and Uncertainties: Several important risks and uncertainties exist which could have an impact on our future
operating results. These factors could cause our actual results to differ materially from our
anticipated results or results that are reflected in any forward-looking statements in this Annual
Report on Form 10-K. These factors, and their impact on the success of our operations and our
ability to achieve our goals, include the following: Market Fluctuations in the Semiconductor Industry Our business and results of operations depend upon capital expenditures by manufacturers of
ICs and discrete electronic components. As a result, our operating results are materially
dependent upon economic and business conditions in the semiconductor industry. This industry has
been subject to significant market fluctuations and has experienced periodic downturns, which often
have had a disproportionate effect on capital equipment suppliers, such as Aetrium. In periods of
excess capacity, the semiconductor industry sharply reduces purchases of capital equipment, such as
our products. A downturn or slowdown in the semiconductor industry could substantially reduce our
revenues and operating results and could harm our financial condition. There has been a trend of
decreasing revenues in the TAP segment of the semiconductor equipment industry that began in the
third quarter of 2004. This trend may continue and may have a material and adverse impact on
Aetrium. Successful Development and Introduction of New Products and Product Improvements We operate in an industry that is highly competitive with respect to timely product
innovations. The market for our products is characterized by rapid technological change and
evolving industry standards. The development of more complex ICs has driven the need for new
equipment and processes to produce such devices at an acceptable cost. We believe that our future
success will depend in part upon our ability to anticipate changes in technologies, IC and discrete
electronic component package types, market trends and industry standards. If we cannot
successfully develop and introduce new and enhanced cost-effective products on a timely basis that
are accepted in the marketplace, our business and operating results would likely suffer. 27




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Reliance on Significant Customers We rely on a limited number of customers for a substantial percentage of our net sales. A
reduction, delay or cancellation of orders from one or more of these significant customers, or the
loss of one or more of these customers, would likely have a negative impact on our operating
results. Fixed Cost Constraints on Reduction of Expenses Many of our expenses, particularly those relating to properties, capital equipment and certain
manufacturing overhead items, are fixed in the short term. Accordingly, reduced demand for our
products and services causes our fixed production costs to be allocated across reduced production
volumes, which negatively affects our gross margins and profitability. Our ability to reduce
expenses is further constrained because we must continue to invest in research and development to
maintain our competitive position and to maintain service and support for our existing customer
base. Accordingly, in the event of a reduction in our revenues, resulting from an industry
downturn or otherwise, we may not be able to maintain profitable operations. Impact of Cost Reduction Actions In the event of a sustained downturn and continuing decline in our revenues, we may implement
cost reduction actions, such as workforce reductions, consolidation of operations, pay freezes and
reductions, and reductions in other expenditures. In doing so, we would attempt to maintain the
necessary infrastructures to allow us to take full advantage of subsequent improvements in
conditions. However, there can be no assurance that reductions we may have made in personnel and
expenditure levels and the loss of the capabilities of personnel we may have terminated would not
inhibit us in the timely completion of product development efforts, the effective service of and
responsiveness to customer requirements, and the timely ramp up of production in response to
improving market conditions. Impact of Changes in Securities Laws and Regulations We have made, and will need to continue to make, changes in our corporate governance and
securities disclosure and compliance practices as a result of the Sarbanes-Oxley Act of 2002. The
SEC and the NASD have enacted, and we expect will continue to enact, new rules on a variety of
subjects as a result of the Sarbanes-Oxley Act of 2002. While we believe that we can ultimately
comply with the new legislated requirements associated with being a public company, compliance with
the Sarbanes-Oxley Act of 2002 will increase our costs and may present new challenges and risks.
These developments could also possibly make it more difficult and more expensive to obtain director
and officer liability insurance. We may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage for our officers and directors, which may make it
more difficult for us to attract and retain qualified board members or executive officers. We are
currently evaluating and monitoring regulatory developments and cannot estimate the timing or
magnitude of additional costs that may be incurred as a result of the Sarbanes-Oxley Act of 2002. Reduction in the Sales Efforts by our Current Distributors We market and sell our test handlers and reliability test products outside of the United
States primarily through international distributors that are not under our direct control. We have
limited internal sales personnel. A reduction in the sales efforts by our current distributors, or
the termination of one or more of these relationships with Aetrium, could negatively affect our
operating results. 28




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##### Table of Contents



Reduction in our International Sales We expect that international sales will continue to account for a significant portion of our
net sales. As a result, our operations are subject to a number of risks inherent in conducting
business internationally, which if any of them occur could negatively impact our operating results. Failure to Retain our IC Processing Equipment OEMs We market our Automation Modules product line to a limited number of IC processing equipment
OEMs. Our revenues from our Automation Modules product line were severely impacted by the record
industry downturn in 2001-2003 as our OEM customers experienced the same business conditions that
we were experiencing. As products incorporating our Automation Modules continue to age, we expect
that future revenues from this product line will be increasingly dependent upon our success in our
OEM customers incorporating Automation Modules into their new product introductions. Sales of
Automation Modules represented less than 3% of our revenue in 2004. Currently we are not engaged in
any material efforts to develop new applications for our Automation Modules. As a result, we do
not expect revenue growth from this product line. Our principal customer for Automation Modules in
2004 has commenced reorganization proceedings and has recently reported entering into an agreement
for the sale of the segment of its business that utilizes Automation Modules. We cannot predict
what impact this transaction may have on our future sales of Automation Modules, but it may be
negative. Supply of Significant Components for our Products Certain significant components used in our products, including certain contactor components,
printed circuit boards, and refrigeration systems, are currently available only from sole or
limited sources. We do not maintain long-term supply agreements with most of our suppliers and we
purchase most of our components through individual purchase orders. Our inability to obtain
components in required quantities or of acceptable quality could result in delays or reductions in
our product introductions or shipments, which could damage our relationships with our customers and
cause our operating results to suffer. We have no obligation to update the above information, including the forward-looking
statements, in this Annual Report on Form 10-K. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our exposure to interest rate risk relates primarily to our short-term investment of excess
funds which, as of December 31, 2004, consisted primarily of bank repurchase agreements with
original maturities of less than three months. Given the short duration of our investments and the
size of our investment portfolio, we do not believe a change in interest rates would have a
significant impact on our financial condition or results of operations. We generally conduct
business in U.S. dollars and, therefore, risks associated with changes in foreign currency rates
are insignificant. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our Consolidated Financial Statements and the report of our independent registered public
accounting firm are included in this Annual Report on Form 10-K beginning on page F-1. The index
to this report and the financial statements is included in Item 15(a)(1) below. 29




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 None. 
 ITEM 9A. CONTROLS AND PROCEDURES. Our President and Chief Executive Officer, our Chief Administrative Officer and our Treasurer
conducted an evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December
31, 2004. Based on their evaluation, they concluded that our disclosure controls and procedures
were effective and designed to give reasonable assurance that the information required to be
disclosed by us in reports that we file or submit under the Exchange Act was made known to them by
others and was recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms. There was no change in our internal controls that occurred during the fourth
fiscal quarter in the period covered by this Annual Report on Form 10-K that has materially
affected, or is reasonably likely to affect, our internal controls over financial reporting. 
 ITEM 9B. OTHER INFORMATION. None. 30




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors of the Registrant The information under the captions Election of Directors  Information About Nominees,
Election of Directors  Other Information About Nominees and Election of DirectorsAdditional
Information About the Board and Its Committees in our 2005 Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference. Executive Officers of the Registrant The information under the caption Item 4A. Executive Officers of the Registrant located
elsewhere in this Annual Report on Form 10-K is incorporated herein by reference. Compliance with Section 16(a) of the Exchange Act The information under the caption Section 16(a) Beneficial Ownership Reporting Compliance in
our 2005 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference. Identification of Audit Committee; Audit Committee Financial Expert The information under the caption Executive Compensation and Other Benefits  Audit Committee
Report  Membership and Role of the Audit Committee in our 2005 Proxy Statement is incorporated in
this Annual Report on Form 10-K by reference. Code of Ethics The information under the caption Code of Ethics in our 2005 Proxy Statement is incorporated
in this Annual Report on Form 10-K by reference. 
 ITEM 11. EXECUTIVE COMPENSATION. The information under the captions Election of Directors  Compensation of Directors and
Executive Compensation and Other Benefits in our 2005 Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference.  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
 The information under the captions Security Ownership of Certain Beneficial Owners and
Management and Executive Compensation and Other BenefitsSecurities Authorized for Issuance Under
Equity Compensation Plans in our 2005 Proxy Statement is incorporated in this Annual Report on
Form 10-K by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption Certain Relationships and Related Transactions in our 2005
Proxy Statement is incorporated in this Annual Report on Form 10-K by reference. 31




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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information concerning principal accountant fees and services and the audit committees
pre-approval polices and procedures under the captions Independent Registered Public Accounting
FirmAudit and Non-Audit Fees and Independent Registered Public Accounting FirmPre-approval
Policies and Procedures in our 2005 Proxy Statement is incorporated in this Annual Report on Form
10-K by reference. 32




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements of Registrant. The following Consolidated Financial Statements of Aetrium and the Independent Registered
Public Accounting Firms Report thereon are included herein: Description
    
    Page(s)Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Financial Statements:Consolidated Statements of Operations
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Changes in Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6  F-17(a) 2. Financial Statement Schedule of Registrant.Schedule II -  Valuation and Qualifying Accounts
    
    
    S-1
 All other schedules are omitted as the required information is inapplicable or the information
is presented in the financial statements or related notes. (a) 3. Exhibits. The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index beginning on
page E-1 of this Annual Report on Form 10-K. If you were one of our shareholders on March 31, 2005 and you want a copy of any of the
exhibits listed or referred to in the Exhibit Index, we will furnish it to you at a reasonable cost
upon your written request sent to Aetrium Incorporated, 2350 Helen Street, North St. Paul,
Minnesota 55109; Attn.: Shareholder Relations. The following is a list of each management contract or compensatory plan or arrangement we are
required to file as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c): 33




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##### Table of Contents



1.
    Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to our Form 10-KSB for the year ended December 31, 1993)
(File No. 0-22166).2.
    Form of Non-Statutory Stock Option Agreement (incorporated by reference
to Exhibit 10.7 our Form 10-KSB for the year ended December 31, 1993)
(File No. 0-22166).3.
    1993 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.2 to our Annual Report on Form 10-K for year ended December
31, 1997) (File No. 0-22166).4.
    Salary Savings Plan (incorporated by reference to Exhibit 10.3 to our
Registration Statement on Form SB-2) (File No. 33-64962C).5.
    Employment Agreement dated April 1, 1986 between Joseph C. Levesque and
us (incorporated by reference to Exhibit 10.6 to our Registration
Statement on Form SB-2) (File No. 33-64962C).6.
    2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.18 to

our Annual Report on Form 10-K for the year ended December 31, 2002)
(File No. 0-22166).7.
    Form of Change of Control Agreement (incorporated by reference to
Exhibit 10.19 to our Annual Report on Form 10-K for the year ended
December 31, 2003) (File No. 0-22166).8.
    Sales Incentive Program (incorporated by reference to Exhibit 10.21 to
our Annual Report on Form 10-K for the year ended December 31, 2003)
(File No. 0-22166).9.
    Executive Officer Profit Sharing Program (filed herewith electronically). 34




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FINANCIAL STATEMENTS OF REGISTRANT 
 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Aetrium Incorporated In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of Aetrium Incorporated
and its subsidiaries (the Company) at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004,
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota
February 7, 2005 F-1




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AETRIUM INCORPORATED 
 Consolidated Statements of Operations
 Year Ended December 31,
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    $
    27,788,624
    
    
    $
    14,088,883
    
    
    $
    12,687,755Cost of goods sold
    
    
    11,999,848
    
    
    
    6,648,671
    
    
    
    5,920,062Gross profit
    
    
    15,788,776
    
    
    
    7,440,212
    
    
    
    6,767,693Operating expenses:Selling, general and administrative
    
    
    8,727,072
    
    
    
    6,398,855
    
    
    
    7,099,306Research and development
    
    
    3,593,487
    
    
    
    2,641,803
    
    
    
    2,299,089Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    705,731Total operating expenses
    
    
    12,320,559
    
    
    
    9,040,658
    
    
    
    10,104,126Income (loss) from operations
    
    
    3,468,217
    
    
    
    (1,600,446
    )
    
    
    (3,336,433
    )Interest income (expense), net
    
    
    61,396
    
    
    
    41,294
    
    
    
    90,506Other income (expense), net (See Note 6)
    
    
    (74,196
    )
    
    
    
    
    
    
    Income (loss) before income taxes and cumulative
effect of a change in accounting principle
    
    
    3,455,417
    
    
    
    (1,559,152
    )
    
    
    (3,245,927
    )Income tax expense (benefit)
    
    
    52,000
    
    
    
    
    
    
    
    (440,000
    )Income (loss) before cumulative effect of a change in
accounting principle
    
    
    3,403,417
    
    
    
    (1,559,152
    )
    
    
    (2,805,927
    )Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5)
    
    
    
    
    
    
    
    
    
    
    (6,486,000
    )Net income (loss)
    
    $
    3,403,417
    
    
    $
    (1,559,152
    )
    
    $
    (9,291,927
    )Basic income (loss) per share:Income (loss) before cumulative effect of a change in
accounting principle
    
    $
    0.35
    
    
    $
    (0.16
    )
    
    $
    (0.30
    )Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5)
    
    
    
    
    
    
    
    
    
    
    (0.68
    )Net income (loss)
    
    $
    0.35
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )Diluted income (loss) per common share:Income (loss) before cumulative effect of a change in
accounting principle
    
    $
    0.34
    
    
    $
    (0.16
    )
    
    $
    (0.30
    )Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5)
    
    
    
    
    
    
    
    
    
    
    (0.68
    )Net income (loss)
    
    $
    0.34
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )Weighted average common shares outstanding:Basic
    
    
    9,589,000
    
    
    
    9,477,000
    
    
    
    9,476,000Diluted
    
    
    10,113,000
    
    
    
    9,477,000
    
    
    
    9,476,000
 The accompanying notes are an integral part of the consolidated financial statements. F-2




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AETRIUM INCORPORATED 
 Consolidated Balance Sheets
 December 31,
    
    2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,267,874
    
    
    $
    4,087,439Accounts receivable, net of allowance for
doubtful accounts of $286,000 and $237,000,
respectively
    
    
    3,538,009
    
    
    
    3,320,345Inventories
    
    
    8,493,928
    
    
    
    6,688,728Other current assets
    
    
    175,224
    
    
    
    209,182Total current assets
    
    
    19,475,035
    
    
    
    14,305,694Property and equipment:Furniture and fixtures
    
    
    588,526
    
    
    
    597,628Equipment
    
    
    2,100,888
    
    
    
    2,497,810Less accumulated depreciation and amortization
    
    
    (2,287,006
    )
    
    
    (2,709,686
    )Property and equipment, net
    
    
    402,408
    
    
    
    385,752Identifiable intangible assets, net
    
    
    878,906
    
    
    
    1,749,870Other assets
    
    
    78,437
    
    
    
    27,774Total assets
    
    $
    20,834,786
    
    
    $
    16,469,090LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    33,339
    
    
    $
    Trade accounts payable
    
    
    1,571,071
    
    
    
    1,579,636Accrued compensation
    
    
    354,013
    
    
    
    312,028Other accrued liabilities
    
    
    1,304,035
    
    
    
    906,865Total current liabilities
    
    
    3,262,458
    
    
    
    2,798,529Long-term debt, less current portion
    
    
    132,294
    
    
    
    Commitments and contingencies (See Note 11)Shareholders equity:Common stock, $.001 par value; 30,000,000
shares authorized; 9,627,436 and 9,477,910
shares issued and outstanding, respectively
    
    
    9,627
    
    
    
    9,478Additional paid-in capital
    
    
    60,617,859
    
    
    
    60,251,952Accumulated deficit
    
    
    (43,187,452
    )
    
    
    (46,590,869
    )Total shareholders equity
    
    
    17,440,034
    
    
    
    13,670,561Total liabilities and shareholders equity
    
    $
    20,834,786
    
    
    $
    16,469,090
 The accompanying notes are an integral part of the consolidated financial statements. F-3




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AETRIUM INCORPORATED 
 Consolidated Statements of Changes in Shareholders Equity
 TotalCommon Stock
    
    
    Additional
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Deficit
    
    
    Equity-Balance, December 31, 2001
    
    
    9,474,566
    
    
    $
    9,475
    
    
    $
    60,246,000
    
    
    $
    (35,739,790
    )
    
    $
    24,515,685Exercise of stock options
    
    
    2,478
    
    
    
    2
    
    
    
    4,173
    
    
    
    
    
    
    
    4,175Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,291,927
    )
    
    
    (9,291,927
    )-Balance, December 31, 2002
    
    
    9,477,044
    
    
    
    9,477
    
    
    
    60,250,173
    
    
    
    (45,031,717
    )
    
    
    15,227,933Exercise of stock options
    
    
    866
    
    
    
    1
    
    
    
    1,779
    
    
    
    
    
    
    
    1,780Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,559,152
    )
    
    
    (1,559,152
    )-Balance, December 31, 2003
    
    
    9,477,910
    
    
    
    9,478
    
    
    
    60,251,952
    
    
    
    (46,590,869
    )
    
    
    13,670,561Exercise of stock options
    
    
    149,526
    
    
    
    149
    
    
    
    365,907
    
    
    
    
    
    
    
    366,056Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,403,417
    
    
    
    3,403,417-Balance, December 31, 2004
    
    
    9,627,436
    
    
    $
    9,627
    
    
    $
    60,617,859
    
    
    $
    (43,187,452
    )
    
    $
    17,440,034
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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AETRIUM INCORPORATED 
 Consolidated Statements of Cash Flows
 Year Ended December 31,
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    3,403,417
    
    
    $
    (1,559,152
    )
    
    $
    (9,291,927
    )Adjustments to reconcile net income (loss) to net cash
generated by (used in) operating activities:Depreciation and amortization
    
    
    1,098,371
    
    
    
    1,133,278
    
    
    
    1,299,970Gain on claim settlement
    
    
    (127,444
    )
    
    
    
    
    
    
    Loss on sale of marketable securities
    
    
    201,640
    
    
    
    
    
    
    
    Provision for excess and obsolete inventories
    
    
    120,000
    
    
    
    80,000
    
    
    
    100,000Provision for bad debts
    
    
    60,000
    
    
    
    
    
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    705,731Cumulative effect of a change in accounting principle, net
of taxes
    
    
    
    
    
    
    
    
    
    
    6,486,000Changes in assets and liabilities:Accounts receivable
    
    
    (383,320
    )
    
    
    (1,691,862
    )
    
    
    (123,301
    )Inventories
    
    
    (1,925,200
    )
    
    
    590,146
    
    
    
    1,497,140Other current assets
    
    
    33,958
    
    
    
    (57,569
    )
    
    
    (20,351
    )Other assets
    
    
    (50,663
    )
    
    
    12,896
    
    
    
    15,692Trade accounts payable
    
    
    31,435
    
    
    
    942,953
    
    
    
    (79,623
    )Accrued compensation
    
    
    41,985
    
    
    
    (129,783
    )
    
    
    (51,463
    )Other accrued liabilities
    
    
    357,170
    
    
    
    (868,206
    )
    
    
    (1,886,092
    )Net cash generated by (used in) operating activities
    
    
    2,861,349
    
    
    
    (1,547,299
    )
    
    
    (1,348,224
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (244,063
    )
    
    
    (162,958
    )
    
    
    (40,611
    )Sale of marketable securities
    
    
    31,460
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (212,603
    )
    
    
    (162,958
    )
    
    
    (40,611
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    366,056
    
    
    
    1,780
    
    
    
    4,175Proceeds from long-term debt
    
    
    190,000
    
    
    
    
    
    
    
    Payments on long-term debt
    
    
    (24,367
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    531,689
    
    
    
    1,780
    
    
    
    4,175Increase (decrease) in cash and cash equivalents
    
    
    3,180,435
    
    
    
    (1,708,477
    )
    
    
    (1,384,660
    )Cash and cash equivalents at beginning of year
    
    
    4,087,439
    
    
    
    5,795,916
    
    
    
    7,180,576Cash and cash equivalents at end of year
    
    $
    7,267,874
    
    
    $
    4,087,439
    
    
    $
    5,795,916
 The accompanying notes are an integral part of the consolidated financial statements. F-5




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AETRIUM INCORPORATED 
 Notes to Consolidated Financial Statements
 NOTE 1: BUSINESS DESCRIPTION Aetrium Incorporated designs, manufactures and markets a variety of electromechanical equipment
used by the semiconductor industry to handle and test integrated circuits, or ICs, and discrete
electronic components. References in the Notes to Consolidated Financial Statements to Aetrium,
the company, we or our, unless the context otherwise requires, refer to Aetrium Incorporated
and its consolidated subsidiaries and their respective predecessors. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation:The consolidated financial statements include the accounts of Aetrium
Incorporated and its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. Use of Estimates:The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Reclassifications:Certain previously reported amounts have been reclassified to conform to the
current year presentation. Such reclassifications had no impact on previously reported net income
(loss), shareholders equity or cash flows. These included the reclassification of $149,000 of
unusual charges related to 2003 restructuring activities from a separate line on the consolidated
statement of operations to selling, general and administrative expenses. Cash Equivalents:Cash equivalents include highly liquid investments purchased with an original
maturity of three months or less. Marketable Securities:Marketable securities are classified as short-term or long-term in our
balance sheet based on their maturity date and expectations regarding sales. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported as a separate
component of shareholders equity until realized. Fair value is determined using quoted market
prices. The carrying amounts of securities used to compute unrealized gains and losses and the cost
of securities used to compute realized gains and losses are determined by specific identification. Inventories:Inventories are valued at the lower of cost or market, with cost determined on a
first-in, first-out basis. Property and Equipment:Furniture, fixtures and equipment are recorded at cost and are depreciated
using the double declining balance method over estimated useful lives ranging from three to seven
years. When assets are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts. Depreciation expense was $0.2 million, $0.2 million and $0.4 million for the
years ended December 31, 2004, 2003 and 2002, respectively. Maintenance and repairs are charged to
expense as incurred. Goodwill:Effective January 1, 2002, Aetrium adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS 142 provides that goodwill is no
longer amortized, but rather is reviewed for impairment at the beginning of the fiscal year in
which the standard is adopted and at least annually thereafter. SFAS 142 requires a two-step
process in the review of
goodwill for impairment. Step one requires that Aetrium compare the fair value of its single
reporting unit (i.e., Aetrium) with the net carrying value of its assets, including goodwill. If
the fair value is less than the net asset carrying value, Aetrium performs the second step of the
impairment test. In F-6




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements step two, Aetrium compares the aggregate fair values of non-goodwill assets and
liabilities with the fair value of Aetrium in order to determine the implied fair value of
goodwill. If the carrying value of goodwill exceeds its implied value, an impairment loss is
recorded. See Note 5 for additional information regarding the adoption of SFAS 142 and the results
of the transitional and annual impairment tests. Other Intangible Assets:Identifiable intangible assets, consisting primarily of acquired
technology, are capitalized at their respective fair values, which are generally determined using
discounted future cash flow techniques and assumptions appropriate to each situation. Such
intangibles are amortized on a straight-line basis over their estimated useful lives of seven to
fifteen years. Valuation of Long-Lived Assets:Aetrium reviews its identifiable intangible and other long-lived
assets for impairment whenever an event or change in circumstances indicates that the carrying
value of an asset may not be recoverable. If such an event or change in circumstances occurs and
potential impairment is indicated because the carrying values exceed the estimated future
undiscounted cash flows, Aetrium would measure the impairment loss as the amount by which the
carrying value of the asset exceeds its fair value. Revenue Recognition:Aetriums policy is to recognize revenue on product sales upon shipment if
contractual obligations have been substantially met, collection of the proceeds is assessed as
being reasonably assured, and title and risk of loss have passed to the customer, which is
generally the case for sales of spare parts, accessories, change kits and some equipment and
equipment upgrades. In instances where title does not pass upon shipment, revenue is recognized
upon delivery or customer acceptance based upon the terms of the sales agreement. In instances
where equipment or equipment upgrade sales contracts include post-shipment obligations to be
performed by Aetrium and/or contractual terms that can only be satisfied after shipment, such as
installation and meeting customer-specified acceptance requirements at the customers site, revenue
is not recognized until such obligations have been completed and there is objective evidence that
the applicable contract terms have been met. In situations where equipment is shipped but revenue
and the related receivable are not recognized, the cost of the equipment is included in inventories
in our consolidated balance sheet. We often receive payments from customers prior to recognizing
revenue. For example, we may receive partial payments prior to shipment, which we record as
customer deposits or we may receive partial payments after shipment but prior to recognizing
revenue, which we record as deferred revenue. Customer deposits and deferred revenue are
recorded as liabilities and included in other accrued liabilities in our consolidated balance
sheet. See Notes 8 and 9. Warranty Costs:Estimated warranty costs are accrued in the period that the related revenue is
recognized. The following table summarizes product warranty liability accruals and settlements for
the three years ended December 31, 2004 (in thousands): Balance at
    
    
    Accruals for
    
    
    
    
    
    
    Balance atbeginning of
    
    
    warranties
    
    
    Settlements
    
    
    end ofyear
    
    
    issued
    
    
    made
    
    
    year2002
    
    $
    455
    
    
    $
    333
    
    
    $
    (383
    )
    
    $
    4052003
    
    
    405
    
    
    
    81
    
    
    
    (281
    )
    
    
    2052004
    
    
    205
    
    
    
    233
    
    
    
    (271
    )
    
    
    167
 There were no changes in estimated warranty accruals for any of the years presented. Research and Development:Research and development expenditures, which include software development
costs, are expensed as incurred. SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software
development costs once technological feasibility is established, which we define as the completion
of a working model. To date, the period between achieving technological feasibility and the
general availability of such software that
is embedded in our equipment has been short and software development costs
qualifying for capitalization have been insignificant.
Accordingly, we have not capitalized any software development costs. F-7




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Income Taxes:Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets are recognized for deductible temporary differences and tax
credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will not be realized, or
the application of SFAS 109 does not permit management to conclude thereunder that it is more
likely than not that some portion or all of the deferred tax assets will be realized. Income (Loss) Per Common Share:Basic income (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding during each period.
Diluted net income per share is computed by dividing net income by the weighted-average number of
common shares and potentially dilutive shares outstanding during each period. Potentially dilutive
shares include stock options using the treasury stock method. For loss periods, the computation of
diluted loss per share excludes the impact of stock options because they would be antidilutive and
diluted loss per share is therefore the same as basic loss per share. A reconciliation of the
number of shares used in the computations of basic and diluted income (loss) per share follows (in
thousands): Year ended Dec. 31,
    
    2004
    
    
    2003
    
    
    2002Weighted average common shares outstanding
    
    
    9,589
    
    
    
    9,477
    
    
    
    9,476Potentially dilutive stock options
    
    
    524
    
    
    
    
    
    
    
    Weighted average common shares
outstanding, assuming dilution
    
    
    10,113
    
    
    
    9,477
    
    
    
    9,476
 For the year ended December 31, 2004, options to purchase 260,938 common shares are excluded
from the diluted computation because their exercise prices exceeded the average market value of our
common stock and they would therefore be antidilutive to earnings per share. For the years ended
December 31, 2003 and 2002, all stock options are excluded from the loss per share computations
because they would be antidilutive. As of December 31, 2003 and 2002, respectively, there were
1,895,299 and 1,498,746 outstanding stock options that could have potentially impacted diluted
earnings per share. Stock-Based Employee Compensation:Aetrium accounts for its stock incentive plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is reflected in our
consolidated statements of operations, as all options granted to employees and directors under our
plans had an exercise price equal to the market value of the underlying common stock on the date of
grant and all options vest based only upon continuing employment. The following table illustrates
the effect on net income (loss) and net income (loss) per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,to stock-based
compensation (in thousands, except per share amounts): Year ended Dec. 31,
    
    2004
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    3,403
    
    
    $
    (1,559
    )
    
    $
    (9,292
    )Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all grants,
net of related tax effects
    
    
    (436
    )
    
    
    (311
    )
    
    
    (641
    )Pro forma net income (loss)
    
    $
    2,967
    
    
    $
    (1,870
    )
    
    $
    (9,933
    )
 F-8




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Year ended Dec. 31,
    
    2004
    
    
    2003
    
    
    2002Net income (loss) per share:Basic - as reported
    
    $
    0.35
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )Basic - pro forma
    
    $
    0.31
    
    
    $
    (0.20
    )
    
    $
    (1.05
    )Diluted - as reported
    
    $
    0.34
    
    
    $
    (0.16
    )
    
    $
    (0.98
    )Diluted - pro forma
    
    $
    0.30
    
    
    $
    (0.20
    )
    
    $
    (1.05
    )
 For the years ending December 31, 2003 and 2002, no tax benefit was applied to the fair value
expense calculated under SFAS No. 123 due to establishing valuation allowances on deferred tax
assets (see Note 15 for further discussion on income taxes). Using the Black-Scholes option-pricing model, the weighted-average fair value of options granted in
2004, 2003, and 2002 was $2.46, $1.31, and $0.99, respectively. Weighted average assumptions used
in applying the Black-Scholes option-pricing model to estimate the fair value of options granted
were as follows: 2004
    
    
    2003
    
    
    2002Expected dividend level
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    70
    %
    
    
    66
    %
    
    
    65
    %Risk-free interest rate
    
    
    2.9
    %
    
    
    2.6
    %
    
    
    3.0
    %Expected life of options (years)
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
 See Note 13 for additional information regarding Aetriums stock option plans. Comprehensive Income (Loss):Aetriums comprehensive income (loss) is equal to its net income
(loss) for all periods presented. Repurchases of Common Stock:Aetrium accounts for repurchased shares as retirements. The par value
of repurchased shares is charged to the common stock account and the excess of the purchase cost
over par value is charged to additional paid-in capital. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory
Costs, an amendment of Accounting Research Bulletin No. 43, which is the result of the FASBs
efforts to converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS 151 requires idle facility expenses, freight, handling costs, and wasted material
(spoilage) costs to be recognized as current-period charges. It also requires that the allocation
of fixed production overheads be based on the normal capacity of the production facilities. SFAS
151 will be effective for inventory costs incurred during 2006. We are currently evaluating the
impact of SFAS 151 on our consolidated financial statements. However, we do not expect SFAS 151 to
have a significant impact on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R will
require Aetrium to expense share-based payment awards with compensation cost for share-based
payment transactions measured at fair value. SFAS 123R requires us to adopt the new accounting
provisions beginning in the third quarter of 2005. This standard, when adopted, will result in a
charge to our operations for all existing unvested stock options and any new stock option grants
over their vesting period. We are currently evaluating how we will adopt the standard and the impact of adopting SFAS
123R on our financial position and results of operations. F-9




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements NOTE 4: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments (refunds) for interest and income taxes were as follows (in thousands): Year ended Dec. 31,
    
    2004
    
    2003
    
    2002Interest paid
    
    $
    10
    
    
    $
    5
    
    
    $
    11Income taxes paid (refunded), net
    
    $
    66
    
    
    $
    
    
    
    $
    (440
    )
 NOTE 5: GOODWILL AND OTHER
INTANGIBLE ASSETS - CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2002, Aetrium adopted SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 142 provides that goodwill is no longer amortized, but rather is reviewed for impairment at
the beginning of the fiscal year in which the standard is adopted and at least annually thereafter. The adoption of SFAS 142 required that we complete a transitional goodwill impairment test as of
January 1, 2002 using a two-step process. We completed step one of the impairment test by comparing
the fair value of our single reporting unit (i.e., Aetrium) with the net carrying value of our
assets, including goodwill. The fair value of Aetrium was determined based on quoted market prices
of our common stock, as adjusted for a control premium. Since the carrying value of our net assets
exceeded their fair value, we concluded that there was a potential impairment. Because there was
an indication of a potential impairment, we completed step two of the impairment test in order to
measure the amount of any impairment loss. In performing the second step of the impairment test, we
compared the aggregate fair values of our non-goodwill assets and liabilities with the fair value
of Aetrium in order to determine the implied fair value of goodwill. Step two of the impairment
test indicated that the carrying value of our goodwill exceeded its implied fair value by $6.5
million. In accordance with SFAS 142, this impairment charge (net of income taxes of $0) was
recorded in our consolidated statement of operations as a change in accounting principle effective
January 1, 2002. Aetrium completed its annual goodwill impairment test at December 31, 2002, again using the
prescribed two-step process. The impairment test at December 31, 2002 indicated that the carrying
value of our goodwill exceeded its implied fair value by $0.7 million. This impairment charge is
included in operating expenses in our consolidated statement of operations for the year ended
December 31, 2002. Identifiable intangible assets are comprised of the following (in thousands): December 31,
    
    2004
    
    
    2003Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    
    amortization
    
    
    Net
    
    
    Gross
    
    
    amortization
    
    
    NetDeveloped technology
    
    $
    2,600
    
    
    $
    (2,511
    )
    
    $
    89
    
    
    $
    2,600
    
    
    $
    (2,155
    )
    
    $
    445Core technology
    
    
    3,167
    
    
    
    (2,761
    )
    
    
    406
    
    
    
    3,167
    
    
    
    (2,368
    )
    
    
    799Customer list
    
    
    1,100
    
    
    
    (742
    )
    
    
    358
    
    
    
    1,100
    
    
    
    (633
    )
    
    
    467Other
    
    
    99
    
    
    
    (73
    )
    
    
    26
    
    
    
    99
    
    
    
    (60
    )
    
    
    39Total
    
    $
    6,966
    
    
    $
    (6,087
    )
    
    $
    879
    
    
    $
    6,966
    
    
    $
    (5,216
    )
    
    $
    1,750
 Amortization expense related to identifiable intangible assets was as follows (in thousands):
2004 - $871; 2003  $884; 2002  $885. Estimated amortization expense in future years is as
follows (in thousands): 2005 - $536; 2006  $202; 2007
 $113; 2008 - $28. F-10




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements NOTE 6: OTHER INCOME (EXPENSE), NET In the second quarter of 2004, we settled a claim against a customer for past-due invoices for
products we had delivered plus charges related to a purchase order cancelled by the customer in
2001. We accepted shares of the customers common stock with a market value of approximately
$233,000 in settlement of these claims. Of this amount, approximately $106,000 was applied to the
customers past-due accounts receivable amounts owed to us. The remaining $127,000, related to
purchase order cancellation charges, was recorded as a gain in the second quarter of 2004. Prior to
December 31, 2004, we sold the shares for approximately $31,000 and realized a loss of
approximately $202,000 in the fourth quarter of 2004. The net effect of these transactions was a
net loss of $74,196, which is presented as Other income (expense), net in our Consolidated
Statement of Operations. NOTE 7: RESTRUCTURING ACTIVITIES During the period 2000 through 2003, the semiconductor equipment industry experienced a
significant, prolonged downturn and we implemented a number of actions to better align our cost
structure with significantly reduced revenue levels. In 2000 and 2001, we recorded restructuring
charges related to various workforce reductions, consolidations of operations, and facility
closures. In the first quarter of 2003, we recorded severance and related costs of $149,000 in
connection with the terminations of six employees. As of December 31, 2004, we had the following lease obligations related to vacated facilities:  
    A facility in North St. Paul, Minnesota is under a lease that expires in February 2006.
Approximately two-thirds of this facility is subleased to third parties through the end of
our lease term.
    A facility in Poway, California is under a lease that expires in January 2010. As of
March 2005, this facility is subleased to three independent parties with the subleases
expiring at various times between March and December 2006. The following table summarizes severance and facility exit restructuring charges and the associated
accrual activity for the three years ended December 31, 2004 (in thousands): Severance &
    
    
    FacilityRelated Costs
    
    
    Exit Costs
    
    
    TotalAccrual balance, December 31, 2001
    
    $
    404
    
    
    $
    704
    
    
    $
    1,108Cash payments
    
    
    (404
    )
    
    
    (329
    )
    
    
    (733
    )Accrual balance, December 31, 2002
    
    
    
    
    
    
    375
    
    
    
    375Severance and related charges
    
    
    149
    
    
    
    
    
    
    
    149Cash payments
    
    
    (149
    )
    
    
    (151
    )
    
    
    (300
    )Accrual balance, December 31, 2003
    
    
    
    
    
    
    224
    
    
    
    224Cash payments
    
    
    
    
    
    
    (139
    )
    
    
    (139
    )Accrual balance, December 31, 2004
    
    $
    
    
    
    $
    85
    
    
    $
    85
 The $85,000 accrual for facility exit costs at December 31, 2004 is related to the vacated
facilities in North St. Paul, Minnesota and Poway, California. We estimate that the accrual will
be paid before the end of 2005 and that scheduled subtenant income, assuming a continuation of the
subleases in place, will fully offset the remainder of our lease obligations. However, if one or more of our current
subtenants were to default on their sublease agreements or if we are unsuccessful in extending
subleases or locating replacement subtenants upon the expiration of current sublease agreements, we
may have to record additional facility exit charges in the future. F-11




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements NOTE 8: INVENTORIES A summary of the composition of inventories is as follows (in thousands): December 31,
    
    2004
    
    
    2003Purchased parts and completed subassemblies
    
    $
    3,919
    
    
    $
    3,127Work-in-process
    
    
    2,903
    
    
    
    2,414Finished goods, including demonstration equipment
    
    
    1,379
    
    
    
    824Equipment shipped, subject to revenue deferral
    
    
    293
    
    
    
    324Total inventories
    
    $
    8,494
    
    
    $
    6,689
 NOTE 9: OTHER ACCRUED LIABILITIES: Other accrued liabilities are comprised of the following (in thousands): December 31,
    
    2004
    
    
    2003Accrued commissions
    
    $
    258
    
    
    $
    146Accrued warranty
    
    
    167
    
    
    
    205Customer deposits and deferred revenue
    
    
    528
    
    
    
    71Accrued restructuring costs
    
    
    85
    
    
    
    224Other
    
    
    266
    
    
    
    261Total other accrued liabilities
    
    $
    1,304
    
    
    $
    907
 NOTE 10: LONG-TERM DEBT In the first quarter of 2004, we executed a note payable to a bank for $190,000, payable in monthly
installments of $3,637 through March 2009. The note is collateralized by certain data processing
equipment with a carrying value of approximately $202,000 at December 31, 2004, and bears interest
at the prime rate plus 1.5% with a minimum loan interest rate of 5.5% and maximum rate of 7.5%. The
prime interest rate was 5.25% at December 31, 2004. The loan balance at December 31, 2004 was
$165,633. Future maturities of long-term debt as of December 31, 2004 are as follows (in
thousands): 2005
    
    $
    332006
    
    
    362007
    
    
    382008
    
    
    412009
    
    
    18Total
    
    $
    166
 NOTE 11: LEASE OBLIGATIONS Aetrium leases two adjacent buildings in North St. Paul, Minnesota from a partnership controlled by
certain of our shareholders under two lease agreements, each of which expires in February 2006.
Each lease provides us with an option to extend the term for an additional five years. None of the
shareholders in the partnership are directors or officers of Aetrium, or, to our knowledge, own
more than five percent of our common stock. In 2001, we vacated one of the buildings in connection
with a restructuring of operations. As of March 2005, we have subleased approximately two-thirds
of this building to three unrelated parties with terms coinciding with the expiration of our lease.
We currently conduct our North St. Paul operations in the second building. Aetrium leases a manufacturing facility in Dallas, Texas under a lease agreement that expires in
April 2006. The lease agreement provides us with an option to extend the term for an additional two
years. F-12




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements In 2000, we vacated a leased facility in Poway, California. The lease expires in January 2010.
The lease was assigned to an unrelated company in 2000 and Aetrium continued to be contingently
liable under the lease if the assignee were to default. In January 2004, we were notified by the
lease assignee that it would be discontinuing operations. We negotiated a termination of the lease
assignment for a lump sum payment of $452,000 less credits for applied deposits and future
subtenant rentals, and the lease was re-assigned to Aetrium. As of March 2005, this facility is
subleased to three independent parties with the sublease agreements expiring at various times
between March and December 2006. Rent expense related to the facility leases described above and various short-term equipment
operating leases was as follows (in thousands): Year ended Dec. 31,
    
    2004
    
    
    2003
    
    
    2002Leased from shareholders
    
    $
    438
    
    
    $
    438
    
    
    $
    438Leased from others
    
    
    808
    
    
    
    344
    
    
    
    473Sublease/assigned lease income
    
    
    (745
    )
    
    
    (341
    )
    
    
    (351
    )Total net rent expense
    
    $
    501
    
    
    $
    441
    
    
    $
    560
 As of December 31, 2004, future minimum annual lease payments under operating leases were as
follows (in thousands): 2005
    
    $
    1,0542006
    
    
    5882007
    
    
    4972008
    
    
    5092009
    
    
    522Thereafter
    
    
    45Total minimum lease payments
    
    $
    3,215
 The above minimum lease payments have not been reduced by minimum sublease rentals of $0.8
million due in the future under noncancellable subleases. NOTE 12: RELATED PARTY TRANSACTIONS We purchase machined parts from two suppliers in which one of our executive officers has a minority
ownership interest. Purchases from these suppliers amounted to a total of $210,000, $237,000 and
$197,000 in the years ended December 31, 2004, 2003 and 2002, respectively. NOTE 13: STOCK OPTION PLANS Aetriums 1993 Stock Incentive Plan (the 1993 Plan) terminated in June 2003. Stock options granted
under the 1993 Plan that were outstanding at the time the plan terminated may continue to be
exercised according to their individual terms. In May 2003, Aetriums shareholders approved the
adoption of the 2003 Stock Incentive Plan (the 2003 Plan) to replace the 1993 Plan. Employees,
officers, directors, consultants and independent contractors providing services to us are eligible
to receive awards under the 2003 Plan. The number of shares available for issuance under the 2003
Plan is equal to 20% of the aggregate number of shares of common stock outstanding less the total
number of shares of common stock issuable upon the exercise or conversion of any outstanding stock
options, warrants or other stock rights. Our 2003 Plan is administered by the Compensation
Committee of our board of directors and provides for the granting of: (a) stock options; (b) stock
appreciation rights; (c) restricted stock; (d) performance awards; and (e) stock awards valued in
whole or in part by reference to or otherwise based upon our stock. Options granted under the 2003
Plan may be incentive stock options or nonqualified stock options. The 2003 Plan will terminate on February 28, 2013. Our stock incentive plans provide that
the Compensation Committee may, at its discretion, allow the exercise price of stock options to be
paid, in whole or in part, by tendering previously acquired shares that have
been held by the
option holder for at least six months. F-13




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements The following table summarizes activity under our stock incentive plans: Outstanding OptionsNumber
    
    
    Range of
    
    
    Weighted Averageof Shares
    
    
    Exercise Prices
    
    
    Exercise PriceBalance, December 31, 2001
    
    
    1,124,000
    
    
    $
    1.69 to 7.08
    
    $
    4.91Options granted
    
    
    545,300
    
    
    
    1.03 to 2.06
    
    
    2.02Options exercised
    
    
    (2,478
    )
    
    
    1.69
    
    
    1.69Options forfeited
    
    
    (168,076
    )
    
    
    1.69 to   7.08
    
    
    5.47Balance, December 31, 2002
    
    
    1,498,746
    
    
    
    1.03 to   7.08
    
    
    3.80Options granted
    
    
    701,950
    
    
    
    0.87 to   2.76
    
    
    2.70Options exercised
    
    
    (866
    )
    
    
    2.06

    
    
    2.06Options forfeited
    
    
    (304,531
    )
    
    
    1.03 to   7.08
    
    
    5.70Balance, December 31, 2003
    
    
    1,895,299
    
    
    
    0.87 to   7.08
    

    
    3.09Options granted
    
    
    100,000
    
    
    
    4.81

    
    
    4.81Options exercised
    
    
    (150,607
    )
    
    
    0.87 to   5.88
    
    
    2.46Options forfeited
    
    
    (135,772
    )
    
    
    2.05 to   7.08
    
    
    6.47Balance, December 31, 2004
    
    
    1,708,920
    
    
    $
    0.87 to 5.97
    
    $
    2.97Options exercisable as of
December 31, 2004
    
    
    964,675
    
    
    $
    0.87 to 5.97
    
    $
    3.07
 The following table summarizes information related to stock options outstanding at December
31, 2004, all of which are nonqualified options and expire five years after the grant date and of
which 297,875 options were fully exercisable when granted, 30,000 options become exercisable over
32 months from date of grant and 1,381,045 options become exercisable over four years from date of
grant: Options Outstanding
    
    
    Options ExercisableWeightedRange of
    
    Number
    
    
    Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedExercise
    
    Outstanding
    
    
    Remaining
    
    
    Average
    
    
    Exercisable
    
    
    AveragePrices
    
    at 12/31/04
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    at 12/31/04
    
    
    Exercise Price$ 0.87 to 1.03
    
    
    25,000
    
    
    2.9 years
    
    $
    0.95
    
    
    
    9,115
    
    
    $
    0.911.69 to 2.06
    
    
    653,703
    
    
    2.0 years
    
    
    1.90
    
    
    
    521,931
    
    
    
    1.872.76
    
    
    669,279
    
    
    4.0 years
    
    
    2.76
    
    
    
    166,441
    
    
    
    2.764.81 to 5.97
    
    
    360,938
    
    
    1.7 years
    
    
    5.47
    
    
    
    267,188
    
    
    
    5.70$ 0.87 to 5.97
    
    
    1,708,920
    
    
    2.7 years
    
    $
    2.97
    
    
    
    964,675
    
    
    $
    3.07
 NOTE 14: EMPLOYEE SAVINGS 401(k) PLAN Aetrium has a 401(k) employee savings plan, which covers full-time employees who are at least 21
years of age. Our contributions to the savings plan, which are at the discretion of management,
amounted to $116,723 in 2004. We made no contributions to the plan in 2002 or 2003. F-14




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements NOTE 15: INCOME TAXES Income tax expense (benefit) reported in our consolidated statement of operations is made up of the
following components (in thousands): Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Current tax expense (benefit):Federal
    
    $
    49
    
    
    $
    
    
    
    $
    (440
    )State
    
    
    3
    
    
    
    
    
    
    
    Total current expense (benefit)
    
    
    52
    
    
    
    
    
    
    
    (440
    )Deferred tax expense (benefit):Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total deferred expense (benefit)
    
    
    
    
    
    
    
    
    
    
    Total income tax expense (benefit)
    
    $
    52
    
    
    $
    
    
    
    $
    (440
    )
 A reconciliation of income tax expense (benefit) computed using the federal statutory rate to
the income tax expense (benefit) reported in our consolidated statements of operations is as
follows (in thousands): Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Tax computed at federal statutory rate
    
    $
    1,175
    
    
    $
    (530
    )
    
    $
    (3,309
    )State taxes, net of federal benefit
    
    
    85
    
    
    
    (31
    )
    
    
    (217
    )Change in tax rates
    
    
    (512
    )
    
    
    
    
    
    
    Increase (decrease) in tax from:Business meals and entertainment
    
    
    26
    
    
    
    17
    
    
    
    15Valuation allowance change
    
    
    (747
    )
    
    
    561
    
    
    
    3,066Other, net
    
    
    25
    
    
    
    (17
    )
    
    
    5Reported income tax expense (benefit)
    
    $
    52
    
    
    $
    
    
    
    $
    (440
    )
 Deferred tax assets (liabilities) are comprised of the following (in thousands): December 31,
    
    2004
    
    
    2003
    
    
    2002Accounts receivable, principally due to
allowances for doubtful accounts
    
    $
    103
    
    
    $
    81
    
    
    $
    95Inventories, principally due to
reserves
for excess and obsolete inventories
and additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986
    
    
    1,103
    
    
    
    1,193
    
    
    
    1,416Employee compensation and benefits
accrued for financial reporting
purposes
    
    
    65
    
    
    
    54
    
    
    
    57Amortization of intangibles
    
    
    7,206
    
    
    
    7,379
    
    
    
    7,970NOL and tax credit carryforwards
    
    
    16,482
    
    
    
    16,721
    
    
    
    15,198Restructuring accruals
    
    
    31
    
    
    
    76
    
    
    
    127Warranty accrual
    
    
    60
    
    
    
    70
    
    
    
    138Other, net
    
    
    49
    
    
    
    54
    
    
    
    66Deferred tax assets
    
    $
    25,099
    
    
    $
    25,628
    
    
    $
    25,067Less, valuation allowance
    
    
    (25,099
    )
    
    
    (25,628
    )
    
    
    (25,067
    )Net deferred tax assets
    
    $
    
    
    
    $
    
    
    
    $
    
 Income tax expense of $52,000 for the year ended December 31, 2004 consisted primarily of the
Federal alternative minimum tax and certain state minimum fees. The income tax benefit of $0.4
million recorded in 2002 was related to a refund resulting from tax legislation enacted in 2002. F-15




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements We carry the benefit we will derive in future accounting periods from tax losses and credits and
deductible temporary differences as deferred tax assets on our balance sheet. In the fourth
quarter of 2000, however, we recorded a full valuation allowance against our deferred tax assets.
We recorded this valuation allowance because the cumulative losses we had incurred over the
previous three years made it questionable whether we would realize value from the deferred tax
assets. Since the fourth quarter of 2000, we have continued to maintain a valuation allowance to
fully reserve these assets. We assess the realizability of our deferred tax assets and the need for
this valuation allowance based on SFAS No. 109. We expect to continue to maintain a full valuation
allowance until we can sustain a level of profitability that demonstrates our ability to use these
assets. To the extent we determine that the realization of some or all of these benefits is more
likely than not based upon expected future taxable income, a portion or all of the valuation
allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for
some portion related to deductions for stock option exercises, an increase in shareholders equity. Approximately $0.3 million of the $25.1 million valuation allowance at December 31, 2004 is related
to deductions for exercised stock options (of which $0.2 million is related to options exercised in
2004), which would be recorded as an increase in shareholders equity if the valuation allowance
were to be reversed in a future period. Aetrium has federal net operating loss carryforwards of approximately $43 million that will begin
to expire in 2020 if not utilized. We also have state net operating loss carryforwards of
approximately $15 million that will expire at various times, beginning in 2005, if not utilized. We
also have federal and state research tax credit carryforwards of approximately $1 million that will
expire at various times, beginning in 2013, if not utilized. The utilization of net operating loss
carryforwards may be subject to annual limitations in the event of future changes in ownership
pursuant to the requirements of Section 382 of the Internal Revenue Code. Such limitations could
result in the expiration of net operating loss and tax credit carryforwards before utilization. NOTE 16: BUSINESS SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION, AND CONCENTRATION OF
CREDIT RISK We view our operations and manage our business as one segment, supplying electromechanical
equipment to the semiconductor industry. Factors used to identify our single operating segment
include our organizational structure and the financial information used by our executive management
in making decisions about how to allocate resources and assess performance. The following table
sets forth the various components of net sales by product line as a percentage of total sales: Year ended December 31,
    
    2004
    
    2003
    
    2002Test handler products
    
    
    56
    %
    
    
    52
    %
    
    
    51
    %Reliability test equipment products
    
    
    21
    
    
    
    20
    
    
    
    18Semiconductor automation products
    
    
    6
    
    
    
    11
    
    
    
    8Change kits and spare parts
    
    
    17
    
    
    
    17
    
    
    
    23Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Sales by geographic region based on product shipment destination were as follows (in
thousands): Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002United States
    
    $
    13,437
    
    
    $
    6,531
    
    
    $
    5,186Asia
    
    
    12,936
    
    
    
    5,357
    
    
    
    6,688Europe
    
    
    1,276
    
    
    
    2,120
    
    
    
    756Other
    
    
    140
    
    
    
    81
    
    
    
    58Total
    
    $
    27,789
    
    
    $
    14,089
    
    
    $
    12,688
 F-16




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Sales to customers comprising more than 10% of our total net sales were as follows: Year ended December 31,
    
    2004
    
    2003
    
    2002Customer A
    
    
    53
    %
    
    
    37
    %
    
    
    31
    %Customer B
    
    
    11
    %
    
    
    
    *
    
    
    
    *Customer C
    
    
    
    *
    
    
    11
    %
    
    
    
    *
    Accounts receivable from customers comprising more than 10% of our total accounts receivable were
as follows: December 31,
    
    2004
    
    2003Customer A
    
    
    38
    %
    
    
    34
    %Customer D
    
    
    
    *
    
    
    12
    %
    We sell our products principally to manufacturers of ICs, discrete electronic components, and
semiconductor equipment. Our accounts receivable balance is concentrated with customers principally
in one industry. We regularly monitor the creditworthiness of our customers, however, in order to
manage this collection risk. F-17




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. AETRIUM INCORPORATEDDate: March 30, 2005
    By:
    /s/ Joseph C. LevesqueJoseph C. LevesqueChief Executive Officer and President 
(principal executive officer) By:
    /s/ Paul H. AskegaardPaul H. AskegaardTreasurer
(principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 30, 2005 by the following persons on behalf of the registrant and in the
capacities indicated. Signature
    
    Title/s/ Joseph C. Levesque

Joseph C. Levesque
    
    Chairman of the Board/s/ Darnell L. Boehm

Darnell L. Boehm
    
    Director/s/ Terrence W. Glarner

Terrence W. Glarner
    
    Director/s/ Andrew J. Greenshields

Andrew J. Greenshields
    
    Director/s/ Douglas L. Hemer

Douglas L. Hemer
    
    Director




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##### Table of Contents



AETRIUM INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 ItemNo.
    
    Item
    
    Method of Filing3.1
    
    Our Restated Articles of Incorporation,
as amended.
    
    Incorporated by reference to
Exhibit 3.1 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).3.2
    
    Amendment to Restated Articles of
Incorporation
    
    Incorporated by reference to
Exhibit 3.2 to our Quarterly
Report for the quarter ended
September 30, 1998 (File No.
0-22166).3.3
    
    Our Bylaws, as amended.
    
    Incorporated by reference to
Exhibit 3.2 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).4.1
    
    Specimen Form of our Common Stock
Certificate.
    
    Incorporated by reference to
Exhibit 4.1 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).10.1
    
    1993 Stock Incentive Plan, as amended.
    
    Incorporated by reference to
Exhibit 10.2 to our Annual
Report on Form 10-K for year
ended December 31, 1997 (File
No. 0-22166).10.2
    
    Salary Savings Plan.
    
    Incorporated by reference to
Exhibit 10.3 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).10.3
    
    Form of Incentive Stock Option Agreement.
    
    Incorporated by reference to
Exhibit 10.6 to our Annual
Report on Form 10-KSB for the
year ended December 31, 1993
(File No. 0-22166).10.4
    
    Form of Non-Statutory Option Agreement.
    
    Incorporated by reference to
Exhibit 10.7 to our Annual
Report on Form 10-KSB for the
year ended December 31, 1993
(File No. 0-22166).10.5
    
    Employment Agreement dated April 1,
1986, between Joseph C. Levesque and us.
    
    Incorporated by reference to
Exhibit 10.6 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).10.6
    
    Credit Agreement dated August 11, 1989,
between Harris Bank and us.
    
    Incorporated by reference to
Exhibit 10.7 to our
Registration Statement on
Form SB-2 (File No.
33-64962C).10.7
    
    Lease Agreement, dated July 19, 1995,
between KAMKO Investments and us.
    
    Incorporated by reference to
Exhibit 10.12 to our
Registration Statement on
Form SB-2 (File No.
33-98040).
 E-1




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##### Table of Contents



ItemNo.
    
    Item
    
    Method of Filing10.8
    
    Amendment to Lease Agreement, dated
September 26, 1995, between KAMKO
Investments and us.
    
    Incorporated by reference to
Exhibit 10.13 to our
Registration Statement on
Form SB-2 (File No.
33-98040).10.9
    
    Indenture dated June 25, 1998 between
KAMKO Investments and the company.
    
    Incorporated by reference to
Exhibit 10.19 to our Annual
Report on Form 10-K for the
year ended December 31, 1998
(File No. 0-22166).10.10
    
    Standard Industrial/Commercial
Single-Tenant Lease, dated September 18,
1998, between W.H. Pomerado, LLC and us,
including addendum and material exhibits
to lease.
    
    Incorporated by reference to
Exhibit 10.16 to our Annual
Report on Form 10-K for the
year ended December 31, 1999
(File No. 0-22166).10.11
    
    Standard Lease Agreement, dated December
19, 1987, between Crow-Markison 22-27,
Limited Partnership and WEB Technology,
Inc., including all supplements and
amendments thereto through December 27,
1999.
    
    Incorporated by reference to
Exhibit 10.17 to our Annual
Report on Form 10-K for the
year ended December 31, 1999
(File No. 0-22166).10.12
    
    Assignment and Assumption of Lease
Agreement, dated August 8, 2000, by and
between us and Littlefeet, Inc.
    
    Incorporated by reference to
Exhibit 10.16 to our Annual
Report on Form 10-K for the
year ended December 31, 2000
(File No. 0-22166).10.13
    
    Bill of Sale, Assignment and Assumption
and Lease Agreement, dated March 31,
2000, by and between Aetrium-EJ Inc. and
Daniel Gamelin and Mark Woodman.
    
    Incorporated by reference to
Exhibit 10.17 to our Annual
Report on Form 10-K for the
year ended December 31, 2000
(File No. 0-22166).10.14
    
    Assignment, dated August 31, 2000, by
and between Aetrium-EJ Inc. and Daniel
Gamelin and Mark Woodman.
    
    Incorporated by reference to
Exhibit 10.18 to our Annual
Report on Form 10-K for the
year ended December 31, 2000
(File No. 0-22166).10.15
    
    Amendment dated January 27, 2003,
between Crow-Markison 22-27, Limited
Partnership and Aetrium-WEB Technology,
LP to Standard Lease Agreement scheduled
herein as item 10.12.
    
    Incorporated by reference to
Exhibit 10.17 to our Annual
Report on Form 10-K for the
year ended December 31, 2002
(File No. 0-22166).10.16
    
    2003 Stock Incentive Plan.
    
    Incorporated by reference to
Exhibit 10.18 to our Annual
Report on Form 10-K for the
year ended December 31, 2002
(File No. 0-22166).10.17
    
    Form of Change of Control Agreement
    
    Incorporated by reference to
Exhibit 10.19 to our Annual
Report on Form 10-K for the
year ended December 31, 2003
(File No. 0-22166).
 E-2




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##### Table of Contents



ItemNo.
    
    Item
    
    Method of Filing10.18
    
    Assignment Agreement, dated January 20,
2004, by and between us and Littlefeet,
Inc.
    
    Incorporated by reference to
Exhibit 10.20 to our Annual
Report on Form 10-K for the
year ended December 31, 2003
(File No. 0-22166).10.19
    
    Sales Incentive Program
    
    Incorporated by reference to
Exhibit 10.21 to our Annual
Report on Form 10-K for the
year ended December 31, 2003
(File No. 0-22166).10.20
    
    Executive Officer Profit Sharing Program
    
    Filed herewith electronically.14.1
    
    Code of Business Conduct and Ethics
    
    Incorporated by reference to
Exhibit 14.1 to our Annual
Report on Form 10-K for the
year ended December 31, 2003
(File No. 0-22166).21.1
    
    Subsidiaries of the Registrant.
    
    Incorporated by reference to
Exhibit 10.18 to our Annual
Report on Form 10-K for the
year ended December 31, 2002
(File No. 0-22166).23.1
    
    Independent Registered Public Accounting
Firms Consent.
    
    Filed herewith electronically.31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    Filed herewith electronically.31.2
    
    Certification of Chief Administrative
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    Filed herewith electronically.31.3
    
    Certification of Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
    
    Filed herewith electronically.32.1
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    Filed herewith electronically.
 E-3




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##### Table of Contents



SCHEDULE II Valuation and Qualifying Accounts Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atbeginning of
    
    
    
    
    
    
    
    
    
    
    end ofDescription
    
    year
    
    
    Additions
    
    
    Deductions
    
    
    yearAllowance for doubtful accounts:2002
    
    $
    395
    
    
    $
    0
    
    
    $
    (115
    )
    
    $
    2802003
    
    
    280
    
    
    
    0
    
    
    
    (43
    )
    
    
    2372004
    
    
    237
    
    
    
    60
    
    
    
    (11
    )
    
    
    286Inventory excess and
obsolescence reserve (1):2002
    
    $
    4,171
    
    
    $
    100
    
    
    $
    (270
    )
    
    $
    4,0012003
    
    
    4,001
    
    
    
    80
    
    
    
    (721
    )
    
    
    3,3602004
    
    
    3,360
    
    
    
    120
    
    
    
    (631
    )
    
    
    2,849
   (1)
    
    Deductions represent sales or disposals of reserved inventory. S-1