** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION********Washington, D.C.  20549**

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**FORM 10-K**

 
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

**For the Fiscal Year EndedDecember 31, 2001**

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

 

**For thetransition period from             to              **

 

**Commission File No. 0-22166**

** **

**AETRIUM INCORPORATED**

(Exact name of registrant as specified in its charter)

 
| **Minnesota**                                                                                  |   | **41-1439182**                        |
|------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                                |   | (I.R.S.  Employer 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 whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES   ý   NO  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-Ko.

 

As of March 21, 2002, 9,474,566 shares of Common Stockof the Registrant were outstanding, and the aggregate market value of theCommon Stock of the Registrant as of that date (based upon the last reportedsale price of the Common Stock on that date as reported by the Nasdaq NationalMarket), excluding outstanding shares beneficially owned by directors,executive officers and affiliates of the Registrant, was approximately$21,523,000.

** **

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Part IIIof this Annual Report on Form 10-K incorporates by reference information (tothe extent specific sections are referred to herein) from the Registrant’sdefinitive Proxy Statement for its 2002 Annual Meeting of Stockholders to beheld May 21, 2002 (the “2002 Proxy Statement”).

 

 

 

**AETRIUM INCORPORATED**

** **

**Form 10-K**

** **

**For the fiscal year ended****December 31, 2001**

** **

**TABLE OF CONTENTS**

 
| **PART I**    |          |
|---------------|---------------|
|          |
|          | **ITEM 1.**   | **BUSINESS.** |
|          | **ITEM 2.**   | **PROPERTIES.** |
|          | **ITEM 3.**   | **LEGAL PROCEEDINGS.** |
|          | **ITEM  4.**  | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS.** |
|          | **ITEM 4A.**  | **EXECUTIVE  OFFICERS OF THE REGISTRANT.** |
|          |          |
| **PART II**   |          |
|          |
|          | **ITEM  5.**  | **MARKET  FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.** |
|          | **ITEM 6.**   | **SELECTED FINANCIAL  DATA.** |
|          | **ITEM  7.**  | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF   OPERATIONS.** |
|          | **ITEM  7A.** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT** |
|          |          | **MARKET  RISK.** |
|          | **ITEM  8.**  | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA.** |
|          | **ITEM  9.**  | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE** |
|          |          |
| **PART  III** |          |
|          |
|          | **ITEM  10.** | **DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT.** |
|          | **ITEM 11.**  | **EXECUTIVE  COMPENSATION.** |
|          | **ITEM  12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.** |
|          | **ITEM  13.** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS.** |
|          |          |
| **PART IV**   |          |
|          |
|          | **ITEM 14.**  | **EXHIBITS, FINANCIAL STATEMENT  SCHEDULES, AND REPORTS ON FORM 8-K** |

 

(i)

 

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**PART I**

** **

This Form 10-Kcontains certain forward-looking statements. For this purpose, any statements contained in this Form 10-K thatare not statements of historical fact may be deemed to be forward-lookingstatements.  Without limiting theforegoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”“estimate” or “continue” or comparable terminology are intended to identifyforward-looking statements.  Thesestatements by their nature involve substantial risks and uncertainties, andactual 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 andResults of Operations” under Item 7 below. References in this Form 10-K to“Aetrium,” “the company,” “we” and “our,” unless the context otherwiserequires, refer to Aetrium Incorporated and its consolidated subsidiaries andtheir respective predecessors.

** **

**ITEM 1.          BUSINESS.**

** **

**Overview**

 

We design,manufacture and market a variety of electromechanical equipment used in thehandling and testing of semiconductor devices, such as integrated circuits, orICs, and discrete electronic components. Our primary focus is on high volume semiconductor device types and onthe latest IC package designs.  Our productsare purchased primarily by semiconductor manufacturers and their assembly andtest subcontractors.  Our products areused in the test, assembly and packaging, or TAP, segment of semiconductormanufacturing.  Our products automatecritical functions to improve manufacturing yield, raise quality levels,increase product reliability and reduce manufacturing costs.

 

We have threeprincipal product lines:

 

•                  Test Handler Products.  In terms of revenue, this is our largest product line.  Our broad line of test handler productsincorporates thermal conditioning, contactor and automated handlingtechnologies to provide automated handling of ICs and discrete electroniccomponents during production test cycles. We also offer change kits to adapt our test handlers to different ICpackage configurations or to upgrade installed equipment for enhancedperformance, which represent a significant part of our revenue.

 

•                  IC Automation Products.  Some of our IC automation products are sold to original equipmentmanufacturers, or OEMs, to be incorporated as the automated handling componentsof such OEMs’ own proprietary equipment for a variety of other IC processingrequirements, such as marking, lead scanning, and lead trim and form.  The rest of our IC automation products aresold to semiconductor manufacturers, and are used to automate the loading andunloading of burn-in boards.

 

•                  Reliability Test Equipment.  The primary focus of our reliability test products is to provideIC manufacturers with IC performance data to aid in the evaluation andimprovement of IC designs and manufacturing processes to increase IC yield andreliability.

 

2001 was a year oftremendous challenge for us, as the semiconductor industry suffered its worstdownturn in 25 years.  This downturnresulted in a 60% decrease in TAP semiconductor equipment sales from theprevious year.  We addressed thischallenge through several restructuring and reorganizing actions that saved usover $10 million in operating expenses over the previous year, reduced ourworkforce from 225 to 102 employees, and maintained our working capital at levelsthat should support us during the 

 

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remainder of this downturn.  Atthe same time, we continued our product development efforts focused on thenewest and fastest growing IC package types and the latest semiconductorprocesses. We believe that our cost structure and product offerings position usto take full advantage of the next industry upturn when it begins.

 

As a result of the restructuring activities completedin fiscal year 2000 and early fiscal year 2001, we now have two operatinglocations where all product development and manufacturing activities areconducted, North St. Paul, Minnesota and Dallas, Texas.  We manufacture products within each of ourprincipal product lines at both of these facilities.

** **

**Background**

 

Our strategy has focused on revenue growth throughproduct line expansion, by both internally developing and acquiringcomplementary technologies, businesses, or product lines.

 

In 1998, we acquired the equipment business of WEBTechnology, Inc., based in Dallas, Texas. The primary products we acquired were IC automation products used toautomate the loading and unloading of burn-in boards.  This equipment can be configured to accommodate any burn-in boardcurrently being manufactured.  Wemanufacture this equipment at our Dallas operations.

 

In 1997, wecompleted two acquisitions that expanded our test handler product lines.  In November 1997, we acquired a product lineof pick-and-place test handlers from Advantek Inc.  This acquisition extended our product line of pick-and-place testhandlers for non-memory analog and logic IC devices.  We manufacture the product line acquired from Advantek at ourNorth St. Paul operations.

 

In April 1997, weacquired a line of turret test handler products through our purchase of theassets of Forward Systems Automation, Inc.  Thisline of test handlers addresses discrete components and small ICs, includingthe 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 havefurther developed and transferred to our North St. Paul operations.

 

In November 1994, we acquired the assets of Sym-TekSystems, Inc., which expanded our presence in the memory IC market, and alsoextended our line of gravity feed test handlers for non-memory IC test handlerapplications.  We have sincediscontinued the products for non-memory applications.  In the fourth quarter of fiscal year 2000,we also decided to exit the highly volatile handler market for memoryapplications.  However, through thisacquisition 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 testsystems product line through the purchase of the assets of Sienna Technologies,Inc. Since the acquisition, we have developed and introduced a new generationproduct line that has been well received by a growing customer base.  Our reliability test products are primarilymanufactured at our North St. Paul operations.

 

In April 1988, we acquired the core products of our5050 series of gravity feed test handlers through our acquisition ofElectro-Mechanical Systems, Inc.  Sincethen, we have expanded this series of products through internal development toinclude a full range of thermal conditioning capabilities, contactors andchange kits for a wide range of IC package types.  We sell these products into the largest 

 

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market segment of the semiconductor industry. We manufacture ourgravity feed test handlers at our North St. Paul operations.

 

We were incorporated in Minnesota in December1982.  Our executive offices are locatedat 2350 Helen Street, North St. Paul, Minnesota 55109, our telephone number is(651) 770-2000.  Our web site address is*www.aetrium.com*.  Our website is not intended to be a part ofthis Annual Report on Form 10-K.

** **

**FinancialInformation About Segments**

 

Since our inception, we have operated in the singleindustry segment of supplying electromechanical equipment to the semiconductorindustry.

** **

**TestHandler Products**

 

Test handlers are electromechanical systems interfacedwith a tester to form a test system designed to handle, thermally condition,contact and sort ICs and discrete electronic components automatically duringthe final test stage of the manufacturing process.  The devices are loaded into the handler from bowls, tubes ortrays and then typically transported to a temperature chamber within the testhandler where they are thermally conditioned and controlled to the requiredtesting temperature.  The devices arethen positioned against the test handler contactor, which provides anelectrical connection between the device and the tester.  After testing, the test handler sorts thedevices according to test performance as instructed by the tester.  In some cases, additional process steps arecompleted by the test handler system. These include marking or inspection of the IC packages, and automaticplacement of the ICs into a tube, tray or tape for shipment to the enduser.  Test handlers must meet industrycriteria for thermal conditioning, contactor integrity and minimization ofdamage to the semiconductor package during the test handling cycle.

 

ICs are multi-function semiconductor devices that canbe made up of up to millions of individual transistor gates, and includemicroprocessors, microcontrollers, digital signal processors and memorydevices.  ICs come in a wide range ofsizes and package types, depending upon their application.  Discrete electronic components are singlefunction semiconductor devices, such as resistors and capacitors.  They are typically very small and arepackaged in several package types.

 

In the testing of semiconductor devices, thesemiconductor package type being tested often dictates the type of test handlerused.  Small outline packages, or SOPs,constituting the largest IC package segment, have leads, or electricalcontacts, extending from two sides and are typically tested with gravity feedtest handlers.  Micro leadless packages,or MLPs and sometimes referred to as MLFTMs, SONs or QFNs, haveelectrical contact pads flush with the sides and bottoms of the ICs and aretypically tested with gravity feed or turret based test handlers.  MLPs constitute one of the fastest growingnew IC package types.  More complex ICsare sometimes packaged in the IC package families most easily damaged inhandling, such as QFPs, BGAs, PGAs, some CSPs and the most fragile SOPpackages. 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 thepackage. PGAs, or pin grid arrays, have pin type leads extending from thebottom of the package. CSPs, or chip scale packages, are a category of some ofthe smallest IC packages, with package sizes being no more than 1.2 times thesize of the IC die within.  More fragileIC package types are typically tested with pick-and-place test handlers.  Discrete electronic component package typesinclude small outline transistor packages, or SOPs, which are also sometimesused for the smallest ICs.  Discreteelectronic component package types are typically tested with turret based testhandlers.

 

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Our primary focus continues to be on the newergeneration of surface mount devices that represent the largest volumes, thenewest IC device types, and the fastest growing markets in the industry.  We believe we offer the broadest line oftest handling products to the semiconductor industry, addressing the fullspectrum of non-memory device types, IC package types and media transporttypes.  Our test handler products arecomplementary with minimal overlap of application, and we distribute andservice them through a common organization for efficiency.

*** ***

***Gravity Feed Test Handlers***

 

Traditionally, test handlers have used gravity to moveICs and other semiconductor devices from tubes through the handler system andback into tubes.  Typically, in gravityfeed systems ICs are halted at necessary points in the handling process bycolliding against other ICs or other stopping mechanisms, which can result inlead damage to more fragile IC packages. Accordingly, gravity handlers are best suited for more rugged ICpackages, which include MLPs and most SOPs.

 

Our gravity feed test handlers compete most favorablyin high-volume applications and their high throughput rates are an addedadvantage in relatively short test time applications.  These handlers adapt to “plunge to board”-type contacting andthird party contactors, as well as our internally developed proprietarycontactors, providing cost-effective solutions to a wide range of customer testrequirements.  In “plunge to board”-typecontacting, the IC is placed directly against the test head with nointermediary sockets or connections, which is particularly well suited for highperformance ICs.  Our gravity feed testhandlers can heat or cool the ICs being tested to any test temperature from -55degrees C to +155 degrees C.  They usemechanical refrigeration to cool ICs, which is more economical than liquidnitrogen, commonly used as a refrigerant in competing handlers. Our principalgravity feed test handlers include:

 

•          *5500 Series*.  Our newlydeveloped 5500 Series of single and dual site gravity feed test handlers foranalog and logic IC applications addresses a wide range of IC packagesincluding SOPs and MLPs.

 

•          *5050 Series*.  Our 5050Series of gravity feed test handlers for analog and logic IC applicationsaddresses a wide range of SOP package types. In addition to single test sitecapability, we offer dual test site and quad test site capability within our5050 Series of handlers to increase productivity and reduce testing costs incertain applications*.*

*** ***

***Turret Based Test Handlers***

 

Turret based handlers have a series of pickup headsthat rotate around a fixed axis and move devices from station to station.  They are typically configured for bowl feedinput and tape and reel output, although they can be configured for tube ortray input and tube or tray output.  Oneor more stations on turret based handlers are used for testing ICs. Stations onturret based handlers can also be used for additional process steps such asmarking and inspection.  Turret basedhandlers are well suited for discrete components and smaller ICs that aredifficult to handle in gravity handlers because of their size and small mass,and are well suited for MLPs because they can be handled in bulk.  Turret based handlers are typically morecostly than gravity feed handlers, but can have throughput rates that rivalmulti-site gravity handlers.

 

Our turret based test handlers are designed for highvolume testing of discrete electronic component packages and ICs in MLP, CSPand SOT packages.  These test handlerscan 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.

 

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These test handlers are typically configured for bowl feed input andtape and reel output.  Our principalturret based handlers include:

 

•          *Model 5800 Series. *We introduced the Model 5800 SmallComponent Integrated Test Handler in 2000. It has eight stations, and can beconfigured for up to four test sites. It operates at temperatures ranging fromambient to +150 degrees C, and can be configured for tube input and tubeoutput. The Model 5800 can achieve throughputs of up to 16,000 devices perhour.

 

•          *Model 8832 Series. *We introduced the Model 8832 SmallComponent Integrated Test Handler in 2000. It has 32 stations, which provide ahigh degree of flexibility in integrating IC process functions into thehandler. It can be configured for up to eight test sites and, optionally, fortube or tray input and tube or tray output. The Model 8832 is capable ofthroughputs of up to 24,000 devices per hour.

 

•          *Model 8816 Series*. We expect to introduce the Model 8816 SmallComponent Integrated Test Handler in 2002. It is based on the Model 8832, hassixteen stations, and provides for a “hard dock” tester interface, where thetest head is docked directly against the test handler to minimize the distancebetween the test head electronics and the IC under test.

*** ***

***Pick-and-Place TestHandlers***

 

Pick-and-placetest handlers move ICs by “picking” up each device and “placing” the device tothe appropriate position, similar to a robot. The motions avoid jarring stopsand potential resulting lead damage. Thus, they can handle a wide variety ofpackages, including the IC package families most easily damaged in handling.

 

Our pick-and-placetest handlers can be configured for a wide variety of analog and logic ICs inSOP, QFP, BGA, CSP and PGA packages. Using a conventional thermal chamber technique, these handlers can heator cool the ICs being tested to any test temperature from -55 degrees C to +155degrees C.  These handlers feature theSoft-Touch ProbeTM 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 canbe modified with change kits, typically within 15 minutes, to accommodatenearly every IC package configuration being manufactured in volume today*.*Our principal pick-and-place handlers include:

 

•          *Model1400. *The Model 1400 is a single site pick-and-place testhandler.

 

•          *Model3000. *The Model 3000 test handler is a dual sitepick-and-place test handler, which allows for significantly increased throughputfor dual site applications, as compared to single site test handlers.

*** ***

***Change Kits,Upgrades and Spare Part****s*

 

We have an ongoingdemand for IC package change kits for our installed test handler products,including test handlers no longer included in our active product lines.  We sell a variety of change kits toaccommodate the growing variety of IC packages used in the IC industry.  The demand for change kits is driven by the introductionof new IC package types and increased production volumes experienced by our endcustomers.  Also included in change kitsare upgrade kits to enhance the performance of installed equipment.  We sell spare parts with new orders as kitsor separately as piece parts or in kit form as required.

** **

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**ICAutomation Products**

 

We believe thatthe growing number and volume of fine pitch SOPs and other delicate devicepackages such as QFPs, BGAs and CSPs is driving a demand for automatedequipment for all IC final manufacturing processes.  Existing processing equipment often will not accommodate thesepackage types or the numerous tray configurations used to transport theICs.  We believe that our automation productlines offer the most effective handling technology to automate these manufacturingprocesses for increasingly difficult to handle newer generation ICs.

*** ***

***4800 Series***

 

Our 4800 Series isa line of products used to automate the loading and unloading of burn-inboards.  Burn-in boards vary in size anddensity, and are used to place individual ICs into a convection oven for anextensive reliability screening and stress testing procedure known as“burn-in.”  Our burn-in board automationproducts take untested ICs out of trays or other media and place them intosockets on a burn-in board.  After theburn-in test is complete, the model 4800 system unloads and removes ICs thathave completed the burn-in cycle from the burn-in board sockets and sorts theICs according to the results of the test as instructed by the burn-insystem.  The burn-in process screens forearly failures by operating the IC at elevated voltages and temperatures,usually at 125 degrees C, for periods typically ranging from 12 to 96hours.  Burn-in systems can processthousands of ICs simultaneously, utilizing multiple boards.  Most leading-edge microprocessors, digitalsignal processors, and memory ICs undergo burn-in testing.

 

Our 4800 Seriescomes in single pick-up head, dual-head, five-head and ten-head versions.  The single and dual head models are bestsuited for large IC packages or for those applications requiring a quickconversion of the model 4800 system to handle a different IC package.  The five-head and ten-head systems are bestsuited to very high volume memory applications.  All are available with a variety of input and output options,including tubes and trays.  Packagepositioning stations ensure device alignment into sockets and outputmedia.  An optional stacked burn-in boardelevator and trolley allows the system to process up to 32 burn-in boards withoutany operator intervention.

*** ***

***IC Automation Product Line for OEMs***

 

We began thedevelopment of our current IC Automation product line in 1990.  This product line is marketed to othersemiconductor equipment manufacturers to provide automation for theirsemiconductor process equipment.  Our ICAutomation modules have been incorporated to provide automation in trim andform, marking, mark curing, lead inspection, mark inspection, leadconditioning, media transfer and prom programming equipment to accommodatevarious device characteristics and media packaging.  Our IC Automation modules currently consist of a series ofrobotic electromechanical handling modules, each designed to perform a specifichandling function.  Together thesemodules perform nearly all of the handling functions necessary for the variousIC manufacturing processes.  Eachhandling module has a microprocessor that directs the handling module’sfunction and communicates with other modules through a proprietary softwareprotocol that enables the transfer of ICs between modules in a logical andefficient manner.

 

The IC Automation handling modules can be readilyassembled into systems configured to provide nearly any IC routing patternrequired by an IC processing application, and can be readily integrated as acomponent of the processing equipment. This generic nature of the IC Automation handling modules allows us toprovide a versatile, cost effective automation solution to IC processingequipment OEMs that overcomes the handling automation challenges presented bymore fragile IC package types.  The ICAutomation modules can also be adapted to provide an automated linkage between 

 

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IC manufacturing processes, thus offering the potential for seamlessautomated handling of ICs from trim and form to packaging for shipment.

 

Our revenues from our IC Automation product line wereseverely impacted by the record industry downturn in 2001 as our OEM customersexperienced the same business conditions that we were experiencing. Because ofthe excess capacity that continues to exist for our OEM customers’ products, weexpect that future revenues from this product line will be increasinglydependent on our success in having our IC Automation modules incorporated intonew OEM customer product introductions.

** **

**ReliabilityTest Equipment**

 

The IC industry’s demand for higher performancedevices through smaller circuit geometries has led to significant technologicalchanges in the materials and processes used to manufacture ICs, including anemerging shift to copper materials for the increasingly minute circuitry ofdevices.  These changes in technology,along with IC user demand for increased reliability, have created a need forincreasingly sophisticated reliability testing of IC designs and manufacturingprocesses.  Our reliability testequipment product line enables IC manufacturers to force precise levels ofvoltage and current through ICs, collect and analyze relevant data, and predictlifetime performance of ICs.  Thisequipment can be utilized to perform reliability testing of packaged andunpackaged ICs.  We have reliabilitytest equipment installed at 18 of the top 20 semiconductor manufacturers in theworld.

 

In 1998, we formally introduced our Model 1164 series,including a suite of applications for customers to perform a variety oftests.  The Model 1164 series is afundamentally improved architecture from our previous reliability testproducts.  The Model 1164 seriesfeatures a modular design that allows for great flexibility in performingreliability tests, and can test up to 4,096 devices at a time and performnumerous simultaneous tests on batches of ICs. The Model 1164 series includes the full reliability test functionalitynecessary for testing an IC manufacturer’s entire copper process.****Ourcopper system has been shipping in volume since the fourth quarter of fiscalyear 1999.

** **

**Competition**

 

The semiconductor capital equipment market is highlycompetitive.  In the market for testhandler products, we compete with a number of companies ranging from very smallbusinesses to large companies, some of which have substantially greaterfinancial, manufacturing, marketing and product development resources than wehave.  Some of these companiesmanufacture and sell both testers and test handlers. The particular companieswith which we compete vary with our different markets, with no one companydominating the overall test handler market. The companies with which we compete most directly in the surface mountIC test handler market include Cohu, Inc., Multitest Electronic Systems GmbH,and Micro Component Technology, Inc.  Wealso compete with Ismeca S.A. and Tesec Corporation in the market for turretbased test handlers configured to handle discrete electronic components**.**

 

We compete for test handler sales primarily on thebasis of effective handler throughput, cost of ownership, temperature accuracy,contactor integrity and other performance characteristics of our products, thebreadth of our product lines, the effectiveness of our sales and distributionchannels and our customer relationships. We believe we compete favorably on all of these factors.

 

The market for burn-in board automation products ishighly competitive.  We compete with anumber of companies ranging from very small businesses to large companies, someof which have substantially greater financial, manufacturing, marketing andproduct development resources than we

 

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have.  The companies with whichwe compete most directly in this market include Cohu, Inc., SIPA, S.p.a., andTodo Seisakusho, Ltd.

 

We compete for burn-in board automation product salesprimarily on the basis of effective throughput, cost of ownership, versatility,and other performance characteristics of our products, the breadth of ourproduct line, the effectiveness of our sales and distribution channels and ourcustomer service.  We believe we competefavorably on all of these factors.

 

We believe that the market for our IC Automationproducts sold on an OEM basis has no clearly defined commercial competitorsoffering similar automated handling modules to the IC industry.  Historically, OEMs supplying equipment forIC manufacturing processes have developed custom or semi-custom handlingcomponents.  Many of these OEMs haveinternal development capability for automated handling and many engineeringcompanies also have automated handling development capability.

 

The market for our reliability test equipment is alsohighly competitive and our competitors include QualiTau, Ltd. and MicroInstrument Company.  We compete forreliability 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.

** **

**Manufacturingand Supplies**

 

We manufacture test handlers, reliability testequipment and our IC Automation product line at our North St. Paul, Minnesotafacility.  We currently manufacture ourturret based test handler products, some of our reliability test equipment andour IC automation products used for burn-in board applications at our Dallas,Texas facility.  Our manufacturingoperations consist of procurement and inspection of components andsubassemblies, assembly and extensive test of finished products.  Quality and reliability are emphasized inboth the design and manufacture of our products.

 

We or our suppliers inspect all components andsubassemblies for mechanical and electrical compliance to ourspecifications.  We test all finishedproducts against company and customer specifications, and fully assembled testhandler products are tested at all temperatures for which they are designed andwith all the IC packages to be accommodated.

 

A significant portion of the components andsubassemblies used in our products, including machined parts, PC boards,refrigeration systems, vacuum pumps and contactor elements, are manufactured bythird parties on a subcontract basis. As a part of our total quality management program, we have an ongoingsupplier quality program under which we select, monitor and rate our suppliers,and recognize suppliers for outstanding performance.

 

Certain components used in our products, includingcertain contactor components, printed circuit boards and refrigeration systems,are currently available from only a limited number of sources.  We do not maintain long term supplyagreements with most of our suppliers, and we purchase most of our componentsthrough individual purchase orders.  Wemay not always be able to replace all of our suppliers within a time periodconsistent with our business requirements. We attempt to keep an adequate supply of critical components in ourinventory to minimize any significant impact the loss of a supplier may cause.

** **

**Customers**

 

We rely on a limited number of customers for asubstantial percentage of our net sales. In fiscal year 2001, our top three customers accounted for 35% of ournet sales, with Maxim Integrated Products,

 

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Inc. accounting for over 10% of net sales.  In fiscal year 2000, our top three customers accounted for 32% ofour net sales, with UST Technology Pte, Ltd. and Maxim Integrated Products,Inc. each accounting for over 10% of net sales.  In fiscal year 1999, our top three customers accounted forapproximately 30% of our net sales, with UST Technology Pte, Ltd. and IBMCorporation each accounting for over 10% of net sales.  The loss of or a significant reduction inorders by these or other significant customers, including reductions due tomarket, economic or competitive conditions in the semiconductor industry, couldhave a negative impact on our financial condition and results of operations.

** **

**Salesand Marketing**

 

We market our products through a combination of directsalespeople and international distributors. Our direct sales organization, comprised of 12 salespeople, isresponsible for all domestic sales, and coordinates the activities of ourinternational distributors and actively participates with them in internationalselling efforts.  This enables us toestablish strong direct ties with our customers.  In December 2001, we terminated our agreements with U.S.independent sales representatives, whom our internal sales force had used priorto that time to assist on domestic sales.

 

We maintain sales and service locations in North St.Paul, Minnesota, Santa Clara, California, Landisville, Pennsylvania, Dallas,Texas, and Saugus, Massachusetts.  As ofDecember 31, 2001, we had international distributors located in the UnitedKingdom, France, Germany, Japan, Taiwan, Thailand, Malaysia, Korea, Singapore,Hong Kong, China and the Philippines.

 

Our marketing efforts include participation inindustry trade shows and production of product literature and sales supporttools.  These efforts are designed togenerate sales leads for our international distributors and direct salespeople.

 

International shipments accounted for 41%, 32% and 37%of our net sales in 1999, 2000, and 2001, respectively.  In addition, it is not uncommon for U.S.customers to take delivery of products in the United States for immediateshipment to international sites, particularly the IC Automation product linethat is sold on an OEM basis.  Most ofour international shipments are made to international sites of U.S.semiconductor manufacturers, although there is a growing foreign customer baseincluded in our international sales.

 

We invoice all of our international sales in U.S.dollars and, accordingly, have not historically been subject to fluctuatingcurrency exchange rates.  We establishcredit limits from time to time on our international distributors, who purchaseproducts from us and resell to end-users. We also often require irrevocable letters of credit from our end-userinternational customers to minimize credit risk and to simplify thepurchasing/payment cycle.

** **

**Researchand Development**

 

We believe we must continue to enhance, broaden andmodify our existing product lines to meet the constantly evolving needs of thesemiconductor equipment market.  Todate, we have relied both on internal development and acquisitions oftechnology and product lines to extend our product lines, increase our customerbase and avoid reliance on any single semiconductor equipment marketsegment.  Due to the record industrydownturn we experienced in 2001 and the resulting decline in our revenues, wesignificantly reduced our levels of research and development spending in 2001and focused our available resources on product development with near termrevenue potential.  We concentrated ournew product development efforts on:

 

•          development of the Model 8816 hard dock turret basedhandler;

 

9

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•          development of new tube and tray input and outputmodules for the Model 8832 turret based handler;

 

•          development of new contacting mechanismswith significantly improved throughput rates for the Model 5500 gravity feedhandler; and

 

•          development of additional testcapabilities for our Model 1164 reliability test equipment for the latestgenerations of copper, insulator and transistor device technologies.

 

Due to budgetary constraints, a lack of clearlydefined market requirements, and limited near term revenue potential, in 2001we suspended our development work on our DTX pick-and-place test handlerplatform for our proprietary conductive thermal technology.

 

Product development expenses typically divideapproximately 50% for new product development and 50% for continuationengineering.  Our continuationengineering efforts include the development of additional change kits to meetthe expanding families of IC package types, further advancement of contactortechnologies, and increasing features and performance options for existingequipment.

 

We expense all research and development costs,including costs for software development, as incurred.  In 1999, 2000, and 2001, our expensesrelating to research and development were approximately $9.8 million, $8.5million and $4.7 million, respectively. Over time, our objective is to invest approximately 13% to 15% of ournet sales in research and development, although the percentage may be higher inperiods of reduced sales, such as 2001 where our research and developmentspending increased as a percentage of net sales to 23.5%.  We employed 26 engineering personnel as ofDecember 31, 2001.

** **

**IntellectualProperty Rights**

 

We attempt to protect the proprietary aspects of ourproducts with patents, copyrights, trade secret law and internal nondisclosuresafeguards.  We currently hold severalU.S. patents covering certain features of our handling systems and ICAutomation modules, the contactor elements incorporated in certain of our testhandlers, and elements of our proprietary conductive thermal technology.  The source code for the software containedin our products is considered proprietary and is not furnished tocustomers.  We have also entered intoconfidentiality agreements with each of our key employees.  Despite these restrictions, it may bepossible for competitors or users to copy aspects of our products or to obtaininformation that we regard as a trade secret.

 

There is a rapid pace of technological change in thesemiconductor industry.  We believe thatpatent, trade secret and copyright protection are less significant to our competitiveposition than factors such as the knowledge, ability and experience of ourpersonnel, new product development, frequent product enhancements, namerecognition and ongoing, reliable product maintenance and support.

 

**Backlog**

 

Our backlog was $5.4 million at the end of fiscal 2001and $18.7 million at the end of fiscal 2000. Because purchase orders are generally subject to cancellation or delayby customers with limited or no penalty, our backlog is not necessarilyindicative of future revenue or earnings.

 

10

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**Employees**

 

As of December 31, 2001, we had 102 employees,including 34 in manufacturing, 26 in engineering and product development, 23 insales, marketing and customer service, and 19 in general administration andfinance.  None of our employees isrepresented by a labor union or is subject to any collective bargainingagreement.  We have never experienced awork stoppage and believe that our employee relations are satisfactory.

** **

**FinancialInformation About Geographic Areas**

 

See Note 15 to the Consolidated Financial Statementsincluded in this Annual Report on Form 10-K for information about geographicareas.

** **

**CertainImportant Factors**

 

In addition to the factors identified above, there areseveral important factors that could cause our actual results to differmaterially from those we anticipate as reflected in any forward-lookingstatements.  Please refer to the heading“Business Risks and Uncertainties” located in “Management’s Discussion and Analysisof Financial Condition and Results of Operations” under Item 7 of this AnnualReport on Form 10-K for a discussion of these factors and their potentialimpact on the success of our operations and our ability to achieve our goals.

** **

**ITEM 2.       PROPERTIES.**

 

We conduct ourcorporate functions and manufacturing, product development, sales, marketingand field service operations in North St. Paul, Minnesota.  We currently occupy approximately 45,000square feet in North St. Paul under a lease that expires in March 2006, with anannual rent of approximately $240,000. We have an option under the lease, exercisable at any time during theinitial lease term, to require construction of an additional approximately45,000 square feet for lease at the same rental rate.

 

We also conduct manufacturing, product development,and certain sales and marketing activities in approximately 29,400 square feetin Dallas, Texas, under a lease that expires in April 2003.  The annual rent is approximately $203,000.

 

We also occupy approximately 3,000 square feet ofspace in Santa Clara, California under a lease that expires in May 2003, withan annual rent of approximately $67,200. We use this space for sales and field service operations.

 

We also have the following continuing lease obligationsfor facilities we have vacated:

 

•          We vacated a 30,000 square foot facilitywhich is adjacent to our North St. Paul facility in June 2001 when weconsolidated our North St. Paul operations into a single building.  This facility is under a lease that expiresin March 2006, with an annual rent of approximately $198,000.  Approximately half of this space iscurrently subleased to third parties, and we are actively seeking to subleasethe remainder.

 

•          We vacated a 10,000 square foot facilitylocated in Poway, California in March 2001 when we completed the consolidationof our Poway, California operation into our North St. Paul operation.  This facility is under a lease that expiresin September 2003, with an annual rent of 

 

11

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                        approximately $113,000.  In April 2001, we subleased this facility to a third party forthe remainder of the lease term, but we remain liable under the lease on acontingent basis.

 

•          We vacated a 45,000 square foot facility in Poway,California in 2000 when we relocated to the 10,000 square foot Poway,California facility.  This lease wasassigned to a third party and we are contingently liable for the lease if theassignee defaults.  This lease expiresin January 2010, and has an annual rent of approximately $429,000.

 

•          We vacated a 26,600 square foot facilityin Grand Prairie, Texas in 2000 when we consolidated our Grand Prairieoperation into our Dallas, Texas operation. This facility is under a lease that expires in June 2003 with an annualrent of $146,000. This property continues to be vacant.  We expect to continue to work with the ownerto locate a sub-tenant for the property.

 

**ITEM3.       LEGAL PROCEEDINGS.**

 

We are not a party to, and none of our property is thesubject of, any material pending legal, governmental, administrative or otherproceedings.

 

**ITEM4.       SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS.**

 

We did not submit anymatter to a vote of our security holders during the fourth quarter of fiscalyear 2001.

** **

**ITEM4A.    EXECUTIVE OFFICERS OF THEREGISTRANT.**

 

Our executive officers,their ages and the offices they held as of March 5, 2002 are as follows:

 
| **Name**           |   | **Age** |   | **Position**                                                      |
|--------------------|--------|---------|--------|-------------------------------------------------------------------|
| Joseph C. Levesque |   | 57      |   | Chairman of the Board, President and Chief Executive  Officer     |
|               |   |    |   |                                                              |
| Douglas L. Hemer   |   | 55      |   | Chief Administrative Officer, Secretary and Director              |
|               |   |    |   |                                                              |
| Daniel  M. Koch    |   | 48      |   | Vice  President — Worldwide Sales                            |
|               |   |    |   |                                                              |
| John J. Pollock    |   | 42      |   | Vice President — General Manager, North St. Paul  Operations |
|               |   |    |   |                                                              |
| Keith E. Williams  |   | 58      |   | President — Dallas Operations                                |
|               |   |    |   |                                                              |
| Paul H. Askegaard  |   | 50      |   | Treasurer                                                         |

 

***Mr. Levesque*** has served as ourPresident, Chief Executive Officer and Chairman of our board since 1986.  From 1973 to 1986, Mr. Levesque served invarious capacities and most recently as Executive Vice President of MicroComponent Technology, Inc., a manufacturer of IC testers and test handlers.

 

12

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***Mr. Hemer*** has served as one of ourdirectors since 1986, and has served as our Secretary since May 2000 and as ourChief Administrative Officer since March 2001. He served as our Group Vice President from August 1998 to March 2001, asthe President of our Poway, California operations from February 1997 to August1998 and as our Chief Administrative Officer from May 1996 until February1997.  Mr. Hemer was a partner in thelaw firm of Oppenheimer Wolff & Donnelly LLP for more than 15 years beforejoining Aetrium.  Mr. Hemer is also adirector of Versa Companies, a privately held company, and serves on itscompensation committee.

*** ***

***Mr. Koch***has served as our Vice President - Worldwide Sales since March 1991.  From March 1990 to March 1991, Mr. Kochserved as the Vice President of Sales of Summation, Inc., a company involvedwith the testing of IC boards.  FromDecember 1973 to March 1990, Mr. Koch served in various sales positionsand most recently as Vice President of Sales of Micro Component Technology,Inc.

*** ***

***Mr. Pollock***has served as the Vice President and General Manager of our North St. Pauloperations since December 2001. From August 1998 to December 2001, Mr. Pollockserved as our Vice President of Product Development and Marketing. From April1998 to August 1998, Mr. Pollock served as interim general manager of our NorthSt. Paul operations. From November 1997 to May 1998, Mr. Pollock served asinterim general manager of the handler group we acquired from Advantek Inc.From September 1996 to August 1997, Mr. Pollock served as Business Unit Managerof our IC Automation products group.

*** ***

***Mr. Williams***has served as the President of our Dallas operations since April 1998, when weacquired the handler equipment business of WEB Technology, Inc.  Mr. Williams co-founded WEB in 1982, andserved as its President and CEO from its inception until we acquired it.

 

***Mr. Askegaard***has served as our Treasurer since February 1992.  From October 1986 to February 1992, Mr. Askegaard served as ourCorporate Controller. Mr. Askegaard is a certified public accountant.

 

13

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**PART II**

** **

**ITEM5.       MARKET FOR THE REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

 

**MarketInformation**

 

Our common stockis quoted on the Nasdaq National Market under the symbol “ATRM”.  The following table summarizes the high and lowclosing sale prices per share of our common stock for the periods indicated, asreported on the Nasdaq National Market. These prices do not include adjustments for retail mark-ups, markdownsor commissions.

 
|   |   |   |   | **First  Quarter** |   | **Second  Quarter** |   | **Third Quarter** |   | **Fourth  Quarter** |   |
|--------|--------|--------|--------|--------------------|--------|---------------------|--------|-------------------|--------|---------------------|--------|
| 2001   |   | High   |   | $                  | 4.63   |                | $      | 2.40              |   | $                   | 2.25   |   | $ | 1.75 |   |
|   |   | Low    |   | $                  | 1.75   |                | $      | 1.25              |   | $                   | 0.71   |   | $ | 0.80 |   |
|   |   |   |   |               |   |                |   |              |   |                |   |
| 2000   |   | High   |   | $                  | 11.94  |                | $      | 10.88             |   | $                   | 7.50   |   | $ | 6.50 |   |
|   |   | Low    |   | $                  | 6.22   |                | $      | 5.00              |   | $                   | 5.38   |   | $ | 2.38 |   |

** **

**Holders**

 

As of March 22, 2002, there were approximately 200shareholders of record.  We estimatethat an additional 4,200 shareholders own stock held for their accounts atbrokerage 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 notanticipate paying cash dividends in the foreseeable future.

** **

**RecentSale of Unregistered Securities**

 

On December 31, 2001, we sold 426,410 shares of ourcommon stock for $544,000 to a group that included Keith E. Williams, Presidentof our Dallas operations, seven other employees of our Dallas operations, andthree of Mr. Williams’ adult children. In November 2001, we had purchased the same number of shares of ourstock from the same group for the same purchase price.  The members of the shareholder group wereall shareholders of WEB Technology, Inc. when we acquired the handler equipmentbusiness assets of WEB in April 1998. The shareholder group acquired their shares of our common stock as apart of the purchase price we paid WEB.

 

We issued the shares of our common stock to theshareholder group without registration under the Securities Act of 1933, asamended, in reliance on the exemption provided by Section 4(2) of theSecurities Act.  Our reliance on thisexemption is based upon the fact that these shares were only issued to theshareholder group, the limited number of persons receiving the shares, ourreasonable belief that each member of the shareholder group was capable of evaluatingthe merits and risks of his or her investment decision, the information we madeavailable to the shareholder group regarding us, and the restrictive legendsplaced on certificates representing the shares, among other factors.

 

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**ITEM6.       SELECTED FINANCIAL DATA.**

 

You should read the Selected Financial Data presentedbelow in conjunction with the Consolidated Financial Statements and notesthereto included elsewhere in this Annual Report on Form 10-K, and inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this Annual Report on Form10-K.

 

**FiveYear Summary**

 

** **
| **Year ended December 31,**                                                 |   | **2001**                                          |   | **2000**   |     | **1999 (7)** |       | **1998 (7)** |   | **1997 (7)** |       |
|-----------------------------------------------------------------------------|--------|---------------------------------------------------|--------|------------|----------|--------------|------------|--------------|--------|--------------|------------|
|                                                                        |   | **(Dollars in thousands, except per share data)** |   |
| **Statement of operations data:**                                           |   |                                              |   |       |     |         |       |         |   |         |       |
| Net sales                                                                   |   | $                                                 | 20,014 |       | $        | 46,052       |       | $            | 37,188 |         | $          | 59,619 |   | $ | 67,575 |   |
| Income (loss) from  operations                                              |   | (11,143                                           | )(1)   | (7,423     | )(2)     | (15,628      | )(4)       | (15,276      | )(5)   | 383          | (6)        |
| Income (loss) before  cumulative effect of a change in accounting principle |   | (10,669                                           | )(1)   | (21,705    | )(2),(3) | (9,013       | )(4)       | (9,450       | )(5)   | 1,229        | (6)        |
| Cumulative effect of a  change in accounting principle                      |   | —                                            |   | (824       | )(7)     | **—**   | ** ** | **—**   |   | —       | ** ** |
| Net income (loss)                                                           |   | (10,669                                           | )(1)   | (22,529    | )(2),(3) | (9,013       | )(4)       | (9,450       | )(5)   | 1,229        | (6)        |
|                                                                        |   |                                              |   |       |     |         |       |         |   |         |       |
| Per basic and diluted  share:                                               |   |                                              |   |       |     |         |       |         |   |         |       |
| Income (loss) before  cumulative effect of a change in accounting principle |   | (1.13                                             | )      | (2.29      | )        | (0.95        | )          | (1.00        | )      | 0.14         |       |
| Cumulative effect of a  change in accounting principle                      |   | —                                            |   | (0.09      | )        | **—**   | ** ** | **—**   |   | **—**   | ** ** |
| Net income (loss)                                                           |   | $                                                 | (1.13  | )          | $        | (2.38        | )          | $            | (0.95  | )            | $          | (1.00 | ) | $ | 0.14 |   |
|                                                                        |   |                                              |   |       |     |         |       |         |   |         |       |
| Weighted average common  shares outstanding:                                |   |                                              |   |       |     |         |       |         |   |         |       |
| Basic                                                                       |   | 9,438                                             |   | 9,466      |     | 9,470        |       | 9,423        |   | 8,668        |       |
| Diluted                                                                     |   | 9,438                                             |   | 9,466      |     | 9,470        |       | 9,423        |   | 8,923        |       |
|                                                                        |   |                                              |   |       |     |         |       |         |   |         |       |
| **December 31,**                                                            |   | **2001**                                          |   | **2000**   |     | **1999**     |       | **1998**     |   | **1997**     |       |
| **Balance sheet data:**                                                     |   |                                              |   |       |     |         |       |         |   |         |       |
| Total assets                                                                |   | $                                                 | 29,386 |       | $        | 44,374       |       | $            | 63,604 |         | $          | 72,444 |   | $ | 70,894 |   |
| Long-term debt, less  current portion                                       |   | —                                            |   | **—** |     | **—**   |       | **—**   |   | —       |       |

 

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1.               Includes pre-tax charges of $3.7 million for inventoryexcess and obsolescence charges and $2.2 million for unusual charges related torestructuring costs and asset write-downs. See Notes 4 and 6 to the Consolidated Financial Statements.

 

2.               Includes pre-tax charges of $1.7 million for inventoryexcess and obsolescence charges and $4.1 million for unusual charges related torestructuring costs and asset write-downs. See Notes 4 and 6 to the Consolidated Financial Statements.

 

3.               Includes a $17.3 million charge to record a valuationreserve against deferred tax assets. See Note 14 to the Consolidated Financial Statements.

 

4.               Includes pre-tax charges of $3.5 million for inventoryexcess and obsolescence charges and $1.4 million for unusual charges related torestructuring costs and the write-off of an intangible asset. See Notes 4 and 6to the Consolidated Financial Statements.

 

5.               Includes pre-tax charges of $3.3 million for inventoryexcess and obsolescence charges and $6.5 million for unusual charges related topurchased in-process research and development, restructuring costs and thewrite-off of intangible assets.

 

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6.               Includes pre-tax charges of $1.1 million for inventoryexcess and obsolescence charges and $9.5 million for unusual charges related topurchased in-process research and development.

 

7.               In 2000, we implemented a change in accounting forrevenue recognition for certain types of equipment sales. The cumulative effectof the change in accounting principle was an after-tax charge of $0.8 million.See Note 2 to the Consolidated Financial Statements.  The table below presents unaudited estimated pro forma resultsfor 1999 and 1998 as if the accounting change was in effect for thoseyears.  Information is not available toprovide pro forma results for 1997.

 
|                                                        |   | **1999** |   | **1998** |   |
|-------------------------------------------------------------|--------|----------|--------|----------|--------|
| Unaudited pro forma (in thousands, except per share  data): |   |     |   |     |   |
| Net sales                                                   |   | $        | 39,575 |     | $      | 65,163 |   |
| Net loss                                                    |   | (8,497   | )      | (7,451   | )      |
| Net loss per diluted share                                  |   | $        | (0.90  | )        | $      | (0.79 | ) |

 

**QuarterlyFinancial Data (Unaudited)**

** **

** **
|                                                                                                            |   | **First  Quarter (2)**                            |       | **Second  Quarter (2)** |       | **Third  Quarter (2)** |       | **Fourth  Quarter** |      |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|------------|-------------------------|------------|------------------------|------------|---------------------|-----------|
|                                                                                                            |   | **(Dollars in thousands, except per share data)** |       |
| 2001 Net sales                                                                                                  |   | **$**                                             | **8,030**  | ** **              | **$**      | **4,344**              | ** ** | **$**               | **3,876** | ** ** | **$** | **3,764** | ** ** |
| Gross profit                                                                                                    |   | **4,195**                                         | ** ** | **1,986**               | ** ** | **1,770**              | ** ** | **(970**            | **)(1)**  |
| Net loss                                                                                                        |   | **(2,278**                                        | **)(1)**   | **(2,972**              | **)(1)**   | **(1,061**             | **)(1)**   | **(4,358**          | **)(1)**  |
| Net loss per share  (basic and diluted)                                                                    |   | **(0.24**                                         | **)(1)**   | **(0.31**               | **)(1)**   | **(0.11**              | **)(1)**   | **(0.47**           | **)(1)**  |
|                                                                                                            |   |                                              |       |                    |       |                   |       |                |      |
| 2000 Net sales                                                                                                  |   | $                                                 | 10,521     |                    | $          | 10,854                 |       | $                   | 10,847    |   | $ | 13,830 |   |
| Gross profit                                                                                                    |   | 4,827                                             |       | 4,965                   | (1)   | 6,147                  |       | 6,718               | (1)  |
| Income (loss) before  cumulative effect of a change in accounting principle                                     |   | (2,779                                            | )(1)       | (1,579                  | )(1)       | 227                    | (1)   | (17,574             | )(1)      |
| Net income (loss)                                                                                               |   | (3,603                                            | )(1)       | (1,579                  | )(1)       | 227                    | (1)        | (17,574             | )(1)      |
| Income (loss) per share  before cumulative effect of a change in accounting principle (basic  and diluted) |   | (0.29                                             | )(1)       | (0.17                   | )(1)       | 0.02                   | (1)   | (1.85               | )(1)      |
| Net income (loss) per  share (basic and diluted)                                                                |   | (0.38                                             | )(1)       | (0.17                   | )(1)       | 0.02                   | (1)   | (1.85               | )(1)      |

 

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1.               These quarterly results include unusualcharges and credits such as inventory and other asset write-downs,restructuring charges and a deferred tax asset valuation reserve chargediscussed elsewhere in this Annual Report on Form 10-K.

2.               Results for the first, second and third quarters of 2000were restated to reflect a change in accounting principle.  See Note 2 to the Consolidated FinancialStatements. 

 

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**ITEM7.       MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF**

**OPERATIONS.**

** **

**Overview:**

 

Aetriumspecializes in the design, development, manufacturing and marketing of avariety of electromechanical equipment used by the semiconductor industry tohandle and test ICs and discrete electronic components.

 

The semiconductor capital equipment industry is oftendescribed as a cyclical growth industry characterized by a long-term growthtrend occasionally interrupted by periods of significant declines inrevenue.  Events impacting us in fiscalyear 2001 must be reviewed in the context of the present semiconductor capitalequipment cycle.

 

1998 was a year of declining revenues for thesemiconductor industry and declining capital spending. In the first half of1999, business conditions showed signs of improvement for some portions of theindustry.  A notable exception was theDynamic Random Access Memory, or DRAM, market that continued to experienceover-capacity and pricing pressures. One of our largest customers, a DRAM manufacturer, announced that it wasexiting the merchant market for DRAM devices and would buy minimal equipment in1999.  A second significant customeralso indicated that its requirements for our equipment for DRAM applicationswould be significantly lower than previously forecasted levels.  As a result, our 1999 revenues related toDRAM applications were approximately $20 million lower than 1998 and 1997levels.

 

In the second half of 1999, business conditionscontinued to improve for most IC manufacturers with some adding capacity andordering new equipment, particularly for their new products.  Our revenue levels increased in the secondhalf of 1999 in all product areas except for DRAM applications, which remainedweak due to reduced capital spending by the two significant customers mentionedabove.

 

Industry conditions continued to improve through thefirst three quarters of 2000.  Weexperienced increased demand for our products as semiconductor manufacturersadded substantially to their production capacity in response to global demandfor semiconductor devices.  Towards theend of 2000, the demand for semiconductor equipment decreased sharply as theU.S. and global economies slowed and the demand for semiconductors softened.

 

In 2001 excess inventories, excess capacity and acontinuing decline in the U.S. and global economies combined to produce arecord setting downturn in the semiconductor industry.  For only the second time in 25 years, fewerICs were shipped than the year before, as unit sales of ICs fell by 21%.  As a result, semiconductor manufacturers severelycurtailed capital spending, and total shipments of equipment for the TAPsegment of the semiconductor industry dropped approximately 60% from 2000totals.

 

As a result of the above factors, we experiencedsignificant declines in revenues in the first half of 1999. Industry conditionsimproved and our revenue levels increased in the second half of 1999 and thefirst nine months of 2000 for most of our products. In 2001 we experiencedsignificant declines in revenues in the first three quarters, and our revenuesfor the year were down 57% from 2000 revenues.

 

In response to the changing industry conditions,fluctuations in business activity, and overall lower revenue levels comparedwith peak periods in 1997, we made a number of strategic decisions and implementedvarious cost control initiatives to improve operating efficiencies throughoutthe period 1999 to 2001.  These actionsincluded discontinuing certain products and technologies, reducing workforce,

 

17

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closing facilities, reorganizing operations, and implementing othercost reductions that are discussed in more detail below.

** **

**CriticalAccounting Policies and Estimates:**

 

Management’s discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  We base our estimateson historical experience and on various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities. Actualresults may differ from these estimates under different assumptions orconditions.  We believe the critical accountingpolicies that require the most significant judgments and estimates used in thepreparation of our consolidated financial statements are those related torevenue recognition, bad debts, inventories, intangible assets, warrantyobligations, and income tax accounting.

 

Our policy is to recognize revenue on product salesupon shipment if contractual obligations have been substantially met and titleand risk of loss have passed to the customer, which is generally the case forsales of spare parts, accessories, change kits and some equipment and equipmentupgrade sales. Some equipment or equipment upgrade sales contracts, however,may include post-shipment obligations and/or contractual terms that can only besatisfied after shipment, such as installation and meeting customer-specifiedacceptance requirements at the customer’s site.  In these cases, revenue is not recognized until such obligationshave been completed and there is objective evidence that the applicablecontract terms have been met.  Due to thehigh selling price of certain types of equipment, the timing of revenuerecognition of a relatively small number of transactions may have a significantimpact on our quarterly results.

 

We maintain an allowance for doubtful accounts whichreflects our estimate of losses that may result from the inability of some ofour customers to make required payments. If the financial condition of one or more of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

 

We establish valuation reserves on our inventories forestimated excess and obsolete inventory equal to the difference between thecost of inventory and its estimated market value based upon assumptions aboutfuture product demand and market conditions. If actual product demand or market conditions are less favorable thanthose projected by management, additional inventory reserves may be required.

 

We review our goodwill and other intangible assetswhenever an event or change in circumstances indicates that the carrying valueof an asset may be impaired.  If such anevent or change in circumstances occurs and potential impairment is indicatedbecause the carrying values exceed the estimated future undiscounted cashflows, we would measure the impairment loss as the amount by which the carryingvalue of the asset exceeds its fair value. We reviewed our goodwill and other intangible assets at December 31,2001 and concluded that there was no impairment.  Effective January 1, 2002 we must adopt Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets.”  SFAS 142 provides a newmethodology for evaluating goodwill impairment.  We anticipate that the methodology prescribed by SFAS 142 forevaluating and measuring the impairment of goodwill will result in a goodwillimpairment charge of between $6.0 and $8.0 million.  Once determined, this charge will be reported as a change inaccounting principle in the first quarter of 2002.  We will be required by SFAS No. 142 to assess, on at least anannual basis, whether our goodwill carrying value is 

 

18

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impaired.  In the event that thefair value of our business declines in the future, we may incur additionalcharges for impairment.

 

We accrue estimated warranty costs in the period thatthe related revenue is recognized.  Ourwarranty cost estimates and warranty reserve requirements are determined basedupon product performance, historical warranty experience, and costs incurred inaddressing product performance issues. Should product performance or cost factors differ from our estimates,adjustments to our warranty accrual may be required.

 

Our deferred tax assets are reduced by a valuationallowance when we believe it is more likely than not that some portion or allof the deferred tax assets will not be realized.  In fiscal 2000, in accordance with SFAS No. 109, “Accounting forIncome Taxes,” due to recent operating losses, reduced sales order activity inlate 2000, and softening industry conditions in early 2001, we recorded avaluation allowance against our deferred tax assets.  If we generate taxable income consistently in future periods, ourassessment of our ability to realize these deferred tax assets may changeand  we may reduce this valuationallowance, which would be reported as an income tax benefit.

** **

**Resultsof Operations:**

 

Selected statement of operations items as a percentageof our net sales for 2001, 2000 and 1999 were as follows:

 
|                                                                                    |   | **2001**   |   | **2000** |   | **1999** |   |
|-----------------------------------------------------------------------------------------|--------|------------|--------|----------|--------|----------|--------|
| Net sales                                                                               |   | **100.0**  | %      | 100.0    | %      | 100.0    | %      |
| Cost of goods sold                                                                      |   | **65.1**   |   | 50.8     |   | 64.3     |   |
| Gross profit                                                                            |   | **34.9**   |   | 49.2     |   | 35.7     |   |
| Operating expenses:                                                                     |   |       |   |     |   |     |   |
| Selling, general and administrative                                                     |   | **56.1**   |   | 37.9     |   | 47.4     |   |
| Research and development                                                                |   | **23.5**   |   | 18.5     |   | 26.4     |   |
| Unusual charges                                                                         |   | **11.0**   |   | 8.9      |   | 3.9      |   |
| Total operating expenses                                                                |   | **90.6**   |   | 65.3     |   | 77.7     |   |
| Loss from operations                                                                    |   | **(55.7**  | )      | (16.1    | )      | (42.0    | )      |
| Other income, net                                                                       |   | **1.2**    |   | 0.9      |   | 1.6      |   |
| Loss before income taxes                                                                |   | **(54.4**  | )      | (15.2    | )      | (40.4    | )      |
| Income tax benefit (provision)                                                          |   | **1.1**    |   | (31.9    | )      | 16.2     |   |
| Net loss before cumulative effect of a change in  accounting principle                  |   | **(53.3**  | )      | (47.1    | )      | (24.2    | )      |
| Cumulative effect of a change in accounting — Staff  Accounting Bulletin   No. 101 |   | **—** |   | (1.8     | )      | —   |   |
| Net loss                                                                                |   | **(53.3**  | **)%** | (48.9    | )%     | (24.2    | )%     |

 

19

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**Net Sales:**

 

Our net sales by product line as a percentage of totalsales for fiscal 2001, 2000 and 1999 were as follows:

 
|                                         |   | **2001** |       | **2000** |   | **1999** |   |
|----------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Test handlers                                |   | **53**   | **%**      | 52       | %      | 46       | %      |
| IC automation products                       |   | **16**   | ** ** | 22       |   | 26       |   |
| Reliability and environmental test equipment |   | **18**   | ** ** | 13       |   | 12       |   |
| Change kits and spare parts                  |   | **13**   | ** ** | 13       |   | 16       |   |
| Total                                        |   | **100**  | **%**      | 100      | %      | 100      | %      |

 

In December 1999,the Securities and Exchange Commission (“SEC”) issued SAB101.  SAB101 summarizes the SEC’s views inapplying generally accepted accounting principles to selected revenuerecognition issues, including equipment sales contracts that contain provisionsrelated to installation and customer acceptance.

 

Prior to 2000, we generally recognized revenue uponshipment if contractual obligations were substantially complete, post-deliveryobligations were inconsequential, and customer acceptance and payment werereasonably assured. In the fourth quarter of 2000, in accordance with SAB101guidance, we changed our accounting policy such that certain equipment revenue,depending on contract terms and other factors, is recognized subsequent toshipment, generally after installation and customer-specified acceptanceprocesses have been completed.  Asrequired, the accounting change was made retroactive to January 1, 2000.  The cumulative effect of the accountingchange was an after-tax charge of $824,228 ($.09 per share), which includesrevenue of approximately $3 million less cost of sales and certain related expensessuch as commissions.  Substantially allof the $3 million in deferred revenue was recognized in 2000 upon satisfyingthe new revenue recognition criteria. Approximately $4 million of 2000 equipment shipments was deferred as ofDecember 31, 2000, substantially all of which was recognized as revenue infiscal 2001.

 

If SAB101 guidance had been effective in fiscal 1999,our estimated consolidated results of operations on an unaudited pro formabasis would have been as follows (in thousands, except per share data):

 
| Unaudited pro forma                  |   |   |   |
|--------------------------------------|--------|--------|--------|
| Net sales                            |   | $      | 39,575 |   |
| Net loss                             |   | (8,497 | )      |
| Net loss per diluted share           |   | (0.90  | )      |
| Reported net loss per  diluted share |   | $      | (0.95  | ) |
|                                      |        |        |        |  |  |

 

Net sales decreased 57% to $20 million in 2001compared with $46.1 million in 2000. The severe semiconductor industry downturn experienced in 2001 resultedin significant decreases in our revenues for the first three quarters andsequentially flat revenues in the fourth quarter.  The decline in revenues impacted all of our product lines.  Sales of our test handlers, which increasedslightly from 52% to 53% as a percentage of our revenues, were heavilyconcentrated in new IC package applications, due to the excess capacity thatexisted for mature IC packages.  Salesof our reliability test equipment increased from 13% to 18% as a percentage ofour revenues, and were heavily concentrated in copper applications, assemiconductor manufacturers continued to invest in the new copper process.  Our IC automation products declined as apercentage of our revenues both because of the impact of the industry downturnon our OEM customers and because of a sharp decline in our sales of burn-inboard loaders.  Sales of spare parts andchange kits were unchanged as a percentage of our revenues, and declined in allareas from 2000 levels.

 

20

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Net sales increased 24% to $46.1 million in 2000compared with $37.2 million in 1999. Generally improving industry conditions in 1999 continued into 2000 andremained favorable for most of the year. Sales of test handlers, which represented 52% of total net sales,increased 39% in 2000, driven by strong demand for non-memory test handlers ascustomers added production capacity in response to increased global demand forsemiconductor devices.  This increasewas offset somewhat by significantly reduced sales of test handlers for DRAMapplications due to excess capacity in that segment and our related decision inthe second quarter of 2000 to discontinue marketing our M3200 DRAM test handlerproduct.  Sales of our IC automationproducts, which represented 22% of total net sales, increased 5% due togenerally improved industry conditions. Sales of reliability and environmental test equipment increased 36% in2000.  Sales of our reliability testequipment more than doubled as the Model 1164 test system continued to gainmarket acceptance and broaden its customer base. Sales of environmental testequipment, which represented less than 5% of 1999 revenue, were insignificantin 2000 as we discontinued this product line in the first quarter and licensedit to a third party.  Sales of changekits and spare parts were relatively flat in 2000 as reduced spares sales toDRAM manufacturers offset sales increases to other segments.

 

**GrossProfit:**

 

Gross profit, as a percentage of net sales, was 34.9%in 2001 compared with 49.2% in 2000 and 35.7% in 1999.  These results include unusual charges asfollows:

 

•                    In fourthquarter 2001, we recorded unusual****inventory write-downs of $2.7million.  By year-end 2001, theconsensus forecast of industry analysts was that the severe semiconductorindustry downturn that started in late 2000 had reached an end, but thatsignificant recovery of the semiconductor equipment industry would not occurbefore the second half of 2002, and that the recovery for our industry would beslow.  Previous industry analystforecasts had suggested that the semiconductor industry downturn would not beas severe or as long. We determined that under the conditions most recentlyforecasted, by the time significant capacity requirements emerge for mature ICpackages, some of our older products focused on those applications will besuperceded by our newer products and those of our competitors.  Accordingly, we wrote down the value of ourinventories for these older products to their estimated net realizable valuesbased upon a revised expectation of limited future sales of these products.

 

•                    In 2000, werecorded unusual inventory write-downs totaling $935,000.  The write-downs were primarily related toinventories for DRAM test handler applications, a volatile market segment thatwe decided not to pursue further.  Inthe second quarter, we recorded an inventory write-down of $450,000 related toour decision to discontinue marketing and manufacturing our oldest DRAM testhandler, the model M3200.  As a resultof this decision, all inventories related to the production of the M3200 werewritten down to scrap value and were substantially disposed of by December 31,2000.  In the fourth quarter, werecorded an inventory write-down of $485,000. This charge was primarily related to our decision to discontinuemarketing our DTX thermal test handler product to the DRAM market segment andrather to focus our marketing of the DTX on high power logic semiconductorapplications, which required significant product design changes.  As a result of this decision, DTX-relatedinventories were evaluated and written down to estimated net realizable value.

 

•                    In the secondquarter of 1999, one of our largest customers, a DRAM manufacturer, announcedthat it was exiting the merchant market for DRAM devices and would buy minimalequipment from us in 1999.  A secondsignificant customer also indicated that its equipment requirements for DRAMapplications would be significantly lower than previously forecasted

 

21

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                        levels.  In response to these events and consideringthe potential obsolescence associated with upcoming transitions to newproducts, inventories were analyzed and we determined that a $2.5 millionunusual inventory write-down was required to properly value inventories at netrealizable value.

 

•                    The unusualinventory write-downs in 2001, 2000 and 1999 were determined through a detailedanalysis of inventories with consideration given to anticipated usage throughfuture equipment and spares sales, and the potential use of common parts inother products.

 

•                    In addition tothe unusual inventory charges discussed above, we regularly record inventorycharges due to the evolving nature of our products. Our products arecontinually improved and modified to better meet evolving marketrequirements.  These productimprovements and modifications regularly result in parts inventory obsolescenceas parts are replaced due to the product changes.  To address this recurring obsolescence, we recorded inventorycharges of $980,000 in 2001, $814,000 in 2000 and $961,000 in 1999, in additionto the unusual inventory charges discussed above.

 

Excluding theunusual charges described above, gross profit was 48.3% of net sales in 2001,compared with 51.2% and 42.4% in 2000 and 1999, respectively.  The gross profit margin decrease in 2001 wasdue primarily to lower overall volumes, offset in part by reduced overheadexpenses resulting from restructuring activities during the year.  We significantly reduced our manufacturingoverhead expenses in 2001 through workforce reductions and reorganization ofour operations at our North St. Paul, Minnesota operations and theconsolidation of those operations into a single facility.  The gross profit margin increased in 2000due to higher overall volumes, favorable mix, and reduced overhead expensesresulting from restructuring activities during the year.  Sales in 2000 included a significantlylarger mix of high-margin test handlers. We significantly reduced our manufacturing overhead expenses in 2000 byclosing our Lawrence, Massachusetts facility, consolidating our twomanufacturing plants in Texas, and reducing costs at our plant in Poway,California.

** **

**Selling,General and Administrative Expenses:**

 

Selling, generaland administrative expenses were $11.2 million in 2001, compared with $17.5million in 2000 and $17.6 million in 1999. Commissions decreased in 2001 due to lower sales levels.  In addition, we significantly reducedselling, general and administrative expenses in 2001 through workforcereductions, the closing of our Poway, California facility, consolidation of ourNorth St. Paul, Minnesota operations into a single facility, and reorganizationof our North St. Paul, Minnesota operations. Commissions and service expenses increased in 2000 to support highersales levels.  These increases wereoffset by personnel, facility, and other operating cost reductions we realizedthrough restructuring activities, including the closing of our Lawrence,Massachusetts and Grand Prairie, Texas facilities in early 2000.  Amortization expense associated withacquisition-related intangible assets, which was included in selling, generaland administrative expenses, totaled $1.6 million, $1.6 million, and $1.9million in 2001, 2000, and 1999, respectively.

 

**Researchand Development:**

 

Research anddevelopment expenses were $4.7 million in 2001 compared with $8.5 million in2000 and  $9.8 million in 1999.  The decrease in 2001 was primarilyattributable to a reduction in engineering personnel, including workforcereductions related to the closing of our Poway, California facility in early2001, as well as workforce reductions we made during the course of 2001 at ourtwo remaining facilities.  The decreasein 2000 was primarily attributable to a reduction in engineering 

 

22

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personnel, including workforce reductions related to the closing of ourLawrence, Massachusetts and Grand Prairie, Texas facilities in early 2000.

** **

**UnusualCharges:**

*** ***

***Fiscal 2001***

 

During 2001, Aetriumcontinued to be impacted by the downturn in the semiconductor equipmentindustry that began in late 2000.  As aresult, we took additional steps to improve operating efficiencies and reducecosts.  During the year we completed thetransfer of our operations in Poway, California to North St. Paul, Minnesota;we restructured our operations in Minnesota; we reduced our facility coststhrough the consolidation of operations; and we significantly reduced ourworkforce. Unusual charges recorded in 2001 related to these activities were asfollows (dollars in thousands):

 

| Restructuring charges                      |   | — severance costs     |   | $      | 928    |   |
|--------------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                       |   | — facility exit costs |   | 799    |   |
| Total restructuring charges                |   | 1,727                      |   |
| Write-down of equipment and leaseholds     |   | 215                        |   |
| Moving expenses and other transition costs |   | 261                        |   |
| Total unusual charges                      |   | $                          | 2,203  |   |

 

During 2001, in responseto declining revenue levels throughout the year, we implemented workforcereductions in March, April, June, and December.  These workforce reductions included the elimination of 98positions in manufacturing, sales, administration, and engineering.  We recorded charges of $928,000 forseverance and related costs associated with these terminations. The chargeswere recorded in the periods when the restructuring plans were approved bymanagement, severance benefits were determined, and the affected employees werenotified.  The workforce reductionsrepresented quarterly cost savings of approximately $1.3 million.

 

In May 2001, we consolidated our North St. Paul,Minnesota operations from two buildings into one.  One of the buildings, which is under lease through February 2006,was vacated prior to June 30, 2001.  Werecorded a facility exit charge of $387,000 in the second quarter for estimatednon-cancelable lease payments and other facility costs we expected to incurduring the estimated time needed to find a sub-tenant.  In the fourth quarter, due to our inabilityto locate a single sub-tenant to occupy the building, we changed our strategyto consider multiple sub-tenants.  InNovember 2001, we subleased 7,500 square feet of the building to a third partyfor a two-year period.  In January 2002,we subleased an additional 8,000 square feet to another party for a periodending concurrent with the master lease. We are continuing to market theremaining unused space in the building. As of December 31, 2001, we estimate that our net costs after subleaseincome to be incurred over the remainder of the master lease will beapproximately $450,000.  In the fourthquarter, we recorded an additional charge of $219,000 to increase the accrualto that amount.  Also, in connectionwith vacating this facility in the second quarter, we recorded a charge of$215,000 related to abandoned leaseholds and losses on the sale of certainequipment during the quarter.

 

Aetrium leases a vacant facility in Grand Prairie,Texas that was utilized by our Grand Prairie operations until that business wastransferred to our Dallas facility in the first quarter of 2000. The leaseexpires in June 2003.  We continue towork with the owner of the building to locate a sub-tenant for theproperty.  In 2001, due to our inabilityto locate a subtenant and due to softening economic conditions late in theyear, we recorded an additional facility exit reserve of $193,000 to cover thenon-cancelable lease payments and other costs we estimate we will incur until anew tenant can be found.

 

23

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In 2001, we incurred moving and other transition costsamounting to $261,000 that were related to restructuring our operations.  Of this amount, approximately $203,000 wasincurred in the first quarter primarily related to the relocation and otherfinal costs associated with the transfer of operations from Poway, Californiato Minnesota and $58,000 was related to moving expenses incurred in the secondquarter when we combined our operations in Minnesota from two buildings intoone.

 

The following table summarizes the severance andfacility exit restructuring charges accrued and the associated activity for theyear ended December 31, 2001 (dollars in thousands):

 
|                                                   |   | **Severance and  Benefits** |   | **Facility  Exit Costs** |   | **Total** |   |
|--------------------------------------------------------|--------|-----------------------------|--------|--------------------------|--------|-----------|--------|
| Accrual balance, December 31, 2000                     |   | $                           | 491    |                     | $      | 305       |   | $ | 796 |   |
| Severance and related charges:                         |   |                        |   |                     |   |      |   |
| Workforce reduction — first quarter               |   | 246                         |   | —                   |   | 246       |   |
| Workforce reduction — second quarter              |   | 317                         |   | —                   |   | 317       |   |
| Workforce reduction — fourth quarter              |   | 365                         |   | —                   |   | 365       |   |
| Facility exit charges:                                 |   |                        |   |                     |   |      |   |
| North St. Paul, MN facility — current year charge |   | **—**                  |   | 606                      |   | 606       |   |
| Grand Prairie, TX facility —accrual increase      |   | **—**                  |   | 193                      |   | 193       |   |
| Cash payments                                          |   | (1,015                      | )      | (400                     | )      | (1,415    | )      |
| Accrual balance, December 31, 2001                     |   | $                           | 404    |                     | $      | 704       |   | $ | 1,108 |   |

 

We estimate that the accrued severance and facilityexit costs at December 31, 2001 will be paid or utilized as follows:  $0.5 million by June 30, 2002; an additional$0.3 million by December 31, 2002; approximately $25,000 per quarterthereafter.

*** ***

***Fiscal 2000***

 

During 2000, Aetrium initiated a number of activitiesto reduce costs and improve operating efficiencies.  These actions included consolidating our two operations in Texas,closing our Lawrence, Massachusetts facility, and restructuring our operationsin Poway, California.  Unusual chargesrecorded in 2000 related to these activities were as follows (dollars inthousands):

 
| Restructuring charges                  |   | — severance costs     |   | $      | 2,157  |   |
|----------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                   |   | — facility exit costs |   | 958    |   |
| Total restructuring charges            |   | 3,115                      |   |
| Write-down of equipment and leaseholds |   | 495                        |   |
| Write-down of intangible assets        |   | 415                        |   |
| Other                                  |   | 51                         |   |
| Total unusual charges                  |   | $                          | 4,076  |   |

 

Consolidation of TexasOperations.

 

During the first quarter of 2000, we consolidated ourtwo operations in Texas.  Strategicallysignificant manufacturing and development activities being conducted at ourGrand Prairie facility were transferred to our Dallas facility where operationsassociated with the product line we acquired from WEB Technology, Inc. arelocated.  The transfer was completed inmid-March 2000 and the Grand Prairie facility was closed in late March 2000.

 

Charges related to this restructuring includedapproximately $565,000 for severance and related costs; $385,000 for facilityexit costs, including estimated non-cancelable lease payments and other 

 

24

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facility costs we expected to incur during the estimated time needed tofind a sub-tenant; $121,000 related to the write-down of abandoned leaseholdsand equipment; and $186,000 related to the write-down of impaired intangibles,primarily capitalized trained workforces. The elimination of 56 positions in Texas and lowered facility and othercosts resulted in quarterly cost savings of approximately $0.9 million, whichreductions were partially offset by increased costs at the Dallas facility.

 

Closure of Lawrence, Massachusetts Facility*.*

 

During the first quarter of 2000, we decided to closeour Lawrence, Massachusetts facility. The Thermal Forcing System product line and the development activitiesassociated with our proprietary conductive thermal technology were transferredto our North St. Paul, Minnesota facility. We sold or licensed certain assets associated with the Lawrenceoperation, including the environmental test equipment product line.Consideration received for these assets was the transferee’s assumption ofcertain future obligations related to the transferred product line androyalties on future sales.  As indicatedbelow, the transferee of the product line subsequently bought out the royaltycontract later in the year.  We ceasedoperations at our Lawrence facility in late March 2000, and the facility wasvacated in May 2000.

 

Charges related to closing this facility includedapproximately $844,000 for severance and related costs and $101,000 forfacility exit costs, including rent, taxes and other facility expenses weincurred during the six weeks from the time operations ceased until we movedout of the facility.  In addition, werecorded charges in the first quarter of $229,000 related to impairedintangibles associated with the transferred product line and  $672,000 for losses on the sale of thebusiness assets and abandoned leaseholds. The charge related to the loss on the sale of the business assets wassubsequently reduced by $629,000 in the second half of 2000 for proceedsreceived from the royalty contract, resulting in a net charge of $43,000.  Because the transferee of the product linebought out the royalty contract, we will not receive royalty payments in thefuture under the contract.

 

The licensing of the environmental test equipmentproduct line and the loss of related revenues is not expected to have asignificant adverse impact on future operations as it accounted for less than5% of our fiscal 1999 revenue of $37.2 million.  The elimination of 38 positions in Lawrence and reduced facilitycosts resulted in quarterly cost reductions of approximately $0.6 million,which reductions were partially offset by increased costs at our Minnesotafacility.

 

Poway, California Restructuring.

 

In the second quarter of 2000, we announced that wewould transfer manufacturing and certain administrative functions at our Poway,California facility to our North St. Paul, Minnesota operations.  Certain marketing and engineering activitieswere to remain in Poway.  The restructuringplan included a workforce reduction, vacating a leased 45,000 square-footbuilding, and transferring the remaining marketing and engineering personnel toa 10,000 square-foot facility nearby. This action resulted in the eliminationof 20 positions in manufacturing, engineering, accounting andadministration.  The lease for the45,000 square-foot facility was subsequently assigned to a third party.

 

In October 2000, we announced our intention totransfer the remaining marketing and engineering operations in Poway to NorthSt. Paul and to close the Poway facility. Prior to December 31, 2000, management had approved the restructuringplan that included the elimination of an additional 20 positions in engineeringand administration and closing the facility by March 31, 2001.  The affected employees were identified andnotified of the terminations and related severance benefits prior to December31, 2000.  Some employees wereterminated prior to December 31, 2000 with the remaining termination dates scheduledfor March 31, 2001 or sooner.  Wesubleased the 10,000 square-foot facility to a third party, effective April 1,2001.

 

25

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Charges related to the Poway restructuring during 2000included approximately $748,000 for severance and related costs,  $472,000 for facility exit costs, and$331,000 related to the write-down of abandoned leaseholds and equipment.  The severance costs were related to theelimination of a total of 40 positions. The facility exit costs were related to exiting both facilities andincluded noncancellable lease payments and other operating costs incurred aftervacating as well as costs incurred to sublease the facilities.

 

The elimination of 40 positions and reduced facilityand other costs associated with the Poway restructuring represented quarterlycost savings of approximately $1.0 million. These cost reductions were partially realized in the second half of 2000after the second quarter restructuring with the balance of the estimatedsavings being realized after the facility closed on March 31, 2001.  These cost decreases were partially offsetby increases at the North St. Paul facility related to the transfer ofoperations.

 

The following table summarizes the severance andfacility exit restructuring charges accrued and the associated activity for theyear ended December 31, 2000 (dollars in thousands):

 
|                               |   | **Severance and  Benefits** |       | **Facility  Exit Costs** |   | **Total** |   |
|------------------------------------|--------|-----------------------------|------------|--------------------------|--------|-----------|--------|
| Accrual balance, December 31, 1999 |   | $                           | **—** |                     | $      | —    |   | $ | — |   |
| Restructuring charges:             |   |                        |       |                     |   |      |   |
| Texas consolidation                |   | 565                         |       | 385                      |   | 950       |   |
| Lawrence,  MA                 |   | 844                         |       | 101                      |   | 945       |   |
| Poway, CA                          |   | 748                         |       | 472                      |   | 1,220     |   |
| Cash payments                      |   | (1,666                      | )          | (653                     | )      | (2,319    | )      |
| Accrual balance, December 31, 2000 |   | $                           | 491        |                     | $      | 305       |   | $ | 796 |   |

 

***Fiscal 1999***

 

In 1999, Aetrium recorded unusual charges as follows(dollars in thousands):

 
| Restructuring charge — severance costs |   | $     | 352    |   |
|---------------------------------------------|--------|-------|--------|--------|
| Write-off of intangible asset               |   | 1,155 |   |
| Other                                       |   | (61   | )      |
| Total                                       |   | $     | 1,446  |   |

 

In order to reduce operating costs, we implemented twoworkforce reductions in 1999.  Thesereductions included the termination of 48 employees resulting in estimatedquarterly cost savings of approximately $0.5 million.  The restructuring charges were recorded in the periods when theaffected employees were identified, severance benefits were determined, and theaffected employees were notified and terminated.  Accordingly, restructuring charges of $190,000 and $162,000 wererecorded in the first and second quarters of 1999, respectively.  The severance costs were paid prior to December31, 1999.

 

When we acquired the handler equipment business of WEBTechnology, Inc. (“WEB”) in April 1998, WEB had a contractual relationship witha customer to develop and deliver certain automation equipment.  A value of $1.4 million was capitalized asan intangible asset related to this customer relationship at the time of theacquisition.  In the fourth quarter of1999, due to a change in its business environment and a shift in its strategicbusiness plan, the customer requested that we discontinue working on theproject.  Prior to December 31, 1999, wenegotiated a termination of the contract with the customer and determined thatthe project would not be resumed.  As aresult, we determined that the intangible asset related to this customer relationshipwas impaired and had no future economic value and the remaining unamortizedbalance of $1.2 million was written off at December 31, 1999.

 

 

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**Other Income, Net:**

 

Other income, net, which consists primarily ofinterest income from the investment of excess funds, amounted to $248,000 in2001, compared with $429,000 in 2000 and $607,000 in 1999.  The decreases are attributable to loweraverage cash balances during each year and generally declining interest rates.

** **

**IncomeTaxes:**

 

In the fourth quarter of fiscal 2000, due to recentoperating losses and weakening industry conditions in late 2000 and early 2001,we recorded a valuation allowance against our deferred tax assets and wedetermined that we would not record any income tax expense or benefit in thefuture until we are consistently profitable on a quarterly basis.  Therefore, no income tax benefit related tocurrent operations was recorded in fiscal 2001.  However, we did record an income tax benefit of $0.2 million inthe quarter ended September 30, 2001 related directly to income taxes paid andexpensed prior to 2001 that were refunded to us during the quarter.

** **

**Financial Condition, Liquidity andCapital Resources:**

 

Cash and cash equivalents decreased by approximately$2.0 million in 2001 to $7.2 million. Operating activities used $1.9 million of cash in 2001.  The major components of cash flows used inoperating activities were a net loss of $10.7 million and decreases in accountspayable of $3.2 million, accrued compensation of $1.0 million, and otheraccrued liabilities of $1.9 million, partially offset by $2.2 million indepreciation and amortization expense, write-downs of the carrying value ofinventories of $3.7 million, restructuring charges of $1.7 million and adecrease in accounts receivable of $6.5 million.** **The decreases in accounts payable and accounts receivable areprimarily attributable to lower production and revenue levels in late 2001compared to the prior year due to the severe downturn in the semiconductorindustry. The decrease in accrued compensation is due to workforce reductionsand wage reductions we implemented in 2001 in response to the semiconductorindustry downturn.

 

Cash and cash equivalents decreased by approximately$4.1 million in 2000 to $9.1 million. Operating activities used $3.7 million of cash in 2000.  The major components of cash flows used inoperating activities were a net loss of $22.5 million, increases in accountsreceivable of $1.9 million and inventories of $3.3 million and a decrease inother accrued liabilities of $2.6 million, partially offset by $2.6 million indepreciation and amortization expense, a $15.4 million decrease in deferredtaxes, $2.9 million in write-downs of inventories and other assets and $3.1million in restructuring charges. Despite higher sales volume, receivablesdecreased in 2000 due to the fourth quarter adoption of SAB101, which has theeffect of shortening the length of time receivables are outstanding because wedo not record the receivable upon shipment in cases where customer acceptanceprovisions cause us to defer revenue recognition.  Inventories and accounts payable increased in 2000 due toincreased production and sales activity in late 2000 compared to 1999.  Also, a portion of the increase ininventories is attributable to the inclusion of equipment at customer sites forwhich revenue is deferred until installation and/or acceptance is completed.

 

Cash and cash equivalents decreased by approximately$4.9 million in 1999 to $13.2 million. Operating activities used $4.0 million in cash in 1999.  The major components of cash flows used inoperating activities were a net loss of $9.0 million and a $6.8 millionincrease in deferred taxes, partially offset by $3.3 million in depreciationand amortization expense and $4.6 million in write-downs of inventories andother assets.  In addition, we receivednet income tax refunds of approximately $2.4 million in 1999.

 

27

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Our use of cash in investing activities in 2001, 2000and 1999 related principally to expenditures for property and equipment, whichamounted to $71,000, $599,000, and $531,000, respectively.  During the last three years, we have usedapproximately $1.0 million in cash to repurchase shares of our stock.  In November 2001, we purchased 426,410shares of our common stock for $544,000 from a shareholder group.  In December 2001, we sold the same number ofshares of our stock to the same group for the same purchase price. See “RecentSale of Unregistered Securities” under “Item 5. Market for the Registrant’sCommon Equity and Related Stockholder Matters.”  In 1999, we purchased $430,000 of our common stock from certainshareholders of WEB Technology, Inc. pursuant to right of first refusalagreements entered into with such shareholders in connection with theacquisition of the handler equipment business of WEB in 1998.

 

We believe our cash and short-term investments of $7.2million at December 31, 2001 will be sufficient to meet capital expenditure andworking capital needs for at least the next twelve months.  Historically we have supported our capitalexpenditure and working capital needs with cash generated from operations, andin the long term we expect to continue to do the same. However,  future semiconductor industry downturnscould affect the demand for and price of our products, which could affectfuture cash flows.  Also, we may acquireother companies, product lines or technologies that are complementary to our business,and our working capital needs may change as a result of such acquisitions.

 

Future minimum annual lease payments under operatingleases as of December 31, 2001 are as follows:

 
| 2002                         |   | $       | 974,000   |   |
|------------------------------|--------|---------|-----------|--------|
| 2003                         |   | 693,000 |      |
| 2004                         |   | 437,000 |      |
| 2005                         |   | 437,000 |      |
| 2006                         |   | 55,000  |      |
| Total minimum lease payments |   | $       | 2,596,000 |   |

 

The above minimum lease payments have not been reducedby minimum sublease rentals of $0.6 million due in the future undernoncancellable subleases.

 

The above minimum lease payments do not include thefacility lease that has been assigned to a third party and on which we remaincontingently liable.  The lease expiresin January 2010 and minimum remaining payments amount to $4.1 million as ofDecember 31, 2001.

 

**RecentAccounting Pronouncements**

 

In June 2001, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No.142, “Goodwill and Other Intangible Assets.” SFAS 141 eliminates the pooling-of-interests method of accounting forbusiness combinations, requiring that all business combinations initiated afterJune 30, 2001 be accounted for using the purchase method.  SFAS 142 provides that goodwill and otherintangible assets with indefinite lives are no longer amortized, but rather arereviewed for impairment at least annually and more frequently in certaincircumstances using a two step process. The first step is to identify a potential impairment and, in transition,this step must be measured as of the beginning of the fiscal year.  However, a company has six months from thedate of adoption to complete the first step. The second step of the goodwillimpairment test measures the amount of the impairment loss (measured as of thebeginning of the year of adoption), if any, and must be completed by the end ofour fiscal year. Aetrium will adopt SFAS 142 effective January 1, 2002.  We estimate that the elimination of goodwillamortization will result in a reduction in amortization expense ofapproximately $200,000 per quarter beginning in the first quarter of 2002. Wealso anticipate that the

28

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methodology prescribed by SFAS 142 for evaluating and measuring theimpairment of goodwill will result in a goodwill impairment charge of between$6.0 and $8.0 million.  Once determined,this charge will be reported as a change in accounting principle in the firstquarter of 2002.

 

In October 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  This statement addressesfinancial accounting and reporting for the impairment of long-lived assets andfor long-lived assets to be disposed of and supercedes SFAS 121.  However, SFAS 144 retains thefundamental provisions of SFAS 121 for the recognition and measurement of theimpairment of long-lived assets to be held and used and the measurement oflong-lived assets to be disposed of by sale. We will adopt SFAS 144 effectiveJanuary 1, 2002. We do not expect this statement to affect our financialposition or results of operations.

 

Aetrium adopted SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” on January 1, 2001.  This standard establishes accounting andreporting standards for derivative instruments and hedging activities.  Since we do not hold derivative instrumentsor engage in hedging activities, the adoption of SFAS 133 did not have animpact on our financial statements.

** **

**BusinessRisks and Uncertainties:**

 

Several important risks and uncertainties exist whichcould have an impact on our future operating results.  These factors could cause our actual results to differ materiallyfrom our anticipated results or results that are reflected in anyforward-looking statements in this Annual Report on Form 10-K.  These factors, and their impact on thesuccess of our operations and our ability to achieve our goals, include thefollowing:

*** ***

***Market Fluctuations in the Semiconductor Industry***

 

Our business and results of operations depend uponcapital expenditures by manufacturers of semiconductor devices.  As a result, our operating results arematerially dependent upon economic and business conditions in the semiconductorindustry.  This industry has beensubject to significant market fluctuations and has experienced periodicdownturns, which often have had a disproportionate effect on capital equipmentsuppliers, such as Aetrium.  In periodsof excess capacity, the semiconductor industry sharply cuts purchases ofcapital expenditures, such as our products. A downturn or slowdown in the semiconductor industry could substantiallyreduce our revenues and operating results and could harm our financialcondition.  The semiconductor industryis currently experiencing a severe downturn of unprecedented magnitude that hasbeen ongoing for several quarters.  Thesevere downturn being experienced in the semiconductor industry over the pastseveral quarters has reduced our revenues, and we expect that our revenues willremain at reduced levels until semiconductor industry capital expendituresincrease.

*** ***

***Fixed CostConstraints on Reduction of Expenses***

 

Many of our expenses, particularly those relating toproperties, capital equipment and manufacturing overhead, are fixed in theshort term.  Accordingly, reduced demandfor our products and services causes our fixed production costs to be allocatedacross reduced production volumes, which negatively affects our gross marginsand profitability.  Our ability toreduce expenses is further constrained because we must continue to invest inresearch and development to maintain our competitive position and to maintainservice and support for our existing customer base.  Reduced production volumes contributed to a decline in our grossmargins in fiscal 2001.  We expect thatour gross margins will continue to be negatively affected by reduced productionvolumes, offset somewhat by the cost reduction actions we took in December2001.  Our current visibility on ourfuture operating results is 

 

29

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severely limited given the current semiconductor industry downturn, andwe cannot accurately predict if or when the production volumes will increase orif or when our operating results will improve.

*** ***

***Impact of CostReduction and Reorganization Actions***

 

During the course of fiscal year 2001, as the downturnin the semiconductor industry continued to deepen, we implemented costreduction and reorganization actions to address our declining revenues, such asworkforce reductions, consolidation of operations, pay freezes and reductions,and reductions in other expenditures. In the event our revenue levels decline further, we may be required toimplement additional cost reduction actions. Our reduced personnel and expenditure levels and the loss of thecapabilities of personnel we have terminated could inhibit us in the timelycompletion of product development efforts, the effective service of andresponsiveness to customer requirements, and the timely ramp up of productionin response to eventual improving market conditions.

*** ***

***Successful Development and Introduction ofNew Products and Product Improvements***

 

We operate in an industry that is highly competitivewith respect to timely product innovations. The market for our products is characterized by rapid technologicalchange and evolving industry standards. The development of more complex ICs has driven the need for newequipment and processes to produce such devices at an acceptable cost.  We believe that our future success willdepend in part upon our ability to anticipate changes in technologies, ICpackage types, market trends and industry standards.  If we cannot successfully develop and introduce new and enhancedcost-effective products on a timely basis that are accepted in the marketplace,our business and operating results may suffer.

*** ***

***Reliance on Significant Customers***

 

We rely on a limited number of customers for asubstantial percentage of our net sales. A reduction, delay or cancellation of orders from one or more of thesesignificant customers, or the loss of one or more of these customers, couldnegatively impact our operating results.

*** ***

***Reduction in the Sales Efforts by our Current Distributors***

 

We market and sell our test handlers and reliabilitytest products outside of the United States primarily through internationaldistributors that are not under our direct control.  We have limited internal sales personnel.  A reduction in the sales efforts by ourcurrent distributors, or the termination of one or more of these relationshipswith Aetrium, could negatively affect our operating results.

 

***Reduction in our International Sales***

 

We expect that international sales will continue toaccount for a significant portion of our net sales.  As a result, our operations are subject to a number of risksinherent in international business activities, which could negatively impactour operating results

 

***Failure to Retain our IC Processing Equipment OEMs***

 

We market our IC Automation product line to a limitednumber of IC processing equipment OEMs. Our ability to retain our OEM customers and attract new OEM customersdepends upon a number of factors, including the changing needs and financialcondition of these customers.  Ourfailure to retain OEM customers could result in the loss of IC Automationproduct line sales, as well as the loss of outstanding receivables due fromsuch OEM customers.

 

30

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***Supply of Significant Components for our Products***

 

Certain significant components used in our products,including certain contactor components, printed circuit boards, andrefrigeration systems, are currently available only from sole or limitedsources.  We do not maintain long-termsupply agreements with most of our suppliers and we purchase most of ourcomponents through individual purchase orders. Our inability to obtain components in required quantities or ofacceptable quality could result in delays or reductions in productintroductions or shipments, which could damage our relationships with ourcustomers 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.

** **

**ITEM7A.    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Our exposure to market risk for changes in interestrates relates primarily to our investment portfolio.  We place our investments with high credit issuers and limit theamount of credit exposure to any one issuer. We have no investments denominated in foreign currencies and thereforewe are not subject to foreign exchange risk. We mitigate default risk by investing in high credit quality securitiesand by positioning our portfolio to respond appropriately to a significantreduction in a credit rating of any investment issuer or guarantor.  As of December 31, 2001, our portfolioconsisted primarily of high quality taxable instruments, including corporatenotes and bonds, money market funds, and bank repurchase agreements.

 

**ITEM8.       FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA.**

** **

Our Consolidated Financial Statements and the reportof our independent accountants are included elsewhere in this Annual Report onForm 10-K. The index to this report and the financial statements is included inItem 14 (a) (1) below.

 

**ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL                      DISCLOSURE.**

 

None.

31

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**PART III**

 

**ITEM10.     DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT.**

** **

**Directorsof the Registrant**

 

The information under the captions “Election ofDirectors — Information About Nominees” and “Election of Directors — OtherInformation About Nominees” in our 2002 Proxy Statement is incorporated hereinby reference.

** **

**ExecutiveOfficers of the Registrant**

 

The information under the caption “Item 4A. ExecutiveOfficers of the Registrant” located elsewhere in this Annual Report on Form 10Kis incorporated herein by reference.

** **

**Compliancewith Section 16(a) of the Exchange Act**

 

The information under the caption “Section 16(a)Beneficial Ownership Reporting Compliance” in our 2002 Proxy Statement isincorporated herein by reference.

** **

**ITEM11.     EXECUTIVE COMPENSATION.**

 

The information under the captions “Election ofDirectors — Compensation of Directors” and “Executive Compensation and OtherBenefits” in our 2002 Proxy Statement is incorporated herein by reference.

** **

**ITEM12.     SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.**

 

The information under the caption “Security Ownershipof Certain Beneficial Owners and Management” in our 2002 Proxy Statement isincorporated herein by reference.

** **

**ITEM13.     CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

 

The information under the caption “CertainRelationships and Related Transactions” in our 2002 Proxy Statement isincorporated herein by reference.

 

32

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**PART IV**

** **

**ITEM 14.               EXHIBITS****,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

**(a) 1.       Financial Statements of Registrant.**

 

The following Consolidated Financial Statements ofAetrium and the Independent Accountants’ Report thereon are included herein:

 
| Description                                                      | Page        |
|------------------------------------------------------------------|-------------|
| Report of Independent  Accountants                               | F-1         |
| Consolidated  Financial Statements:                              |        |
| Consolidated  Statements of Operations                           | F-2         |
| Consolidated Balance Sheets                                      | F-3         |
| Consolidated Statements  of Changes in Shareholders’ Equity | F-4         |
| Consolidated  Statements of Cash Flows                           | F-5         |
| Notes to  Consolidated Financial Statements                      | F-6  - F-20 |

 

**                (a) 2.       Financial Statement Schedules of Registrant.**

 

The following financial statement schedule is includedherein and should be read in conjunction with the financial statements referredto above:

 

Financial Statement Schedule: II.  Valuation and Qualifying Accounts

 

**Years ended December 31, 1999, 2000, and 2001**

** **
| **Description**                                 |   | **Balance at   beginning of  period** |      | **Additions** |   | **Deductions** |   | **Balance at  end of period** |       |
|-------------------------------------------------|--------|---------------------------------------|-----------|---------------|--------|----------------|--------|-------------------------------|------------|
| **Allowance  for doubtful accounts:**           |   |                                  |      |          |   |           |   |                          |       |
| 1999                                            |   | $                                     | 537,000   |          | $      | 57,000         |   | $                             | (75,000    | ) | $ | 519,000 |   |
| 2000                                            |   | 519,000                               |      | 0             |   | (5,000         | )      | 514,000                       |       |
| 2001                                            |   | 514,000                               |      | 0             |   | (119,100       | )      | 394,900                       |       |
| **Inventory  excess and obsolescence reserve:** |   |                                  |      |          |   |           |   |                          |       |
| 1999                                            |   | $                                     | 3,628,800 |          | $      | 3,460,800      |   | $                             | (3,600,200 | ) | $ | 3,489,400 |   |
| 2000                                            |   | 3,489,400                             |      | 1,749,300     |   | (2,980,800     | )      | 2,257,900                     |       |
| 2001                                            |   | 2,257,900                             |      | 3,657,000     |   | (1,743,900     | )      | 4,171,000                     |       |
| **Warranty  reserve:**                          |   |                                  |      |          |   |           |   |                          |       |
| 1999                                            |   | $                                     | 894,800   |          | $      | 826,300        |   | $                             | (899,700   | ) | $ | 821,400 |   |
| 2000                                            |   | 821,400                               |      | 802,300       |   | (1,190,300     | )      | 433,400                       |       |
| 2001                                            |   | 433,400                               |      | 503,100       |   | (481,700       | )      | 454,800                       |       |

 

33

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All other schedules are omitted as the requiredinformation is inapplicable or the information is presented in the financialstatements or related notes.

 

**(a) 3.       Exhibits.**

 

The exhibits to this Annual Report on Form 10-K arelisted in the Exhibit Index attached hereto.

** **

**If youwere one of our shareholders on March 29, 2002 and you want a copy of any ofthe exhibits listed or referred to above, we will furnish it to you at areasonable cost upon your written request sent to Aetrium Incorporated, 2350Helen Street, North St. Paul, Minnesota 55109; Attn.: Shareholder Relations.**

 

The following is a list of each management contract orcompensatory plan or arrangement we are required to file as an exhibit to thisAnnual Report on Form 10-K pursuant to Item 14(a)(3):

 

1.                       Form of Incentive Stock Option Agreement(incorporated by reference to Exhibit 10.6 to our Form 10-KSB for the yearended December 31, 1993) (File No. 0-22166).

 

2.                       Form of Non-Statutory Stock OptionAgreement (incorporated by reference to Exhibit 10.7 our Form 10-KSB for theyear 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-Kfor year ended December 31, 1997) (File No. 0-22166).

 

4.                       Salary Savings Plan (incorporated byreference to Exhibit 10.3 to our Registration Statement on Form SB-2) (File No.33-64962C).

 

5.                       Employee Stock Purchase Plan(incorporated by reference to Exhibit 99.1 to our Registration Statement onForm S-8) (File No. 33-74616).

 

6.                       Employment Agreement dated April 1, 1986between Joseph C. Levesque and us (incorporated by reference to Exhibit10.6 to our Registration Statement on Form SB-2) (File No. 33-64962C).

** **

**(b)           Reportson Form 8-K.**

 

We did not file any Current Reports on Form 8-K duringthe fourth quarter of 2001.

 

34

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                       | **AETRIUM  INCORPORATED** |
|----------------------------|---------------------------|
|                       |                      |   |   |
| Date:  April  1, 2002 | By:                       |  /s/ Joseph  C. Levesque |   |
|                       |                      | Joseph C. Levesque |
|                       |                      | Chief Executive Officer and President |
|                       |                      | (principal executive officer) |
|                       |                      |   |
|                       | By:                       |  /s/ Paul H.  Askegaard |   |
|                       |                      | Paul H. Askegaard |
|                       |                      | Treasurer |
|                       |                      | (principal financial and accounting officer) |
|                       |                      |   |
|                            |                           |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below on April 1, 2002 by thefollowing persons on behalf of the registrant and in the capacities indicated.

 
| **Signature**              |   | **Title** |                  |
|----------------------------|--------|-----------|-----------------------|
|                       |   |      |                  |
| /s/ Joseph C. Levesque     |   |      | Chairman of the Board |   |
| Joseph C. Levesque         |   |      |                  |
|                       |   |      |                  |
| /s/ Darnell L. Boehm       |   |      | Director              |   |
| Darnell L. Boehm           |   |      |                  |
|                       |   |      |                  |
| /s/ Terrence W. Glarner    |   |      | Director              |   |
| Terrence W. Glarner        |   |      |                  |
|                       |   |      |                  |
| /s/ Andrew J. Greenshields |   |      | Director              |   |
| Andrew J. Greenshields     |   |      |                  |
|                       |   |      |                  |
| /s/ Douglas L. Hemer       |   |      | Director              |   |
| Douglas L. Hemer           |   |      |                  |
|                            |        |           |                       |  |  |  |  |  |

 

35

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**AETRIUMINCORPORATED**

**EXHIBITINDEX TO ANNUAL REPORT ON FORM 10-K**

**FORTHE FISCAL YEAR ENDED DECEMBER 31, 2001**

** **
| **Item  No.** |   | **Item**                                                                      |   | **Method of Filing**                                                                                                                    |   |
|---------------|--------|-------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1           |   | 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

----

 
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.8      |   | 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      |   | Employee Stock Purchase Plan.                                                                                                                                                     |       | Incorporated by reference to Exhibit 99.1 to our Registration  Statement on Form S-8 (File No. 33-74616).                                 |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 10.10     |   | 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).    |   |
| 10.11     |   | 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).    |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 10.12     |   | Standard Lease Agreement, dated December 19, 1987, between  Crow-Markison 22-27, Limited Partnership and WEB Technology, Inc., including  all supplements and amendments thereto. |       | 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).    |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| **10.13** |   | **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** |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 10.14     |   | 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 10.16 to our Annual Report on  Form 10-K for the year ended December 31, 2000 (File No. 0-22166).    |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 10.15     |   | Assignment, dated August 31, 2000, by and  between Aetrium-EJ Inc. and Daniel Gamelin and Mark Woodman.                                                                           |       | 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).    |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 10.16     |   | Agreement, dated November 30, 2001, by and among Aetrium and certain  shareholders.                                                                                               |       | Filed herewith electronically.                                                                                                            |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 21.1      |   | Subsidiaries of the Registrant.                                                                                                                                                   |       | Incorporated by reference to Exhibit 21.1 to our Annual Report on  Form 10-K for the year ended December 31, 1997 (File No. 0-22166).     |   |
|      |   |                                                                                                                                                                              |       |                                                                                                                                      |   |
| 23.1      |   | Independent Accountants’ Consent.                                                                                                                                            |       | Filed herewith electronically.                                                                                                            |   |

 

 

E-2

----

 

**FINANCIALSTATEMENTS AND NOTES THERETO**

** **

**Reportof Independent Accountants**

 

To theShareholders and Board of Directors of Aetrium Incorporated

 

Inour opinion, the consolidated financial statements listed in the indexappearing under Item 14(a)(1) present fairly, in all material respects, thefinancial position of Aetrium Incorporated and its subsidiaries (“the Company”)at December 31, 2001 and 2000, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2001,in conformity with accounting principles generally accepted in the UnitedStates of America.  In addition, in ouropinion, the financial statement schedule appearing under Item 14(a)(2)presents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedule are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements and financial schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
|                           |
| Minneapolis, Minnesota         |
| February 1, 2002               |

 

F-1

----

 

**AETRIUM INCORPORATED**

**ConsolidatedStatements of Operations**

 
| **Year Ended December 31,**                                                         |   | **2001**        |            | **2000**    |   | **1999**    |       |
|-------------------------------------------------------------------------------------|--------|-----------------|-----------------|-------------|--------|-------------|------------|
| Net sales                                                                           |   | **$**           | **20,013,852**  |        | $      | 46,051,881  |       | $ | 37,188,312 |   |
| Cost of goods sold                                                                  |   | **13,032,316**  |            | 23,395,023  |   | 23,909,624  |       |
| Gross profit                                                                        |   | **6,981,536**   |            | 22,656,858  |   | 13,278,688  |       |
| Operating expenses:                                                                 |   |            |            |        |   |        |       |
| Selling, general and administrative                                                 |   | **11,227,602**  |            | 17,473,987  |   | 17,631,833  |       |
| Research and development                                                            |   | **4,694,477**   |            | 8,530,804   |   | 9,828,375   |       |
| Unusual charges                                                                     |   | **2,202,630**   |            | 4,075,536   |   | 1,446,083   |       |
| Total operating expenses                                                            |   | **18,124,709**  |            | 30,080,327  |   | 28,906,291  |       |
| Loss from operations                                                                |   | **(11,143,173** | )               | (7,423,469  | )      | (15,627,603 | )          |
| Other income, net                                                                   |   | **247,864**     |            | 428,917     |   | 607,497     |       |
| Loss before income taxes and cumulative effect of a  change in accounting principle |   | **(10,895,309** | )               | (6,994,552  | )      | (15,020,106 | )          |
| Income tax benefit (provision)                                                      |   | **226,000**     |            | (14,710,000 | )      | 6,007,000   |       |
| Loss before cumulative effect of a change in  accounting principle                  |   | **(10,669,309** | )               | (21,704,552 | )      | (9,013,106  | )          |
| Cumulative effect of a change in accounting  principle — See Note 2.           |   | **—**      |            | (824,228    | )      | **—**  | ** ** |
| Net loss                                                                            |   | **$**           | **(10,669,309** | **)**       | $      | (22,528,780 | )          | $ | (9,013,106 | ) |
| Loss per common share (basic  and diluted):                                         |   |            | ** **      |        |   |        |       |
| Loss before cumulative effect  of a change in accounting principle                  |   | **$**           | **(1.13**       | **)**       | $      | (2.29       | )          | $ | (0.95 | ) |
| Cumulative effect of a change in accounting principle  — See Note 2.           |   | **—**      | ** **      | (0.09       | )      | **—**  | ** ** |
| Net loss                                                                            |   | **$**           | **(1.13**       | **)**       | $      | (2.38       | )          | $ | (0.95 | ) |
| Weighted average common shares outstanding (basic  and diluted)                     |   | **9,438,000**   |            | 9,466,000   |   | 9,470,000   |       |

 

*Seeaccompanying notes to the consolidated financial statements.*

 

F-2

----

 

**AETRIUM INCORPORATED**

**ConsolidatedBalance Sheets**

 
| **December 31,**                                                                                      |   | **2001**        |           | **2000**    |   |
|-------------------------------------------------------------------------------------------------------|--------|-----------------|----------------|-------------|--------|
| ASSETS                                                                                                |   |            |           |        |   |
| Current assets:                                                                                       |   |            |           |        |   |
| Cash and cash equivalents                                                                             |   | **$**           | **7,180,576**  |        | $      | 9,132,132 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $395,000 and $514,000, respectively   |   | **1,505,182**   |           | 7,984,315   |   |
| Refundable income taxes                                                                               |   | **—**      |           | 345,329     |   |
| Inventories                                                                                           |   | **8,956,014**   |           | 12,683,200  |   |
| Other current assets                                                                                  |   | **131,262**     |           | 187,626     |   |
| Total current assets                                                                                  |   | **17,773,034**  |           | 30,332,602  |   |
| Property and equipment:                                                                               |   |            |           |        |   |
| Furniture and fixtures                                                                                |   | **597,628**     |           | 1,159,362   |   |
| Equipment                                                                                             |   | **3,090,780**   |           | 3,501,880   |   |
| Less accumulated depreciation & amortization                                                      |   | **(2,841,933**  | )              | (3,014,603  | )      |
| Property and equipment, net                                                                           |   | **846,475**     |           | 1,646,639   |   |
| Intangible and other assets, net                                                                      |   | **10,766,919**  |           | 12,394,605  |   |
| Total assets                                                                                          |   | **$**           | **29,386,428** |        | $      | 44,373,846 |   |
|                                                                                                  |   |            |           |        |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                             |   |            |           |        |   |
| Current liabilities:                                                                                  |   |            |           |        |   |
| Trade accounts payable                                                                                |   | **$**           | **676,306**    |        | $      | 3,862,507 |   |
| Accrued compensation                                                                                  |   | **493,274**     |           | 1,497,576   |   |
| Other accrued liabilities                                                                             |   | **3,701,163**   |           | 3,828,769   |   |
| Total current liabilities                                                                             |   | **4,870,743**   |           | 9,188,852   |   |
| Commitments and contingencies                                                                         |   |            |           |        |   |
| Shareholders’ equity:                                                                            |   |            |           |        |   |
| Common stock, $.001 par value; 30,000,000 shares  authorized; 9,474,566 shares issued and outstanding |   | **9,475**       |           | 9,475       |   |
| Additional paid-in capital                                                                            |   | **60,246,000**  |           | 60,246,000  |   |
| Accumulated deficit                                                                                   |   | **(35,739,790** | )              | (25,070,481 | )      |
| Total shareholders’ equity                                                                       |   | **24,515,685**  |           | 35,184,994  |   |
| Total liabilities and shareholders’ equity                                                       |   | **$**           | **29,386,428** |        | $      | 44,373,846 |   |

 

*Seeaccompanying notes to the consolidated financial statements.*

* *

F-3

----

 

**AETRIUM INCORPORATED**

**Consolidated Statements of Changes in Shareholders’ Equity**

** **
|                                                                                             |   | **Common Stock** |   |   | **Additional  Paid-in** |       |   | **Retained  Earnings  (Accumulated** |   |        | **Total  Shareholders'** |   |
|--------------------------------------------------------------------------------------------------|--------|------------------|--------|--------|-------------------------|------------|--------|--------------------------------------|--------|-------------|--------------------------|--------|
|                                                                                             |   | **Shares**       |   |   | **Amount**              |       |   | **Capital**                          |   |        | **Deficit)**             |   |   | **Equity** |   |
| **Balance  Dec. 31, 1998**                                                                       |   | 9,471,642        |   | $      | 9,472                   |       | $      | 60,304,164                           |   | $           | 6,471,405                |   | $ | 66,785,041 |   |
| Exercise of stock options                                                                        |   | 69,192           |   | 69     |                    | 481,033    |   | —                               |   | 481,102     |                     |
| Surrender of common stock  in connection with exercise of stock options                          |   | (48,649          | )      | (49    | )                       | (451,130   | )      | —                               |   | (451,179    | )                        |
| Repurchase of common stock                                                                       |   | (56,150          | )      | (56    | )                       | (430,003   | )      | —                               |   | (430,059    | )                        |
| Tax benefit related to  exercise of stock options                                                |   | —           |   | — |                    | 58,353     |   | —                               |   | 58,353      |                     |
| Net loss                                                                                         |   | —           |   | — |                    | —     |   | (9,013,106                           | )      | (9,013,106  | )                        |
| **Balance  Dec. 31, 1999**                                                                       |   | 9,436,035        |   | 9,436  |                    | 59,962,417 |   | (2,541,701                           | )      | 57,430,152  |                     |
| Exercise of stock options                                                                        |   | 39,864           |   | 40     |                    | 286,336    |   | —                               |   | 286,376     |                     |
| Surrender of common stock  in connection with exercise of stock options                          |   | (1,333           | )      | (1     | )                       | (13,537    | )      | —                               |   | (13,538     | )                        |
| Tax benefit related to  exercise of stock options                                                |   | —           |   | — |                    | 10,784     |   | —                               |   | 10,784      |                     |
| Net loss                                                                                         |   | —           |   | — |                    | —     |   | (22,528,780                          | )      | (22,528,780 | )                        |
| **Balance  Dec. 31, 2000**                                                                       |   | 9,474,566        |   | 9,475  |                    | 60,246,000 |   | (25,070,481                          | )      | 35,184,994  |                     |
| Purchase and sale of  common shares pursuant to stock purchase and sale agreement (See Note 11): |   |             |   |   |                    |       |   |                                 |   |        |                     |
| Purchase of common shares                                                                        |   | (426,410         | )      | (426   | )                       | (543,247   | )      | —                               |   | (543,673    | )                        |
| Sale of common shares                                                                            |   | 426,410          |   | 426    |                    | 543,247    |   | —                               |   | 543,673     |                     |
| Net loss                                                                                         |   | —           |   | — |                    | —     |   | (10,669,309                          | )      | (10,669,309 | )                        |
| **Balance  Dec. 31, 2001**                                                                       |   | 9,474,566        |   | $      | 9,475                   |       | $      | 60,246,000                           |   | $           | (35,739,790              | )      | $ | 24,515,685 |   |

 

*Seeaccompanying notes to the consolidated financial statements.*

 

F-4

----

 

**AETRIUM INCORPORATED**

**ConsolidatedStatements of Cash Flows**

** **
| **Year Ended December 31,**                                                  |   | **2001**       |            | **2000**   |       | **1999**    |       |
|------------------------------------------------------------------------------|--------|----------------|-----------------|------------|------------|-------------|------------|
| **Cash  flows from operating activities:**                                   |   |           | ** **      |       | ** ** |        | ** ** |
| Net loss                                                                     |   | **$**          | **(10,669,309** | )          | $          | (22,528,780 | )          | $ | (9,013,106 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |           |            |       |       |        |       |
| Depreciation and amortization                                                |   | **2,186,643**  |            | 2,624,316  |       | 3,331,906   |       |
| Provision for excess and obsolete inventories                                |   | **3,657,017**  |            | 1,749,300  |       | 3,460,800   |       |
| Provision for bad debts                                                      |   | **—**     |            | —     |       | 57,000      |       |
| Write-down of intangibles, equipment and leaseholds                          |   | **214,793**    |            | 1,180,899  |       | 1,155,000   |       |
| Unusual charges                                                              |   | **1,727,000**  |            | 3,115,000  |       | 352,000     |       |
| Cumulative effect of a change in accounting  principle, net of taxes         |   | **—**     |            | 824,228    | ** ** | **—**  | ** ** |
| Deferred taxes                                                               |   | **—**     |            | 15,362,059 |       | (6,760,000  | )          |
| Changes in assets and liabilities:                                           |   |           |            |       |       |        |       |
| Accounts receivable                                                          |   | **6,479,133**  |            | (1,878,279 | )          | (1,247,269  | )          |
| Refundable income taxes                                                      |   | **345,329**    |            | (345,329   | )          | 3,182,172   |       |
| Inventories                                                                  |   | **70,169**     |            | (3,278,494 | )          | 1,196,685   |       |
| Other current assets                                                         |   | **56,364**     |            | 45,402     |       | 128,152     |       |
| Intangible and other assets                                                  |   | **29,871**     |            | 78,975     |       | (23,315     | )          |
| Trade accounts payable                                                       |   | **(3,186,201** | )               | 1,946,070  |       | 1,195,076   |       |
| Accrued compensation                                                         |   | **(1,004,302** | )               | (69,597    | )          | 21,620      |       |
| Other accrued liabilities                                                    |   | **(1,854,606** | )               | (2,552,163 | )          | (1,053,744  | )          |
| Net cash used in operating  activities                                       |   | **(1,948,099** | )               | (3,726,393 | )          | (4,017,023  | )          |
| **Cash  flows from investing activities:**                                   |   |           | ** **      |       | ** ** |        | ** ** |
| Purchase of property and equipment                                           |   | **(70,798**    | )               | (598,599   | )          | (531,349    | )          |
| Proceeds from sale of equipment                                              |   | **67,341**     |            | —     |       | —      |       |
| Net cash used in investing activities                                        |   | **(3,457**     | )               | (598,599   | )          | (531,349    | )          |
| **Cash  flows from financing activities:**                                   |   |           | ** **      |       | ** ** |        | ** ** |
| Net proceeds from sale of common stock                                       |   | **543,673**    |            | 286,376    |       | 100,546     |       |
| Repurchases of common stock                                                  |   | **(543,673**   | )               | (13,538    | )          | (500,682    | )          |
| Net cash provided by (used in)  financingactivities                          |   | **—**     |            | 272,838    |       | (400,136    | )          |
| **Decrease in cash and cash equivalents**                                    |   | **(1,951,556** | )               | (4,052,154 | )          | (4,948,508  | )          |
| **Cash  and cash equivalents at beginning of year**                          |   | **9,132,132**  |            | 13,184,286 |       | 18,132,794  |       |
| **Cash and cash equivalents at end of year**                                 |   | **$**          | **7,180,576**   |       | $          | 9,132,132   |       | $ | 13,184,286 |   |

 

*Seeaccompanying notes to the consolidated financial statements.*

 

F-5

----

 

**AETRIUM INCORPORATED**

**Notesto Consolidated Financial Statements**

 

**NOTE1: BUSINESS DESCRIPTION**

 

Aetriumspecializes in the design, development, manufacturing and marketing of avariety of electromechanical equipment used by the semiconductor industry tohandle and test integrated circuits and other electronic components.

** **

**NOTE2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Basisof Presentation: **The consolidated financial statementsinclude the accounts of Aetrium Incorporated and its wholly ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated in consolidation.

** **

**Useof Estimates: **The preparation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ from those estimates.

** **

**Reclassifications: **Certain prior-year amounts have been reclassified toconform to the current year presentation. Such reclassifications had no impact on previously reported net loss,shareholders’ equity or cash flows.

** **

**CashEquivalents: **Cash equivalents include highly liquidinvestments purchased with an original maturity of less than three months.

** **

**Inventories: **Inventories are valued at the lower of cost or market,with cost determined on a first-in, first-out basis.

** **

**Propertyand Equipment: **Furniture, fixtures and equipment arerecorded at cost and are depreciated using the double declining balance methodover estimated useful lives ranging from three to seven years.  When assets are retired or disposed of, thecost and accumulated depreciation are removed from the accounts.  Maintenance and repairs are charged toexpense as incurred.

** **

**IntangibleAssets:**Goodwillrepresents the excess of purchase price over the fair value of net assets ofacquired businesses. Acquired intangible assets such as customer lists, trainedworkforces, developed technology, core technology, and patent rights arecapitalized at their respective fair values, which are generally determinedusing discounted future cash flow techniques and assumptions appropriate toeach situation, except for trained workforces, which are determined based upon estimatesof replacement cost. Intangibles are amortized on a straight-line basis overtheir estimated useful lives as follows: Goodwill — 15 years, Customer Lists -10 years, Trained Workforces - 7 years, Developed Technology - 2 to 8 years,Core Technology — 10 years, Patents — 7 years or legal life, if shorter.

 

During 2001, the Financial Accounting Standards Board(“FASB”) issued new accounting standards related to goodwill and otherintangible assets.  Aetrium will adoptthe new standards in 2002. See Note 3.

** **

**Valuation/Impairmentof Long-Lived Assets:**In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of,” Aetrium reviews its intangible and other long-livedassets whenever an event or change in circumstances indicates that the carryingvalue of an asset may not be recoverable. If such an event or change in circumstances occurs and potential impairmentis indicated because the carrying 

 

F-6

----

 

values exceed the estimated future undiscounted cashflows, we would measure the impairment loss as the amount by which the carryingvalue of the asset exceeds its fair value.

 

During 2001, the FASB issued new accounting standardsrelated to intangible and other long-lived assets, including SFAS 142 and SFAS144 which address accounting for the impairment of goodwill and long-livedassets and supercede SFAS 121. Aetrium will adopt the new standards in 2002.See Note 3.

** **

**RevenueRecognition:**Aetrium’spolicy is to recognize revenue on product sales upon shipment if contractualobligations have been substantially met and title and risk of loss have passedto the customer, which is generally the case for sales of spare parts,accessories, change kits and some equipment and equipment upgrade sales. Someequipment or equipment upgrade sales contracts, however, may includepost-shipment obligations to be performed by Aetrium and/or contractual termsthat can only be satisfied after shipment, such as installation and meetingcustomer-specified acceptance requirements at the customer’s site.  In these cases, revenue is not recognizeduntil such obligations have been completed and there is objective evidence thatthe applicable contract terms have been met. In situations where equipment is shipped but revenue and the relatedreceivable are not recognized, the cost of the equipment is included ininventories on our balance sheet.  Weoften receive payments from customers prior to recognizing revenue.  For example, we may receive partial paymentsprior to shipment, which we record as “Customer Deposits,” or we may receivepartial payments after shipment but prior to recognizing revenue, which werecord as “Deferred Revenue.”  CustomerDeposits and Deferred Revenue are recorded as liabilities and included in“Other accrued liabilities” in our consolidated balance sheet.  See Notes 6 and 8.

 

Ourrevenue recognition policy described above reflects a change in policy that weimplemented in 2000 for certain types of equipment sales.  The accounting change was made in responseto guidance provided in SEC Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements” (“SAB101”), which was issued in final formin late 2000. SAB101 summarizes the SEC’s views in applying generally acceptedaccounting principles to various revenue recognition issues, including issuesrelated to equipment installation and customer acceptance.  Prior to 2000, our policy was to recognizerevenue for equipment sales upon shipment if title and risk of loss had passedto the customer, contractual obligations were substantially complete,post-delivery obligations were inconsequential, and customer acceptance andpayment were reasonably assured.  Theassessment of whether customer acceptance and payment were reasonably assuredwas based on the nature of the acceptance criteria, our history of acceptancewith the equipment and the individual customer, and the nature and cost of anyremaining obligations necessary to obtain acceptance.  In cases where these criteria were not met at the time ofshipment, we deferred all of the revenue on the equipment sale until customeracceptance or payment was received.

 

Asprovided for in SAB101, the accounting change in 2000 was recorded as a changein accounting principle retroactive to January 1, 2000.  The cumulative effect of the accountingchange was an after-tax charge of $824,228 ($.09 per share), which includedrevenue of approximately $3 million less cost of sales and certain related expensessuch as commissions.  Substantially allof the $3 million in deferred revenue was recognized in 2000.

 

Thefollowing table presents the estimated consolidated results of our operationson an unaudited pro forma basis as if SAB101 had been effective in 1999 (inthousands, except per share data):

 
| Unaudited pro forma                 |   |   |   |
|-------------------------------------|--------|--------|--------|
| Net sales                           |   | $      | 39,575 |   |
| Net loss                            |   | (8,497 | )      |
| Net loss per diluted share          |   | (0.90  | )      |
| Reported net loss per diluted share |   | $      | (0.95  | ) |
|                                     |        |        |        |  |  |

** **

F-7

----

** **

**WarrantyCosts: **Estimated warranty costs are accrued in the periodthat the related revenue is recognized.

** **

**Researchand Development:**Research and development expenditures, which includesoftware development costs, are expensed as incurred. SFAS No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,”requires the capitalization of certain software development costs oncetechnological feasibility is established, which we define as the completion ofa working model.  To date, the periodbetween achieving technological feasibility and the general availability ofsuch software that is embedded in our equipment has been short and softwaredevelopment costs qualifying for capitalization have been insignificant.Accordingly, we have not capitalized any software development costs.

** **

**IncomeTaxes: **Income taxes are accounted for in accordance with SFASNo. 109, “Accounting for Income Taxes.” Deferred tax assets are recognized fordeductible temporary differences and tax credit carryforwards and deferred taxliabilities are recognized for taxable temporary differences.  Deferred tax assets are reduced by avaluation allowance when, in the opinion of management, it is more likely thannot 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 concludethereunder that it is more likely than not that some portion or all of thedeferred tax assets will be realized.

** **

**NetIncome (Loss) Per Common Share: **Basic net income (loss) per share iscomputed by dividing net income (loss) by the weighted-average number of commonshares outstanding during each year. Diluted net income (loss) per share iscomputed by dividing net income (loss) by the weighted-average number of commonshares and potentially dilutive shares outstanding during each year.  Potentially dilutive shares include stockoptions using the treasury stock method. Stock options are not included in the diluted loss per sharecalculations in fiscal years 1999, 2000 and 2001 because they are antidilutive.  As of December 31, 2001, there were1,124,000 outstanding stock options which could potentially impact dilutedearnings per share.  The number ofweighted-average stock options outstanding using the treasury stock method thatwould have been included in the earnings per share calculation if we had beenprofitable in 2001 was insignificant.

** **

**Repurchasesof Common Stock: **Aetrium accounts for repurchased sharesas retirements.  The par value ofrepurchased shares is charged to the common stock account and the excess of thepurchase cost over par value is charged to additional paid-in capital.

** **

**NOTE3: RECENT ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No.142, “Goodwill and Other Intangible Assets.” SFAS 141 eliminates the pooling-of-interests method of accounting forbusiness combinations, requiring that all business combinations initiated afterJune 30, 2001 be accounted for using the purchase method.  SFAS 142 provides that goodwill is no longeramortized, but rather is reviewed for impairment at least annually and morefrequently in certain circumstances using a two step process.  The first step is to identify a potentialimpairment and, in transition, this step must be measured as of the beginningof the fiscal year. However, a company has six months from the date of adoptionto complete the first step.  The secondstep of the goodwill impairment test measures the amount of the impairment loss(measured as of the beginning of the year of adoption), if any, and must becompleted by the end of our fiscal year. Aetrium will adopt SFAS 142 effective January 1, 2002.  We estimate that the elimination of goodwillamortization will result in a reduction in amortization expense ofapproximately $200,000 per quarter beginning in the first quarter of 2002.  We also anticipate that the methodologyprescribed by SFAS 142 for evaluating and measuring the impairment of goodwillwill result in a goodwill impairment charge of between $6.0 

 

F-8

----

 

million and $8.0 million.  Once determined, this charge will be reported as a change inaccounting principle in the first quarter of 2002.

 

In October 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  This statement addressesfinancial accounting and reporting for the impairment of long-lived assets andfor long-lived assets to be disposed of and supercedes SFAS 121.  However, SFAS 144 retains the fundamental provisionsof SFAS 121 for the recognition and measurement of the impairment of long-livedassets to be held and used and the measurement of long-lived assets to bedisposed of by sale.  We will adopt SFAS 144 effective January 1, 2002.  We do not expect this statement toaffect our financial position or results of operations.

 

Aetriumadopted SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” on January 1, 2001.  Thisstandard establishes accounting and reporting standards for derivativeinstruments and hedging activities. Since we do not hold derivative instruments or engage in hedgingactivities, the adoption of SFAS 133 did not have an impact on our financialstatements.

** **

**NOTE4: UNUSUAL CHARGES**

*** ***

***Fiscal 2001***

 

During2001, Aetrium continued to be impacted by the downturn in the semiconductorequipment industry that began in late 2000. As a result, we took additional steps to improve operating efficienciesand reduce costs.  During the year wecompleted the transfer of our operations in Poway, California to North St.Paul, Minnesota; we restructured our operations in Minnesota; we reduced ourfacility costs through the consolidation of operations; and we significantlyreduced our workforce.  Unusual chargesrecorded in 2001 related to these activities were as follows (dollars inthousands):

 
| Restructuring charges                      |   | — severance costs     |   | $      | 928    |   |
|--------------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                       |   | — facility exit costs |   | 799    |   |
| Total restructuring charges                |   | 1,727                      |   |
| Write-down of equipment and leaseholds     |   | 215                        |   |
| Moving expenses and other transition costs |   | 261                        |   |
| Total unusual charges                      |   | $                          | 2,203  |   |
|                                            |        |                            |        |        |        |        |  |

 

During 2001, in response to declining revenue levelsthroughout the year, we implemented workforce reductions in March, April, June,and December.  These workforcereductions included the elimination of 98 positions in manufacturing, sales,administration, and engineering.  Werecorded charges of $928,000 for severance and related costs associated withthese terminations.  The charges wererecorded in the periods when the restructuring plans were approved bymanagement, severance benefits were determined, and the affected employees werenotified.

 

In May 2001, we consolidated our North St. Paul,Minnesota operations from two buildings into one.  One of the buildings, which is under lease through February 2006,was vacated prior to June 30, 2001.  Werecorded a facility exit charge of $387,000 in the second quarter for estimatednon-cancelable lease payments and other facility costs we expected to incurduring the estimated time needed to find a sub-tenant.  In the fourth quarter, due to our inabilityto locate a single sub-tenant to occupy the building, we changed our strategyto consider multiple sub-tenants.  InNovember 2001, we subleased 7,500 square feet of the building to a third partyfor a two-year period. In January 2002, we subleased an additional 8,000 squarefeet to another party for a period ending concurrent with the masterlease.  We are continuing to market theremaining unused space in the building. As of December 31, 2001, we estimate that our net costs after subleaseincome to be 

 

F-9

----

 

incurred over the remainder of the master lease willbe approximately $450,000.  In thefourth quarter, we recorded an additional charge of $219,000 to increase theaccrual to that amount.  Also, in connectionwith vacating this facility in the second quarter, we recorded a charge of$215,000 related to abandoned leaseholds and losses on the sale of certainequipment during the quarter.

 

Aetrium leases avacant facility in Grand Prairie, Texas that was utilized by our Grand Prairieoperation until that business was transferred to our Dallas facility in thefirst quarter of 2000. The lease expires in June 2003.  We continue to work with the owner of thebuilding to locate a sub-tenant for the property.  In 2001, due to our inability to locate a subtenant and due tosoftening economic conditions late in the year, we recorded an additionalfacility exit reserve of $193,000 to cover the non-cancelable lease payments andother costs we estimate we will incur until a new tenant can be found.

 

In 2001, we incurred moving and other transition costsamounting to $261,000 that were related to restructuring our operations.  Of this amount, approximately $203,000 wasincurred in the first quarter primarily related to the relocation and otherfinal costs associated with the transfer of operations from Poway, Californiato Minnesota and $58,000 was related to moving expenses incurred in the secondquarter when we combined our operations in Minnesota from two buildings intoone.

 

The following tablesummarizes the severance and facility exit restructuring charges accrued andthe associated activity for the year ended December 31, 2001 (dollars inthousands):

 
|                                                   |   | **Severance  and Benefits** |   | **Facility  Exit Costs** |   | **Total** |   |
|--------------------------------------------------------|--------|-----------------------------|--------|--------------------------|--------|-----------|--------|
| Accrual balance, December 31, 2000                     |   | $                           | 491    |                     | $      | 305       |   | $ | 796 |   |
| Severance and related charges:                         |   |                        |   |                     |   |      |   |
| Workforce reduction — first quarter               |   | 246                         |   | —                   |   | 246       |   |
| Workforce reduction — second quarter              |   | 317                         |   | —                   |   | 317       |   |
| Workforce reduction — fourth quarter              |   | 365                         |   | —                   |   | 365       |   |
| Facility exit charges:                                 |   |                        |   |                     |   |      |   |
| North St. Paul, MN facility — current year charge |   | **—**                  |   | 606                      |   | 606       |   |
| Grand Prairie, TX facility —accrual increase      |   | **—**                  |   | 193                      |   | 193       |   |
| Cash payments                                          |   | (1,015                      | )      | (400                     | )      | (1,415    | )      |
| Accrual balance, December 31, 2001                     |   | $                           | 404    |                     | $      | 704       |   | $ | 1,108 |   |
|                                                        |        |                             |        |                          |        |           |        |  |  |  |  |  |

 

We estimate that the accrued severance and facilityexit costs at December 31, 2001 will be paid or utilized as follows:  $0.5 million by June 30, 2002; an additional$0.3 million by December 31, 2002; approximately $25,000 per quarter thereafter.

*** ***

***Fiscal 2000***

 

During 2000, Aetrium initiated a number of activitiesto reduce costs and improve operating efficiencies.  These actions included consolidating our two operations in Texas,closing our Lawrence, Massachusetts facility, and restructuring our operationsin Poway, California.  Unusual chargesrecorded in 2000 related to these activities were as follows (dollars inthousands):

 

F-10

----

 
| Restructuring charges                   |   | — severance costs     |   | $      | 2,157  |   |
|-----------------------------------------|--------|----------------------------|--------|--------|--------|--------|
|                                    |   | — facility exit costs |   | 958    |   |
| Total restructuring  charges            |   | 3,115                      |   |
| Write-down of equipment  and leaseholds |   | 495                        |   |
| Write-down of intangible  assets        |   | 415                        |   |
| Other                                   |   | 51                         |   |
| Total unusual charges                   |   | $                          | 4,076  |   |

 

Consolidation of Texas Operations.

 

During the first quarter of 2000, we consolidated ourtwo operations in Texas.  Strategicallysignificant manufacturing and development activities being conducted at ourGrand Prairie facility were transferred to our Dallas facility where operationsassociated with the product line we acquired from WEB Technology, Inc. arelocated.  The transfer was completed inmid-March 2000 and the Grand Prairie facility was closed in late March 2000.

 

Charges related to this restructuring includedapproximately $565,000 for severance and related costs associated with thetermination of 56 employees; $385,000 for facility exit costs, includingestimated non-cancelable lease payments and other facility costs we expected toincur during the estimated time needed to find a sub-tenant; $121,000 relatedto the write-down of abandoned leaseholds and equipment; and $186,000 relatedto the write-down of impaired intangibles, primarily capitalized trainedworkforces.

 

Closure of Lawrence, Massachusetts Facility*.*

 

During the first quarter of 2000, we decided to closeour Lawrence, Massachusetts facility. The Thermal Forcing System product line and the development activitiesassociated with our proprietary conductive thermal technology were transferredto our North St. Paul, Minnesota facility. We sold or licensed certain assets associated with the Lawrenceoperation, including the environmental test equipment product line.Consideration received for these assets was the transferee’s assumption ofcertain future obligations related to the transferred product line androyalties on future sales.  As indicatedbelow, the transferee of the product line subsequently bought out the royaltycontract later in the year.  We ceasedoperations at our Lawrence facility in late March 2000 and the facility wasvacated in May 2000.

 

Charges related to closing this facility includedapproximately $844,000 for severance and related costs associated with thetermination of 38 employees and $101,000 for facility exit costs, includingrent, taxes and other facility expenses we incurred during the six weeks from thetime operations ceased until we moved out of the facility.  In addition, we recorded charges in thefirst quarter of $229,000 related to impaired intangibles associated with thetransferred product line and  $672,000for losses on the sale of the business assets and abandoned leaseholds.  The charge related to the loss on the saleof the business assets was subsequently reduced by $629,000 in the second halfof 2000 for proceeds received from the royalty contract, resulting in a netcharge of $43,000.  Because thetransferee of the product line bought out the royalty contract, we will notreceive royalty payments in the future under the contract.

 

Poway, California Restructuring*.*

 

In the second quarter of 2000, we announced that wewould transfer manufacturing and certain administrative functions at our Poway,California facility to our North St. Paul, Minnesota

 

F-11

----

 

operation. Certain marketing and engineering activities were to remain inPoway.  The restructuring plan includeda workforce reduction, vacating a leased 45,000 square-foot building, andtransferring the remaining marketing and engineering personnel to a 10,000square-foot facility nearby.  Thisaction resulted in the elimination of 20 positions in manufacturing,engineering, accounting and administration. The lease for the 45,000 square-foot facility was subsequently assignedto a third party.

 

In October 2000, we announced our intention totransfer the remaining marketing and engineering operations in Poway to NorthSt. Paul and to close the Poway facility. Prior to December 31, 2000, management had approved the restructuringplan that included the elimination of an additional 20 positions in engineeringand administration and closing the facility by March 31, 2001.  The affected employees were identified andnotified of the terminations and related severance benefits prior to December31, 2000.  Some employees wereterminated prior to December 31, 2000 with the remaining termination datesscheduled for March 31, 2001 or sooner. We subleased the 10,000 square-foot facility to a third party, effectiveApril 1, 2001.

 

Charges related to the Poway restructuring during 2000included approximately $748,000 for severance and related costs,  $472,000 for facility exit costs, and$331,000 related to the write-down of abandoned leaseholds and equipment.  The severance costs were related to theelimination of a total of 40 positions. The facility exit costs were related to exiting both facilities andincluded noncancellable lease payments and other operating costs incurred aftervacating as well as costs incurred to sublease the facilities.

 

The following table summarizes the severance andfacility exit restructuring charges accrued and the associated activity for theyear ended December 31, 2000 (dollars in thousands):

 
|                               |   | **Severance and  Benefits** |   | **Facility  Exit Costs** |   | **Total** |   |
|------------------------------------|--------|-----------------------------|--------|--------------------------|--------|-----------|--------|
| Accrual balance, December 31, 1999 |   | $                           | — |                     | $      | —    |   | $ | — |   |
| Restructuring charges:             |   |                        |   |                     |   |      |   |
| Texas consolidation                |   | 565                         |   | 385                      |   | 950       |   |
| Lawrence,  MA                 |   | 844                         |   | 101                      |   | 945       |   |
| Poway, CA                          |   | 748                         |   | 472                      |   | 1,220     |   |
| Cash payments                      |   | (1,666                      | )      | (653                     | )      | (2,319    | )      |
| Accrual balance, December 31, 2000 |   | $                           | 491    |                     | $      | 305       |   | $ | 796 |   |

 

***Fiscal 1999***

 

In 1999, Aetrium recorded unusual charges as follows(dollars in thousands):

 
| Restructuring charge —  severance costs |   | $     | 352    |   |
|----------------------------------------------|--------|-------|--------|--------|
| Write-off of intangible  asset               |   | 1,155 |   |
| Other                                        |   | (61   | )      |
| Total                                        |   | $     | 1,446  |   |

 

In order to reduce operating costs, we implemented twoworkforce reductions in 1999 which resulted in the termination of 48employees.  The restructuring chargeswere recorded in the periods when the affected employees were identified,severance benefits were determined, and the affected employees were notifiedand terminated.  Accordingly,restructuring charges of $190,000 and $162,000 were recorded in the first andsecond quarters of 1999, respectively. The severance costs were paid prior to December 31, 1999.

 

F-12

----

 

When we acquired the handler equipment business of WEBTechnology, Inc. in April 1998, WEB had a contractual relationship with acustomer to develop and deliver certain automation equipment.  A value of $1.4 million was capitalized asan intangible asset related to this customer relationship at the time of theacquisition.  In the fourth quarter of1999, due to a change in its business environment and a shift in its strategicbusiness plan, the customer requested that we discontinue working on theproject.  Prior to December 31, 1999, wenegotiated a termination of the contract with the customer and determined thatthe project would not be resumed.  As aresult, we determined that the intangible asset related to this customerrelationship was impaired and had no future economic value and the remainingunamortized balance of $1.2 million was written off at December 31, 1999.

** **

**NOTE5: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

Cashpayments (refunds) for interest and income taxes were as follows:

 
| **Year Ended Dec. 31,**           |   | **2001** |         | **2000** |   | **1999** |   |
|-----------------------------------|--------|----------|--------------|----------|--------|----------|--------|
| Interest paid                     |   | **$**    | **11,214**   |     | $      | 18,771   |   | $ | 13,884 |   |
| Income taxes paid (refunded), net |   | **$**    | **(631,393** | )        | $      | (306,730 | )      | $ | (2,428,557 | ) |

 

Duringthe years ended December 31, 2000 and 1999, employees surrendered shares ofcommon stock in connection with the exercise of stock options as follows:

** **
| **Year ended December 31,**        |   | **2000**              |   | **1999**          |   |
|------------------------------------|--------|-----------------------|--------|-------------------|--------|
|                               |   | **Number of  Shares** |   | **Market  Value** |   | **Number of  Shares** |   | **Market Value** |   |
| Shares surrendered as payment for: |   |                  |   |              |   |   |   |   |   |
| Exercise prices                    |   | —                |   | $                 | — |   | 41,996 |   | $ | 380,556 |   |
| Payroll taxes                      |   | 1,333                 |   | 13,538            |   | 6,653 |   | 70,623 |   |
| Total shares surrendered           |   | 1,333                 |   | $                 | 13,538 |   | 48,649 |   | $ | 451,179 |   |

 

**NOTE6: INVENTORIES**

 

A summary of the composition of inventories is asfollows:

 
| **December 31,**                                                                                                              |   | **2001**      |          | **2000**  |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------------|-----------|--------|
| Purchased parts and completed subassemblies                                                                                   |   | **$**         | **4,095,579** |      | $      | 5,398,326 |   |
| Work-in-process                                                                                                               |   | **2,479,694** |          | 3,466,368 |   |
| Finished goods, including demonstration equipment  and equipment shipped, subject to  installation and/or customer acceptance |   | **2,380,741** |          | 3,818,506 |   |
| Total inventories                                                                                                             |   | **$**         | **8,956,014** |      | $      | 12,683,200 |   |

 

Werecorded inventory excess and obsolescence charges amounting to $3.7 million,$1.7 million, and $3.5 million in 2001, 2000, and 1999, respectively, whichincluded unusual charges related to significant discrete circumstances as wellas charges related to product design changes made in the ordinary course of ourbusiness.

 

In the fourth quarter of 2001, we recorded unusual inventorywrite-downs of $2.7 million.  As aresult of the severe semiconductor industry downturn that began in late 2000and continued throughout 2001 and the resulting excess capacity in the marketsegments served by some of our older test handler products, we wrote down thevalue of our inventories for these older products to their estimated netrealizable values based upon a revised expectation of limited future sales ofthese products.

 

F-13

----

 

In  2000, werecorded unusual inventory write-downs totaling $935,000.  The write-downs were primarily related toinventories for DRAM test handler applications, a market segment that wedecided not to pursue further.  In thesecond quarter, we recorded an inventory write-down of $450,000 related to ourdecision to discontinue marketing and manufacturing our oldest DRAM testhandler, the model M3200.  As a resultof this decision, all inventories related to the production of the M3200 werewritten down to scrap value and were substantially disposed of by December 31,2000.  In the fourth quarter, werecorded an inventory charge of $485,000. This charge was primarily related to our decision to discontinuemarketing our DTX thermal test handler product to the DRAM market segment andrather focus the DTX on high power logic semiconductor applications.  As a result of this decision, DTX-relatedinventories were evaluated and written down to estimated net realizable value.

 

Inthe second quarter of 1999, one of our largest customers, a DRAM manufacturer,announced that it was exiting the merchant market for DRAM devices and wouldbuy minimal equipment in 1999.  A secondsignificant customer also indicated that its equipment requirements for DRAMapplications would be significantly lower than previously forecasted levels.  In response to these events and consideringthe potential obsolescence associated with upcoming transitions to newproducts, inventories were analyzed and we determined that a $2.5 millionunusual inventory charge was required to properly value inventories at netrealizable value.

 

The unusual inventory write-downs in 2001, 2000 and1999 were quantified through a detailed analysis of inventories withconsideration given to potential future equipment and spares sales, and thepotential use of common parts in other products.

 

In addition to the unusual inventory charges discussedabove, we regularly record inventory charges due to the evolving nature of ourproducts.  Our products are continuallyimproved and modified to better meet evolving market requirements.  These product improvements and modificationsregularly result in parts inventory obsolescence as parts are replaced due tothe product changes.  To address thisrecurring obsolescence, we recorded inventory charges of $980,000 in 2001,$814,000 in 2000 and $961,000 in 1999, in addition to the unusual inventorycharges discussed above.

** **

**NOTE7: INTANGIBLE AND OTHER ASSETS**

 

Intangibleand other assets are comprised of the following:

 
| **December 31,**                       |   | **2001**       |           | **2000**   |   |
|----------------------------------------|--------|----------------|----------------|------------|--------|
| Goodwill                               |   | **$**          | **10,436,049** |       | $      | 10,436,049 |   |
| Customer lists                         |   | **1,100,000**  |           | 1,100,000  |   |
| Trained workforces                     |   | **123,162**    |           | 123,162    |   |
| Developed technology                   |   | **2,600,000**  |           | 2,600,000  |   |
| Core technology                        |   | **3,167,136**  |           | 3,167,136  |   |
| Other                                  |   | **155,496**    |           | 185,367    |   |
| Total                                  |   | **17,581,843** |           | 17,611,714 |   |
| Accumulated amortization               |   | **(6,814,924** | )              | (5,217,109 | )      |
| Total intangible and other assets, net |   | **$**          | **10,766,919** |       | $      | 12,394,605 |   |

 

Asexplained in Note 4, write-downs of intangible assets amounted to $0.4 millionand $1.2 million in 2000 and 1999, respectively.  Amortization expense related to intangibles amounted to $1.6million, $1.6 million, and $1.9 million in 2001, 2000, and 1999, respectively.

 

During 2001, the Financial Accounting Standards Board(“FASB”) issued new accounting standards related to goodwill and otherintangible assets, which we will adopt in 2002. See Note 3.

** **

F-14

----

** **

**NOTE8: OTHER ACCRUED LIABILITIES:**

 

Otheraccrued liabilities are comprised of the following:

 
| **December 31,**                       |   | **2001**      |          | **2000**  |   |
|----------------------------------------|--------|---------------|---------------|-----------|--------|
| Accrued commissions                    |   | **$**         | **189,604**   |      | $      | 271,926 |   |
| Accrued warranty                       |   | **454,753**   |          | 433,389   |   |
| Customer deposits and deferred revenue |   | **1,526,874** |          | 1,748,568 |   |
| Accrued restructuring costs            |   | **1,108,128** |          | 795,733   |   |
| Other                                  |   | **421,804**   |          | 579,153   |   |
| Total other accrued liabilities        |   | **$**         | **3,701,163** |      | $      | 3,828,769 |   |

** **

**NOTE9: LONG-TERM DEBT AND CREDIT AGREEMENT**

 

As of December 31, 2001, we had no outstandinglong-term debt.  We have a line ofcredit with a bank which provides for borrowings of up to the lesser of$5,000,000, or 80% of eligible accounts receivable and 50% of eligibleinventory.  The line of credit iscollateralized by receivables and inventories. There were no line of credit advances outstanding as of December 31,2001 and 2000.

** **

**NOTE10: LEASE OBLIGATIONS**

 

Aetrium leases two adjacent buildings in North St.Paul, Minnesota from a partnership controlled by certain of our shareholdersunder two lease agreements, each of which expires in 2006. None of theshareholders in the partnership are directors or officers of Aetrium, or, toour knowledge, own more than five percent of our common stock.  During 2001, we vacated one of the buildingsin connection with a restructuring of operations.  We have subleased approximately half of this building to twooutside parties.

 

We also lease a building in Grand Prairie, Texas thatwas owned by a partnership controlled by a former officer and shareholder untilit was sold in February 2001.  The leaseexpires in June 2003.  In January 2000,the officer’s employment was terminated, and we vacated the building when theGrand Prairie operations were consolidated with our Dallas operation. AtDecember 31, 2001, the Grand Prairie facility remained vacant and we areseeking a subtenant.

 

In 2000 we vacated a leased 45,000 square-footfacility in Poway, California when we relocated the operation to a 10,000square-foot facility.  The lease for thelarger facility was assigned to a third party and we are contingently liablefor the lease if the assignee defaults. The 10,000 square-foot facility was subleased on April 1, 2001.

 

Aetriumalso leases certain equipment and a sales/service office under variousoperating leases.  Rent expense underall operating leases was as follows:

 
| **Year Ended Dec. 31,**        |   | **2001**     |        | **2000** |   | **1999**  |   |
|--------------------------------|--------|--------------|-------------|----------|--------|-----------|--------|
| Paid to shareholders           |   | **$**        | **437,476** |     | $      | 583,776   |   | $ | 583,776 |   |
| Paid to others                 |   | **561,073**  |        | 775,086  |   | 943,163   |   |
| Sublease/assigned lease income |   | **(163,668** | )           | —   |   | —    |   |
| Total net rent expense         |   | **$**        | **834,881** |     | $      | 1,358,862 |   | $ | 1,526,939 |   |

 

Future minimum annual lease payments under operatingleases are as follows:

 
| 2002                         |   | $       | 974,000   |   |
|------------------------------|--------|---------|-----------|--------|
| 2003                         |   | 693,000 |      |
| 2004                         |   | 437,000 |      |
| 2005                         |   | 437,000 |      |
| 2006                         |   | 55,000  |      |
| Total minimum lease payments |   | $       | 2,596,000 |   |

 

F-15

----

 

The above minimum lease payments have not been reducedby minimum sublease rentals of $0.6 million due in the future undernoncancellable subleases.

 

The above minimum lease payments do not include thefacility lease that has been assigned to a third party and on which we remaincontingently liable.  The lease expiresin January 2010 and minimum remaining payments amount to $4.1 million as ofDecember 31, 2001.

** **

**NOTE11: RELATED PARTY AND COMMON STOCK TRANSACTIONS**

 

In November 2001, we repurchased 426,410 shares of ourcommon stock from a group of shareholders that included certain employees ofour Dallas operation and certain of their relatives in exchange for $543,673and an option to require this shareholder group to purchase 426,410 shares ofour common stock for $543,673, which we could exercise from December 31, 2001to January 31, 2002.  On December 31,2001, we exercised our option to require the shareholder group to purchase 426,410shares of our common stock.  Terms ofthis transaction require us to file a registration statement covering theseshares with the Securities and Exchange Commission and to maintain theeffectiveness of the registration until December 31, 2002.  We anticipate that the registrationstatement will be declared effective during the quarter ended June 30, 2002.

 

In connection with the April 1998 acquisition of thehandler equipment business of WEB Technology, Inc., we entered into agreementswith certain WEB shareholders whereby we received a right of first refusal onshares of our common stock issued to such shareholders.  In 1999, we repurchased 56,150 shares for$430,059 pursuant to these agreements.

** **

**NOTE12: STOCK OPTIONS**

 

In 1993, Aetrium’s shareholders approved the adoptionof the 1993 Stock Incentive Plan. Employees, officers, directors, consultants and independent contractorsproviding services to us are eligible to receive awards under our stockincentive plan. The number of shares available for issuance under our stockincentive plan is equal to 17.5% of the aggregate number of shares of commonstock outstanding less the total number of shares of common stock issuable uponthe exercise or conversion of any stock options, warrants or other stock rights.  Our stock incentive plan is administered bythe Compensation Committee of our Board of Directors and provides for thegranting of: (a) stock options; (b) stock appreciation rights; (c) restrictedstock; (d) performance awards; and (e) stock awards valued in whole or in partby reference to or otherwise based upon our stock.  Options granted under our stock incentive plan may be incentivestock options or nonqualified stock options. Our stock incentive plan provides that the Compensation Committee may,at its discretion, allow the exercise price of stock options to be paid, inwhole or in part, by tendering previously acquired shares that have been heldby the option holder for at least six months. Our stock incentive plan will terminate on June 8, 2003.

 

F-16

----

 

Thefollowing table summarizes activity under our stock incentive plan:

 
|                                             |   |                         |       | **Outstanding Options**        |                      |                                  |   |
|--------------------------------------------------|--------|------------------------------|------------|--------------------------------|---------------------------|---------------------------------------|--------|
|                                             |   | **  Number of  Shares** | ** ** | **Range of  Exercise  Prices** | ** **                | **Weighted  Average  Exercise Price** |   |
| **Balance,  December 31, 1998**                  |   | 1,446,064                    |       | $                              | 5.63 to 18.81             |                                  | $      | 8.15 |   |
| Options granted                                  |   | 178,500                      |       | 5.88 to    7.08      |                      | 6.59                                  |   |
| Options exercised                                |   | (69,192                      | )          | 6.63 to    8.34      |                      | 6.96                                  |   |
| Options forfeited                                |   | (84,536                      | )          | 5.63 to 16.63                  |                      | 8.25                                  |   |
| **Balance,  December 31, 1999**                  |   | 1,470,836                    |       | 5.63 to 18.81                  |                      | 8.01                                  |   |
| Options granted                                  |   | 356,500                      |       | 5.69 to    6.54      |                      | 5.81                                  |   |
| Options exercised                                |   | (39,864                      | )          | 5.63 to 10.25                  |                      | 7.18                                  |   |
| Options forfeited                                |   | (258,055                     | )          | 5.63 to 10.25                  |                      | 6.95                                  |   |
| **Balance,  December 31, 2000**                  |   | 1,529,417                    |       | 5.63 to 18.81                  |                      | 7.70                                  |   |
| Options granted                                  |   | 332,000                      |       | 1.69                           |                      | 1.69                                  |   |
| Options forfeited                                |   | (737,417                     | )          | 1.69 to 18.81                  |                      | 9.25                                  |   |
| **Balance,  December 31, 2001**                  |   | 1,124,000                    |       | $                              | 1.69 to    7.08 |                                  | $      | 4.91 |   |
| **Options  exercisable as of December 31, 2001** |   | 695,153                      |       | $                              | 1.69 to    7.08 |                                  | $      | 4.85 |   |

 

Thefollowing table summarizes information related to stock options outstanding atDecember 31, 2001, all of which are nonqualified options and expire five yearsafter the grant date and of which 206,175 options were fully exercisable whengranted and 917,825 options become exercisable over a four to five-year period:

 
|                            |               | **Options Outstanding**               |      |                                              |      | **Options Exercisable**               |   |
|---------------------------------|--------------------|---------------------------------------|-----------|---------------------------------------------------|-----------|---------------------------------------|--------|
| **Range of   Exercise  Prices** |               | **Number   Outstanding at  12/31/01** |      | **Weighted Average  Remaining  Contractual Life** |      | **Weighted  Average  Exercise Price** |   | **Number  Exercisable  at 12/31/01** |   | **Weighted  Average  Exercise Price** |   |
| $                               | 1.69               |                                  | 329,375   |                                              | 4.4 years |                                  | $      | 1.69 |   | 221,903 |   | $ | 1.69 |   |
| 5.63  to 7.08              |               | 794,625                               |      | 2.5 years                                         |      | 6.25                                  |   | 473,250 |   | 6.33 |   |
| $                               | 1.69  to 7.08 |                                  | 1,124,000 |                                              | 3.1 years |                                  | $      | 4.91 |   | 695,153 |   | $ | 4.85 |   |

 

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” we apply APB Opinion No. 25 andrelated interpretations in accounting for options granted to employees anddirectors under our stock incentive plan. Accordingly, no compensation expense has been recorded for optionsgranted under our stock incentive plan, as the exercise price has been equal tothe market price of the underlying stock on the dates of grant.  If we had elected to recognize compensationexpense based on the fair value of the options at the grant date as prescribedby SFAS 123, net loss and net loss per share would have been as reflected inthe pro forma amounts indicated below (in thousands, except per share amounts):

 
| **Year  Ended Dec. 31,**               |   | **2001** |        | **2000** |   | **1999** |   |
|----------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
| Net loss:                              |   |     |        |     |   |     |   |
| As reported                            |   | **$**    | **(10,669** | )        | $      | (22,529  | )      | $ | (9,013 | ) |
| Pro forma                              |   | **$**    | **(11,371** | )        | $      | (22,968  | )      | $ | (9,938 | ) |
| Net loss per basic and diluted  share: |   |     |        |     |   |     |   |
| As reported                            |   | **$**    | **(1.13**   | )        | $      | (2.38    | )      | $ | (0.95 | ) |
| Pro forma                              |   | **$**    | **(1.20**   | )        | $      | (2.43    | )      | $ | (1.05 | ) |

 

F-17

----

 

Theweighted-average fair value per option at the date of grant for options grantedin 2001, 2000, and 1999 was $0.81, $2.62, and $2.76 respectively.  The fair value of options was estimatedusing the Black-Scholes option-pricing model with the following assumptions:

 
|                             |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Expected dividend level          |   | **0**    | %      | 0        | %      | 0        | %      |
| Expected stock price volatility  |   | **63**   | %      | 54       | %      | 50       | %      |
| Risk-free interest rate          |   | **4.0**  | %      | 5.9      | %      | 5.5      | %      |
| Expected life of options (years) |   | **3.5**  |   | 3.5      |   | 3.5      |   |

 

During the years ended December 31, 2000 and 1999, inconnection with certain stock option exercises, employees surrendered 1,333($13,538 fair market value) and 48,649 ($451,179 fair market value) shares,respectively, of common stock as payment for the exercise prices of suchoptions and related withholding tax obligations.

 

Aetrium recorded a tax benefit of $10,784 and $58,353for the years ended December 31, 2000 and 1999, respectively, related to theexercise of nonqualified stock options, which amounts were credited toAdditional Paid-in Capital.

** **

**NOTE13: EMPLOYEE SAVINGS 401(k) AND STOCK PURCHASE PLANS**

 

Aetrium has a 401(k) employee savings plan, whichcovers full-time employees who are at least 21 years of age.  Our contributions to our savings plan, whichare at the discretion of management, amounted to $108,893, $140,907, and$231,377 in 2001, 2000 and 1999, respectively.

 

Aetrium also has a nonqualified employee stockpurchase plan.  Full-time eligibleemployees may purchase shares of common stock by contributing to our stockpurchase plan through payroll deductions. Employee contributions to our stock purchase plan are limited to 10% ofeach employee’s base compensation.  Ourstock purchase plan purchases shares on the open market at fair marketvalue.  At management’s discretion, wemay choose to contribute to our stock purchase plan. We contributed $4,984,$12,983, and $18,921 to our stock purchase plan in 2001, 2000 and 1999,respectively.

** **

**NOTE14: INCOME TAXES**

 

Theprovision (benefit) for income taxes is made up of the following components:

 
| **Year Ended December 31,**                 |   | **2001**     |         | **2000**   |   | **1999**   |   |
|---------------------------------------------|--------|--------------|--------------|------------|--------|------------|--------|
| Current tax provision (benefit):            |   |         |         |       |   |       |   |
| Federal                                     |   | **$**        | **(226,000** | **)**      | $      | —     |   | $ | 711,000 |   |
| State                                       |   | **—**   | ** **   | —     |   | 42,000     |   |
| Total current provision (benefit)           |   | **(226,000** | **)**        | —     |   | 753,000    |   |
| Deferred tax provision (benefit):           |   |         | ** **   |       |   |       |   |
| Federal                                     |   | **—**   | ** **   | 14,408,000 |   | (6,384,000 | )      |
| State                                       |   | **—**   | ** **   | 302,000    |   | (376,000   | )      |
| Total deferred provision (benefit)          |   | **—**   | ** **   | 14,710,000 |   | (6,760,000 | )      |
| Total provision (benefit) for  income taxes |   | **$**        | **(226,000** | **)**      | $      | 14,710,000 |   | $ | (6,007,000 | ) |

 

Thecumulative effect of a change in accounting principle included in the 2000consolidated statement of operations is net of a $550,000 deferred tax benefitwhich is not included in the table above.

 

F-18

----

 

An analysis of the effective tax rate on earnings anda reconciliation from the expected statutory rate are as follows:

 
| **Year Ended December 31,**                    |   | **2001**      |            | **2000**   |   | **1999**   |   |
|------------------------------------------------|--------|---------------|-----------------|------------|--------|------------|--------|
| Loss before income taxes                       |   | **$**         | **(10,895,313** | **)**      | $      | (6,994,552 | )      | $ | (15,020,106 | ) |
| Statutory federal tax rate                     |   | **34**        | **%**           | 34         | %      | 34         | %      |
| Tax benefit computed at federal statutory rate |   | **$**         | **(3,704,406**  | **)**      | $      | (2,378,148 | )      | $ | (5,106,836 | ) |
| State taxes, net of federal benefit            |   | **(273,170**  | **)**           | (71,624    | )      | (220,440   | )      |
| Increase (decrease) in tax from:               |   |          | ** **      |       |   |       |   |
| Goodwill amortization                          |   | **19,369**    | ** **      | 19,369     |   | 19,369     |   |
| Foreign sales corporation benefit              |   | **(23,800**   | **)**           | (56,100    | )      | (93,626    | )      |
| Tax-exempt interest income                     |   | **(9,915**    | **)**           | —     |   | (33,154    | )      |
| Business meals and entertainment               |   | **22,780**    | ** **      | 40,120     |   | 38,544     |   |
| Tax credits                                    |   | **(284,429**  | **)**           | (147,000   | )      | (456,000   | )      |
| Valuation allowance change                     |   | **4,113,125** | ** **      | 17,337,685 |   | —     |   |
| Other, net                                     |   | **(85,554**   | **)**           | (34,302    | )      | (154,857   | )      |
| Provision (benefit) for income taxes           |   | **$**         | **(226,000**    | **)**      | $      | 14,710,000 |   | $ | (6,007,000 | ) |

 

Deferred tax assets (liabilities) are comprised of thefollowing:

 
| **December 31,**                                                                                                                                                         |   | **2001**        |           | **2000**    |   | **1999**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|----------------|-------------|--------|------------|--------|
| Accounts receivable, principally due to allowances  for doubtful accounts                                                                                                |   | **$**           | **134,106**    |        | $      | 157,764    |   | $ | 159,410 |   |
| Inventories, principally due to reserves for excess  and obsolete  inventories and additional costs inventoried for tax purposes pursuant  to the Tax Reform Act of 1986 |   | **1,482,914**   |           | 898,365     |   | 1,271,503  |   |
| Employee compensation and benefits accrued for  financial reporting  purposes                                                                                            |   | **74,552**      |           | 137,280     |   | 105,825    |   |
| Amortization of intangibles                                                                                                                                              |   | **6,109,908**   |           | 6,257,183   |   | 6,635,959  |   |
| Tax credits and NOL carryforwards                                                                                                                                        |   | **13,707,360**  |           | 10,286,837  |   | 6,309,244  |   |
| Restructuring reserves                                                                                                                                                   |   | **303,664**     |           | 260,349     |   | —     |   |
| Other, net                                                                                                                                                               |   | **188,306**     |           | (110,093    | )      | 319,808    |   |
| Deferred tax asset — gross                                                                                                                                          |   | **$**           | **22,000,810** |        | $      | 17,887,685 |   | $ | 14,801,749 |   |
| Less, valuation allowance                                                                                                                                                |   | **(22,000,810** | **)**          | (17,887,685 | )      | —     |   |
| Net deferred tax asset                                                                                                                                                   |   | **$**           | **—**     |        | $      | —     |   | $ | 14,801,749 |   |

 

Aetriumhas Federal net operating loss carryforwards of approximately $34 million thatwill begin to expire in 2020 if not utilized. We also have state net operating loss carryforwards of approximately $14million that will expire at various times, beginning in fiscal year 2003, ifnot utilized.

 

Infiscal 2000, in accordance with Statement of Financial Accounting Standards No.109, due to recent operating losses, reduced sales order activity in late 2000,and softening industry conditions in early 2001, we recorded a valuationallowance against our deferred tax assets. The valuation allowance was $22.0 million and $17.9 million at December31, 2001 and 2000, respectively.  We donot expect to record any tax expense or benefit in the future until we areconsistently profitable on a quarterly basis.

** **

F-19

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**NOTE 15: BUSINESS SEGMENT, GEOGRAPHICAND SIGNIFICANT CUSTOMER INFORMATION, AND CONCENTRATION OF CREDIT RISK**

 

Weview our operations and manage our business as one segment, supplyingelectromechanical equipment to the semiconductor industry.  Factors used to identify our singleoperating segment include our organizational structure and the financialinformation used by our executive management in making decisions about how to allocateresources and assess performance.  Thefollowing table sets forth the various components of net sales by product lineas a percentage of total sales:

 
| **Year Ended December 31,**                 |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Test handlers                               |   | **53**   | %      | 52       | %      | 46       | %      |
| IC automation products                      |   | **16**   |   | 22       |   | 26       |   |
| Reliability and environmental test products |   | **18**   |   | 13       |   | 12       |   |
| Change kits and spare parts                 |   | **13**   |   | 13       |   | 16       |   |
| Total                                       |   | **100**  | %      | 100      | %      | 100      | %      |

 

Foreignsales from the United States were as follows:

** **
| **Year Ended December 31,** |   | **2001**      |          | **2000**  |   | **1999**   |   |
|-----------------------------|--------|---------------|---------------|-----------|--------|------------|--------|
| Asia                        |   | **$**         | **4,275,000** |      | $      | 12,253,000 |   | $ | 11,445,000 |   |
| Europe                      |   | **1,282,000** |          | 1,701,000 |   | 1,916,000  |   |
| Other                       |   | **1,757,000** |          | 988,000   |   | 2,052,000  |   |
| Total                       |   | **$**         | **7,314,000** |      | $      | 14,942,000 |   | $ | 15,413,000 |   |

 

Salesto a single customer represented 22.6% and 10.2% of total net sales in 2001 and2000, respectively.        Sales to asecond customer represented 13.8% and 14.4% of total net sales in 2000 and1999, respectively.  Sales to a thirdcustomer represented 10.7% of total net sales in 1999.

 

Wesell our products principally to manufacturers of integrated circuits, otherelectronic components, and semiconductor equipment. Our accounts receivablebalance is concentrated with customers principally in one industry; however, weregularly monitor the creditworthiness of our customers and credit losses havehistorically been minimal.

 

F-20

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