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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION 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 (I.R.S. Employer
incorporation or organization) Identification No.)
2350 HELEN STREET
NORTH ST. PAUL, MINNESOTA 55109
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (651) 704-1800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 24, 1999, 9,483,393 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the last reported sale price of
the Common Stock on that date as reported by the Nasdaq National Market),
excluding outstanding shares beneficially owned by directors and executive
officers, was approximately $55,170,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific pages are referred to herein) from the
registrant's Annual Report to Shareholders for the year ended December 31, 1998
(the "1998 Annual Report"). Part III of this Annual Report on Form 10-K
incorporates by reference information (to the extent specific sections are
referred to herein) from the registrant's Proxy Statement for its 1999 Annual
Meeting to be held May 18, 1999 (the "1999 Proxy Statement").
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PART I
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This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."
ITEM 1. BUSINESS.
Aetrium Incorporated ("Aetrium" or the "Company") designs,
manufactures and markets a variety of electromechanical equipment used in the
handling and testing of microelectronic components, including semiconductor
devices known as integrated circuits ("ICs") and other forms of electronic
components. The Company's primary focus is on high volume electronic component
types and on the latest package designs. Aetrium's products are purchased
primarily by semiconductor manufacturers, and their assembly and test
subcontractors, and are used in the test, assembly, and packaging portion of
semiconductor manufacturing. The Company's products automate critical functions
to improve manufacturing yield, raise quality levels, reduce manufacturing costs
and increase product reliability.
The Company has three principal product lines. The largest, in terms
of revenue, is its broad line of test handlers, which incorporate thermal
conditioning, contactor and automated handling technologies to provide automated
handling of ICs and other electronic components during production test cycles.
Test handler products are primarily produced by the Company's operations in
North St. Paul, Minnesota; San Diego, California; and Grand Prairie, Texas.
Change kits to adapt the Company's test handlers to different IC package
configurations or to upgrade installed equipment for enhanced performance also
represent a significant part of the Company's revenue. The Company's second
product line consists of its IC Automation products, which are produced in North
St. Paul and by the Aetrium WEB Technology operation in Dallas, Texas. The North
St. Paul operation's IC Automation products are sold to original equipment
manufacturers ("OEMs") to incorporate as the automated handling components of
such OEM's own proprietary equipment for a variety of other IC processing
requirements, such as marking, lead scanning, and lead trim and form. The
Aetrium WEB Technology operation's IC Automation products are sold to
semiconductor manufacturers, and used to automate the loading and unloading of
burn-in boards. The Company's third product line is specialty test equipment,
which includes reliability test equipment and environmental test equipment. The
Company's reliability test systems provide IC manufacturers with IC performance
data to aid in the evaluation and improvement of IC designs and manufacturing
processes to increase IC yield and reliability and are produced in North St.
Paul. The Company's environmental test equipment products are used for burn-in
testing of ICs and are produced at the Company's facility in Lawrence,
Massachusetts.
The Company's strategy has focused on revenue growth through product
line expansion, by both internal development and by acquiring complementary
technology, businesses, or product lines, and through customer satisfaction.
Company sales have increased at an average annual compounded growth rate of
approximately 30% during the period from 1986 through 1998. Currently, the
Company has an installed base of more than 6,000 test handlers, which the
Company believes is the second largest installed base among all test handler
manufacturers.
In 1998, the Company completed the acquisition of the equipment
business of WEB Technology Inc. ("WEB"), based in Dallas, Texas, by acquiring
certain assets and assuming certain liabilities of WEB. This acquisition
significantly expanded the Company's IC Automation product lines to include IC
automation products for loading and unloading burn-in boards. Products produced
by Aetrium WEB Technology include a line of burn-in board automation products
that can be configured to accommodate
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any burn-in board currently being manufactured.
In 1997, the Company completed two acquisitions that expanded its
test handler product lines. In April 1997, Aetrium acquired a line of test
handler products produced in its Grand Prairie, Texas, operation by acquiring
substantially all of the assets of Forward Systems Automation, Inc. ("FSA").
Products produced in Grand Prairie include test handlers for ICs as well as
so-called discrete components, which are a non-semiconductor form of electronic
component. In November 1997, Aetrium acquired a product line of pick-and-place
test handlers by acquiring certain assets and assuming certain liabilities of
the Handler Division of Advantek Inc., which extended Aetrium's product line of
pick-and-place test handlers for nonmemory ICs. The product line acquired from
Advantek was incorporated into and is produced at the Company's North St. Paul
facility.
The Company acquired the core products of its 5050 series of gravity
feed test handlers through its acquisition of Electro-Mechanical Systems, Inc.
("EMS") in 1988. Since then, the Company has expanded this series of products
through internal development to include a full range of thermal conditioning
capabilities, contactor change kits for a wide range of package types in the
largest segment of surface mount ICs, high performance contactors, dual test
site capability, quad test site capability, and more recently, micro small
outline package ("MSOP") test capability. Aetrium also acquired certain test
handler products through its acquisition of the assets of Sym-Tek Systems, Inc.
("SymTek") in November 1994, which allowed Aetrium to enter the memory IC market
with both high volume multisite pick-and-place and extensive multisite gravity
feed test handler product lines. The SymTek acquisition also extended Aetrium's
line of gravity feed test handlers for the nonmemory IC market.
The Company acquired its reliability test systems product line
through the purchase of the assets of Sienna Technologies, Inc. ("Sienna
Technologies") in December 1993. At the time of the acquisition, Sienna
Technologies' revenue was declining and customer confidence was eroding due in
part to product performance and customer service issues. Since the acquisition,
a new generation product has been developed and introduced, products have been
improved to address performance issues, customer service has improved, customer
confidence has been substantially restored, and gross profit margins have
increased.
Aetrium acquired its environmental test products through its
acquisition of substantially all of the assets of E.J. Systems, Inc. ("EJ
Systems") in December 1995. These products are primarily environmental
conditioning chambers for burn-in testing of ICs. Since the acquisition, the
Company has substantially increased marketing and product distribution efforts,
increased average selling prices, and improved manufacturing efficiencies.
Aetrium emphasizes both product quality and customer service to
achieve customer satisfaction, which is reflected in the certification of its
Minnesota facility in March 1995 as the first test handler producer to be
certified under the ISO 9001 program established by the European Community. In
1998, the Company's facilities in Lawrence, Massachusetts, and San Diego,
California, were ISO 9001 certified, and the Minnesota facility successfully
completed a recertification audit.
The Company was incorporated in Minnesota in December 1982. The
Company's executive offices are located at 2350 Helen Street, North St. Paul,
Minnesota 55109, and its telephone number is (651) 704-1800.
TEST HANDLER PRODUCTS
Test handlers are electromechanical systems interfaced with a tester
to form a test system designed to handle, thermally condition, contact and sort
ICs and other electronic components
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automatically during the final testing process. The components are loaded into
the handler from tubes or trays and then typically transported to a temperature
chamber within the test handler where they are thermally conditioned to the
required testing temperature. The component is then positioned against the test
handler contactor, which provides an electrical connection between the component
and the tester. After testing, the test handler sorts the component according to
test performance. In some cases, additional process steps are completed by the
test handler system, including a machine vision inspection of the IC package and
automatic placement of the device into a form of device transport media for
immediate shipment of the electronic component to the end user.
Traditionally, test handlers used gravity to move ICs and other
components through the handler system. In order to accommodate more fragile IC
package families, gravity feed systems have incorporated various velocity
limiting techniques to reduce the speed of IC packages and minimize IC damage
upon impact with other ICs or other stopping mechanisms. More recently,
pick-and-place test handler systems have been introduced for the IC package
families most easily damaged in handling, such as quad flatpack families
("QFPs"), ball grid array packages ("BGA") and some small outline packages
("SOPs"). Pick-and-place systems move ICs electromechanically, and thus can
avoid jarring stops and the resulting lead damage. Pick-and-place systems are
typically slower and more costly than gravity feed handlers.
Test handlers are designed for either memory ICs, nonmemory ICs, or
discrete components. Memory ICs require relatively long test times. In order to
achieve acceptable throughput rates, memory IC test handlers have been designed
to test up to 64 devices at a time. Nonmemory ICs and most forms of discrete
components require relatively short test times, and traditionally test times
have not been a limiting factor for throughput rates. Test times, however, have
increased as certain types of nonmemory ICs have become more complex and IC
manufacturers have also sought to fully utilize the capacity of their testers.
Accordingly, multisite test handlers, with as many as eight test sites, are now
available for appropriate nonmemory IC applications.
Test handlers must meet industry criteria for thermal conditioning,
contactor integrity and minimization of lead damage. Test handlers compete on
the basis of cost, throughput, versatility, reliability and the specific
application requirements of the IC manufacturer. The combination of these
factors measures the cost of ownership of the test handler per device tested.
Aetrium believes its broad line of test handlers competes favorably on the basis
of cost of ownership for a wide range of electronic component manufacturer
applications.
The Company's primary focus continues to be on the newer generation
ICs referred to as surface mount devices ("SMD") which represent the largest
volumes, the newest IC device types, and the fastest growing market in the
industry. The Company offers the broadest line of test handling products to the
microelectronics industry, addressing the full spectrum of the industry,
including discrete components. Aetrium's test handler products are complementary
in nature with minimal overlap of application and can be distributed and
serviced through a common organization for efficiency.
GRAVITY FEED TEST HANDLERS
5050 SERIES. Aetrium's 5050 Series of gravity feed test handlers for
nonmemory IC applications addresses a wide range of SOP package types, which
constitute the largest segment of all surface mount ICs. These handlers compete
most favorably in high-volume applications and their high throughput rates are
an added advantage in relatively short test time applications. Models within
this series vary on adaptability to different IC package sizes and
configurations and the temperature range available for thermal conditioning in
order to provide cost-effective solutions to a wide range of customer
requirements. The Company also offers dual test site and quad test site
capability within its 5050 Series
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of handlers to increase productivity and reduce testing costs in certain
applications.
300 SERIES. The 300 Series is a product line of gravity feed test
handlers designed to handle a wide variety of DIP devices. The 300 Series
provides hot and cold thermal conditioning with a temperature range of
- -60 degrees C to +150 degrees C with +/-2 degrees C control capabilities. A menu
driven CRT display allows the operator to set up the handler's operational
parameters as well as continually monitor the handler status. The handler can be
programmed to sort devices into user-defined categories.
MODEL M4300. The Model M4300 is a gravity feed test handler that
provides parallel testing of up to 32 memory ICs. The quick load spool design
reduces the number of moving parts in the test environment, eliminating multiple
test site adjustments common to other systems. The Model M4300 systems are
equipped with two separate environmental chambers, independently controlled with
a cold and hot temperature range of -60 degrees C to +150 degrees C.
PICK-AND-PLACE TEST HANDLERS
MODEL M3200. The Model M3200 test handler is a pick-and-place,
high-volume production application test handler for memory ICs. The M3200
addresses a wide range of IC package types that cannot be processed on gravity
feed test handlers without special carriers, and provides hot, ambient and cold
parallel testing with up to 32 test sites. Its horizontal tray based system
design provides package protection with input and output modules capable of
automatically loading and unloading tubes or trays.
MODEL M3200S. The Model M3200S test handler is a pick-and-place,
high-volume production application test handler for memory ICs. The M3200S
addresses the newest form of IC package types used for memory devices, including
chip scale and micro ball grid array-type packages that cannot be effectively
processed on older generation pick-and-place test handlers. It provides hot,
ambient and cold parallel testing with up to 32 test sites, and can be
configured to sort tested ICs in up to 13 individual sort categories. Its
horizontal tray based system design provides package protection with input and
output modules capable of automatically loading and unloading trays.
1000 SERIES. The 1000 Series pick-and-place test handlers are
offered in a full range of temperature options for thermal conditioning, and can
be configured to gently handle a wide variety of nonmemory devices. They feature
the Soft-Touch Probe(TM) to safely and reliably handle the most fragile IC
packages. Devices are transported with their leads up, virtually eliminating the
possibility of lead damage. The 1000 Series features "plunge to board"-type
contacting, and offers complete electrostatic discharge protection. The 1000
Series products can be modified with change kits, typically within 15 minutes,
to accommodate nearly every IC package configuration being manufactured in
volume today.
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MODEL 3000. The Model 3000 pick-and-place test handler tests ICs at
two test sites, which allows for significantly increased throughput as compared
to single site test handlers. The Model 3000 is offered in a full range of
temperature options for thermal conditioning, and can be configured to gently
handle a wide variety of nonmemory devices. It features the Soft-Touch Probe(TM)
to safely and reliably handle the most fragile IC packages. Devices are
transported with their leads up, virtually eliminating the possibility of lead
damage. The Model 3000 features "plunge to board"-type contacting, and offers
complete electrostatic discharge protection. The Model 3000 products can be
modified with change kits, typically within 15 minutes, to accommodate nearly
every IC package configuration being manufactured in volume today.
MODEL QT. The Model QT pick-and-place test handler is a bench-top
sized machine designed to accommodate small lot production runs and engineering
characterization testing. The QT can be configured for any device package
smaller than 2.5 inches wide, including ICs and discrete electronic components.
The QT input can accept ICs from metal or plastic tubes, a custom device tray,
or a bulk bowl feeder. The QT Series products are offered with several different
options for contacting, including "plunge to board"-type contacting.
2000 SERIES. The 2000 Series of pick-and-place test handlers are
designed for production testing of TO-type discrete electronic components. They
can be configured for up to four test sites and a variety of options for
contacting. The 2000 Series is offered with a number of options for input,
including bulk bowl feeders or tubes. The output options include bulk, tube, and
radial tape and reel. Other options include the capability to perform vision
inspection of the coplanarity of leads and to mark individual devices with a
laser marking system.
5000 SERIES. The 5000 Series of pick-and-place test handlers are
designed for production testing of SOT-type discrete electronic components. They
can be configured for up to six test sites and a variety of options for
contacting, including "plunge to board"-type contacting. The 5000 Series is
offered with a bulk bowl feeder input and a variety of output options including
bulk, tube, or radial tape and reel. Tested devices can be sorted into up to 19
programmable categories. Other options include the capability to perform vision
inspection of the coplanarity of leads and to mark individual devices with a
laser marking system.
7000 SERIES. The 7000 Series of pick-and-place test handlers are
designed for high-volume testing of MSOP- and TSSOP-type IC packages. They have
extruded, multi-track tray input. Contacting options include standard contacts
as well as "plunge to board"-type contacting. The 7000 Series is offered with
the capability to perform visual inspection of the coplanarity of leads and to
mark individual devices with a laser marking system. Devices can be sorted into
multi-track trays or tape and reel, with up to 19 programmable sort categories.
CHANGE KITS, UPGRADES AND SPARE PARTS
The Company has ongoing demand for IC package change kits for its
installed test handler equipment, including test handlers no longer included in
its active product line, and it sells a variety of change kits to accommodate
the growing variety of IC packages used by the IC industry. The demand for
change kits is driven by the introduction of new IC package types and production
volume changes experienced by the Company's end customers. Also included in
change kits are upgrade kits to enhance the performance of installed equipment.
IC AUTOMATION PRODUCTS
The Company believes that the growing number and volume of fine
pitch and other delicate IC
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packages is driving a demand for automated equipment for all IC manufacturing
processes. Existing processing equipment often will not accommodate these
package types or the numerous tray configurations used to transport them.
Aetrium believes that its IC Automation product line offers the most effective
handling technology to automate these manufacturing processes for increasingly
difficult to handle, newer generation ICs.
4800 SERIES. The 4800 Series is a line of products used to automate
the loading and unloading of burn-in boards. Burn-in boards vary in size and
density, and are used to place individual ICs into a convection oven for an
extensive reliability screening and stress testing procedure known as "burn-
in." The burn-in process screens for early failures by operating the IC at
elevated voltages and temperatures, usually at 125 degrees C (257 degrees F),
for periods typically ranging from 12 to 48 hours. Burn-in systems can process
thousands of ICs simultaneously, utilizing multiple boards. Most leading-edge
microprocessors, microcontrollers, digital signal processors, and memory ICs
undergo burn-in testing. Burn-in board automation products take untested ICs out
of trays or other media, place them into sockets on a burn-in board, and then
lock the socket. After the burn-in test is complete, the machine removes tested
ICs from the burn-in board sockets and sorts the ICs according to the results of
the test.
The 4800 Series comes in a single pick-up head version, a dual-head
version, and a recently introduced five-head version. The single and dual head
models are best suited for large IC packages or for those applications requiring
a quick conversion of the machine to handle a different IC package. The
five-head system is best suited to very high volume production applications. All
are available with a variety of input and output options, including tubes,
sleeves, or trays. Package positioning stations ensure device alignment into
socket and tray. Each version can be configured to identify a burn-in board
using bar coding, resistor array, or diode array. An optional stacked burn-in
board elevator and trolley allows the system to process up to 32 burn-in boards
without any operator intervention.
IC AUTOMATION PRODUCTS FOR OEMS. The Company began the development
of the IC Automation product line in 1990. This product line is marketed to
other semiconductor equipment manufacturers and currently consists of a series
of robotic electromechanical handling modules, each designed to perform a
specific handling function. Together these modules perform nearly all of the
handling functions necessary for the various IC manufacturing processes. Each
handling module has a microprocessor that directs the handling module's function
and communicates with other modules through a proprietary software protocol that
enables the transfer of ICs between modules in a logical and efficient manner.
The IC Automation handling modules can be readily assembled into
systems configured to provide nearly any IC routing pattern required by an IC
processing application, and can be readily integrated as a component of the
processing equipment. This generic nature of the IC Automation handling modules
allows the Company to provide a versatile, cost effective automation solution to
IC processing equipment OEMs that overcomes the handling automation challenges
presented by more fragile IC package types. The IC Automation modules can also
be adapted to provide an automated linkage between IC manufacturing processes,
thus offering the potential for seamless automated handling of ICs from trim and
form to packaging for shipment. The Company's IC Automation modules have been
incorporated in trim and form, marking, mark curing, lead inspection, mark
inspection, lead conditioning, media transfer and prom programming equipment to
accommodate various device characteristics and media packaging.
Following are the principal automation modules in the IC Automation
product line:
PICK-AND-PLACE MODULE. The pick-and-place module provides the means
to pick up, transport and place IC packages on an individual basis. The
pick-and-place module adapts to various end effectors
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that perform the actual picking and releasing of the IC package as the end
effectors are moved along a horizontal axis between fixed or user programmable
locations. The pick-and-place module can transport most IC packages from or to
tray, tube or other transport media to or from the IC process site. Standard
Aetrium end effectors are commonly purchased with the pick-and-place module,
although the module can easily accommodate customer-designed end effectors. The
pick-and-place module is currently in use by the Company's OEM customers in lead
inspection, mark inspection, mark curing, trim and form, taping, lead
conditioning, media transfer and prom programming equipment.
TRAY TRANSPORT MODULE. The tray transport module is a user
programmable IC tray handler that precisely indexes a tray of ICs row by row
through a process site. The tray transport module can accommodate a wide variety
of IC trays and tray matrix configurations including all industry standard
trays. Other customer trays can also be accommodated with the addition of
appropriate adapter kits. This module, together with the Company's
pick-and-place module, is used by the Company's OEM customers in lead
inspection, mark inspection, taping, lead conditioning, marking, media transfer
and prom programming equipment.
CONVEYOR BELT MODULE. The conveyor belt module is designed to
transport and index IC trays through a process. The transport speeds and the
number and size of the index steps are user programmable, providing a versatile
transport mechanism for those applications that require continuous, single
directional flow of IC trays to, through and from manufacturing processes. The
conveyor belt module is commonly used in conjunction with the tray
stacker/unstacker modules as an automation subsystem to provide a continuous
supply of trays with minimal operator intervention, and is currently in use by
the Company's OEM customers in lead inspection, mark inspection, trim and form,
media transfer, marking and mark curing equipment.
TRAY STACKER/UNSTACKER MODULE. The tray stacker/unstacker module
separates a single tray from a stack of up to 30 IC trays for individual
processing with no operator intervention, and operates in reverse sequence to
stack trays after processes are complete. This module, in conjunction with the
conveyor, is user programmable and precisely positions trays for further
processing and/or transport. Tray stacker/unstacker modules are currently in use
by the Company's OEM customers in lead inspection, mark inspection, marking,
mark curing, burn-in board loading, trim and form, media transfer and prom
programming equipment.
INVERTING END EFFECTOR. One of several end effector configurations,
this end effector inverts an IC 180 degrees from its previous position. This
capability is required, for example, in some inspection processes where the IC
is transported with the leads pointing down but must be inspected with the leads
pointing up and returned to the transport media with the leads pointing down.
The inverter module is used in conjunction with a programmable pick-and-place
module by the Company's OEM customers in lead inspection and mark inspection
equipment.
TAPING MODULE. The taping module provides an automated means for
indexing tape media to a position for placement of devices commonly transferred
with the pick-and-place module. A reel of tape is a medium often used to ship
ICs to customers. This module is currently used by the Company's OEM customers
in lead inspection, mark inspection and taping equipment.
SPECIALTY TEST EQUIPMENT
RELIABILITY TEST PRODUCTS
In December 1993, the Company acquired its reliability test systems
product line through the acquisition of substantially all of the assets of
Sienna Technologies. Since the acquisition the Company
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has developed and improved this product line to improve product performance and
satisfy the needs of its customers.
The IC industry's demand for higher performance devices with smaller
circuit geometries has led to significant technological changes in the materials
and processes used to manufacture ICs, including an emerging shift to copper
materials for the minute circuitry of the device. These changes in technology,
along with IC user demand for increased reliability, have created a need for
increasingly sophisticated reliability testing of IC designs and manufacturing
processes. The reliability test equipment product line includes a variety of
systems with which IC manufacturers can force precision levels of voltage and
current through ICs, collect and analyze relevant data, and predict lifetime
performance of ICs. This equipment can be utilized to perform reliability
testing of packaged and unpackaged ICs.
The Company has formally launched its Model 1164, including a suite
of applications for customers to perform a variety of tests. The Model 1164 is a
fundamentally improved design from the Company's previous reliability test
products. The Model 1164 features a modular design that allows for great
flexibility in performing reliability tests, and can test up to 4,096 devices at
a time or perform numerous simultaneous tests on smaller batches of ICs.
ENVIRONMENTAL TEST PRODUCTS
The Company acquired its environmental test equipment product line
from EJ Systems in December 1995, which developed the line in response to a
trend toward higher power and higher speed device applications. The
corresponding increase in power dissipation resulted from increased device
complexity (more circuits) within smaller geometries. This phenomenon is
especially evident in high pin count application specific integrated circuits
(ASICs) and microprocessors. This high degree of power dissipation (heat) led to
unique thermal conditioning problems in the testing of such devices. EJ Systems
developed environmental test equipment that permitted individual IC temperature
control using conduction (direct contact) method rather than the traditional
convection (forced hot air) method to thermally condition devices. These
techniques were patented and incorporated into the BAK-PAK(TM) Burn-In Systems.
This equipment also features the ability to interface high-speed test circuitry
in close proximity to the IC being tested.
The BAK-PAK technology has been designed into a module called the
QUBE-PAK(R). Each QUBE-PAK is housed in the BAK-PAK Tower system. The Tower
System can accommodate up to 32 QUBE-PAK modules, with multiple ICs on each QUBE
position. Each position is under individual thermal control and can dissipate up
to 100 watts of power.
In 1998, the Company determined that its TMU-100 Thermal Management
System, which performed thermal conditioning during the manual testing of
semiconductor devices, was not practical for use by customers in the field and
ceased marketing the product. During 1998, the Company continued to develop a
new thermal conditioning and thermal management concept that appears to have
significant potential for use in automated test handlers.
COMPETITION
The semiconductor capital equipment market is highly competitive. In
the market for test handler products, Aetrium competes with a number of
companies ranging from very small businesses to large companies, some of which
have substantially greater financial, manufacturing, marketing and product
development resources than the Company. Some of these companies manufacture and
sell both testers and test handlers. The Company believes its test handlers are
compatible with all major testers, including those manufactured by companies
that sell both testers and test handlers. The particular companies with
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which the Company competes vary with the Company's different markets, with no
one company dominating the overall test handler market. The companies with which
the Company competes most directly in the surface mount IC test handler market
include Advantest Corporation, Aseco Corporation, Cohu, Inc., Multitest
Electronic Systems GmbH and Micro Component Technology, Inc. The Company also
competes with Ismeca S.A. and Tesec Corporation in the market for test handlers
configured to handle passive and discrete electronic components.
The Company competes for test handler sales primarily on the basis
of effective handler throughput, cost of ownership, temperature accuracy,
contactor integrity and other performance characteristics of its products, the
breadth of its product lines, the effectiveness of its sales and distribution
channels and its customer service. The Company believes that it competes
favorably on all of these factors.
The market for burn-in board automation products is highly
competitive. Aetrium competes with a number of companies ranging from very small
businesses to large companies, some of which have substantially greater
financial, manufacturing, marketing and product development resources than the
Company. The companies with which the Company competes most directly in this
market include Schlumberger Ltd., SIPA, S.p.a., and Todo Seisakusho, Ltd.
The Company competes for burn-in board automation product sales
primarily on the basis of effective throughput, cost of ownership, versatility,
and other performance characteristics of its products, the breadth of its
product line, the effectiveness of its sales and distribution channels and its
customer service.
The Company believes that the market for its IC Automation products
sold on an OEM basis is emerging, with no clearly defined competitors offering
similar automated handling modules to the IC industry. Historically, OEMs
supplying equipment for IC manufacturing processes have developed custom or
semi-custom handling components. Many of these OEMs have internal development
capability for automated handling and many engineering companies also have
automated handling development capability. The Company believes, however, that
its IC Automation product line of generic automation modules offers OEMs the
only existing, developed solution for their new automated handling requirements.
In addition, the Company believes it offers standard generic handling modules to
its OEM customers at a price difficult for its OEM customers to achieve from
competitors or by developing internal capabilities, because of the greater
product volumes the Company can reach through multiple customers and
applications. The Company believes the economics, the current availability and
the effectiveness of its IC Automation products provide strong incentives to the
Company's OEM customers to forego new product development and to use Aetrium's
IC Automation handling modules.
The market for the Company's reliability test systems also is
competitive and the Company's competitors include QualiTau, Ltd. and Micro
Instruments, Inc.
There are also a number of companies that manufacture and sell
conventional burn-in equipment in the United States, which compete with the
Company's environmental test equipment product line, including Aehr Test
Systems, Inc. and Reliability, Inc. The Company is not aware of any competitors
that provide burn-in equipment that addresses the combined needs of high-power
dissipation and high-performance while maintaining sufficiently accurate thermal
conditioning.
MANUFACTURING AND SUPPLIES
The Company manufactures test handlers, reliability test equipment,
and certain of its IC automation products in North St. Paul, Minnesota; certain
of its test handler products at its facilities in
10
<PAGE>
San Diego, California, and Grand Prairie, Texas; its IC automation products used
for burn-in board applications in Dallas, Texas, and its environmental test
equipment in Lawrence, Massachusetts. The Company's manufacturing operations
consist of procurement and inspection of components and subassemblies, assembly
and extensive testing of finished products. Quality and reliability are
emphasized in both the design and manufacture of the Company's products. This
emphasis is reflected in the certification of the Company's North St. Paul
facility in March 1995 under the ISO 9001 certification criteria established by
the European Community for the standardization of manufacturing documentation
and processes, and successful recertification audit of the Minnesota facility.
The Company's San Diego and Lawrence facilities were also certified under the
ISO 9001 standards in 1998.
All components and subassemblies are inspected for mechanical and
electrical compliance to Company specifications. All finished products are
tested against Company and customer specifications, and fully assembled test
handler products are tested at all temperatures for which they are designed and
with all the IC packages to be accommodated. Where appropriate, the Company's
products are shipped in custom-engineered protective packaging to minimize
potential damage during shipment.
A significant portion of the components and subassemblies of the
Company's products, including PC boards, refrigeration systems, vacuum pumps and
contactor elements, are manufactured by third parties on a subcontract basis. As
a part of Aetrium's total quality management program, the Company has an ongoing
supplier quality program under which it selects, monitors and rates its
suppliers, and recognizes suppliers for outstanding performance.
Certain components are currently available from only a limited
number of sources. The Company currently has one purchased subassembly used in
certain tri-temperature test handlers that is only available from a sole source,
although efforts are ongoing to qualify a second source for such system. Aetrium
believes it can replace any of its suppliers within a time period consistent
with its business requirements. The Company also attempts to keep an adequate
supply of critical components in its inventory to minimize any significant
impact the loss of a supplier may cause.
CUSTOMERS
The Company relies on a limited number of customers for a
substantial percentage of its net sales. In 1998, its top three customers
accounted for approximately 37% of the Company's net sales. In 1997, its top
three customers accounted for approximately 44% of the Company's net sales. In
1996, its top three customers accounted for approximately 35% of the Company's
net sales. The loss of or a significant reduction in orders by these or other
significant customers, including reductions due to market, economic or
competitive conditions in the semiconductor industry, would adversely affect the
Company's financial condition and results of operations.
SALES AND MARKETING
The Company markets its test handler products, burn-in board
automation products, environmental test equipment and reliability test systems
through a combination of direct salespeople and independent manufacturers'
representatives and distributors. Aetrium sells its IC Automation Products
directly to OEM customers through its internal sales force. As of December 31,
1998, the Company had 16 U.S. manufacturers' representatives with an average of
3 salespeople each located throughout the U.S. and Canada in areas critical to
the Company's success. International distributors are located in the United
Kingdom, France, Germany, Switzerland, Holland, Sweden, Japan, Taiwan, Thailand,
Malaysia, Korea, Singapore, Hong Kong, China and the Philippines.
Aetrium's direct sales organization, comprised of 13 salespeople,
coordinates the activities of the
11
<PAGE>
Company's manufacturers' representatives and distributors and actively
participates with them in selling efforts. This enables the Company to establish
strong direct ties with its customers. The Company provides sales and technical
support to its manufacturers' representatives and distributors through the
Company's sales and service locations in North St. Paul, Minnesota; San Diego
and Santa Clara, California; Landisville, Pennsylvania; Austin, Dallas, and
Grand Prairie, Texas; and Saugus and Lawrence, Massachusetts.
Aetrium's marketing efforts include participation in industry trade
shows and production of product literature and sales support tools. These
efforts are designed to generate sales leads for the Company's manufacturers'
representatives, distributors and direct salespeople.
International shipments accounted for 28%, 29% and 25% of the
Company's net sales in 1996, 1997, and 1998, respectively. In addition, it is
not uncommon for U.S. customers to take delivery of products in the U.S. for
immediate shipment to international sites, particularly the IC Automation
products that are sold on an OEM basis. Most of the Company's international
shipments are made to international sites of U.S. electronic component
manufacturers, although there is a growing foreign customer base included in the
Company's international sales.
All of Aetrium's international sales are invoiced in U.S. dollars
and, accordingly, have not historically been subject to fluctuating currency
exchange rates. Credit limits have been established from time to time on the
Company's international distributors, who purchase products from the Company and
resell to end users. Irrevocable letters of credit are often used to minimize
credit risk and to simplify the purchasing/payment cycle.
RESEARCH AND DEVELOPMENT
Aetrium believes it must continue to enhance, broaden and modify its
existing product lines to meet the constantly evolving needs of the
semiconductor equipment market. To date, the Company has relied both on internal
development and acquisitions of technology and product lines to extend its
product lines, increase its customer base, and avoid reliance on any single
semiconductor equipment market segment, and to develop its IC Automation
products that are sold on an OEM basis. The IC Automation product line required
development of a software protocol that plays an important role in the success
of that product. Software is a critical element in the Company's reliability
test equipment and software development continues to play an increasingly
important role in test handling and burn-in board automation products. The
Company intends to bring additional resources to this area as required.
Product development expenses are typically split approximately 50%
for new product development and 50% for continuation engineering. In 1997 the
Company completed the Model 1164, and completed development of certain models in
the 5000 Series and the 7000 Series of test handlers. The Company completed
development of an upgraded Model 5050QTS to increase throughput and reliability
and commenced the design of its Model M3200S, which has a reduced footprint,
increased sort capability, and improved functionality from previous designs. In
1998 the Company substantially completed the Model 3000 and the Model M3200S,
introduced a new version of the 4800, and developed new test capabilities for
the Model 1164. The Company's continuing engineering efforts include development
of additional change kits to meet the expanding families of IC package types,
advancement of contactor technologies to meet the challenges of high performance
ICs, enhancement of the 4800 Series to increase throughput and reliability, and
enhancement of the command and control features of the 5050 product line.
The Company expenses all research and development costs, including
costs for software development as incurred. In 1996, 1997 and 1998, the
Company's expenses relating to research and
12
<PAGE>
development were approximately $7.6 million, $10.5 million and $12.2 million,
respectively. The Company's objective is to invest approximately 13% to 15% of
its net sales in research and development each year. The Company employed 105
engineering personnel as of December 31, 1998.
INTELLECTUAL PROPERTY RIGHTS
Aetrium attempts to protect the proprietary aspects of its products
with patents, copyrights, trade secret law and internal nondisclosure
safeguards. The Company currently holds several U.S. patents covering certain
features of its handling systems and IC Automation modules and the contactor
elements incorporated in certain of its test handlers and for elements of its
environmental conditioning chambers. The source code for the software contained
in the Company's products is considered proprietary and is not furnished to
customers. Some OEM customers have signed non-compete agreements with the
Company that deter them from direct competition with the IC Automation product
line. The Company has also entered into confidentiality agreements with each of
its key employees. Despite these restrictions, it may be possible for
competitors or users to copy aspects of the Company's products or to obtain
information that the Company regards as a trade secret.
Because of the rapid pace of technological changes in the
microelectronics industry, the Company believes that patent, trade secret and
copyright protection are less significant to its competitive position than
factors such as the knowledge, ability, and experience of the Company's
personnel, new product development, frequent product enhancements, name
recognition and ongoing, reliable product maintenance and support.
BACKLOG
The Company's backlog, which consists of customer purchase orders
that the Company expects to ship within the next 12 months, was approximately
$15.0 million as of December 31, 1998, compared to $32.5 million as of December
31, 1997. Because all purchase orders are subject to cancellation or delay by
customers with limited or no penalty, the Company's backlog is not necessarily
indicative of future revenue or earnings.
EMPLOYEES
As of December 31, 1998 the Company had 381 employees, including 178
in manufacturing, 105 in engineering and product development, 55 in sales,
marketing and customer service, and 43 in general administration and finance.
None of the Company's employees is represented by a labor union or is subject to
any collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are satisfactory.
CERTAIN IMPORTANT FACTORS
In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to differ
materially from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals,
include the following:
1. the Company's dependence on the microelectronics market
and the capital expenditures of electronic component
manufacturers;
2. the ability of the Company to manage its growth and to
integrate and assimilate recent and future acquisitions;
13
<PAGE>
3. new product development cycles and market acceptance of
new products;
4. potential fluctuations in the Company's operating
results based on factors such as cancellation or
rescheduling of orders, seasonal fluctuations in
business activity, and product announcements by the
Company or by competitors;
5. the impact of competition in the test handler, IC
automation equipment, reliability test equipment and
environmental test equipment markets;
6. the effect of customer concentration and the loss of any
significant customer on the Company's sales; and
7. volatility of the Company's stock price based on factors
including developments in the microelectronics industry
and high-technology industries generally, as well as
fluctuations in the Company's quarterly operating
results.
14
<PAGE>
ITEM 2. PROPERTIES.
The Company conducts manufacturing, product development, sales,
marketing and field service operations in North St. Paul, Minnesota, where the
Company currently occupies approximately 45,000 square feet under a lease which
expires in March 2006, with an annual rent of approximately $240,000. The lease
includes an option to the Company, exercisable at any time during the initial
lease term, to require construction of an additional approximately 45,000 square
feet for lease at the same rental rate. The Company's corporate functions, and
certain sales, marketing and development activities are conducted in an
adjacent, 30,000 square foot facility under a lease that expires in March 2006,
with an annual rent of approximately $198,000.
The Company conducts manufacturing, product development, and certain
sales and marketing activities in approximately 26,600 square feet in Grand
Prairie, Texas. The facility is leased from a partnership controlled by an
officer of the Company, under a lease that expires in 2003, with an annual rent
of $133,000. The Company believes the lease terms obtained at this facility
approximate the rates that could be obtained at comparable properties in that
area. The Company's manufacturing, product development, and certain sales and
marketing activities of its Aetrium WEB Technology operation occupy
approximately 29,400 square feet in Dallas, Texas, under a lease that expires in
April 2000. The annual rent is approximately $144,000.
The Company conducts manufacturing, product development and certain
sales and marketing activities in an approximately 42,000 square foot facility
located in San Diego, California under a lease that expires in 1999, with an
annual rent of approximately $275,000. The Company has entered into an agreement
with a property developer for construction of a 45,000 square foot facility in
Poway, California, that the Company will lease for a period of ten years. The
property is scheduled to be ready for occupancy in the third quarter of 1999,
concurrent with the expiration of the existing lease.
The Company also leases and occupies approximately 3,000 square feet
of space in Santa Clara, California under a lease that expires in 1999, with a
monthly rent of approximately $4,650. The Company uses this space for sales and
field service operations.
In Lawrence, Massachusetts, the Company conducts manufacturing,
sales and marketing and product development activities for its environmental
test product line in facilities with approximately 61,500 square feet under a
sublease that expires in December 1999, with an annual rent of approximately
$332,000. The Company has commenced an analysis to determine whether to renew
its sublease at such facility, or relocate the Lawrence operation to a different
facility upon the expiration of its current sublease.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
15
<PAGE>
The executive officers of the Company, their ages and the offices
held, as of February 19, 1999 are as follows:
NAME AGE POSITION
- ---- --- --------
Joseph C. Levesque 54 Chairman of the Board, President and Chief
Executive Officer
Darnell L. Boehm 50 Chief Financial Officer, Secretary and Director
Douglas L. Hemer 52 Group Vice President and Director
Daniel M. Koch 45 Vice President - Worldwide Sales
Gerald C. Clemens 47 Vice President - Reliability Test Products
Kenneth R. Lee 53 President - Lawrence Division
Farid J. Sabounchi 42 President - Grand Prairie Division
Keith E. Williams 55 President - Aetrium WEB Technology Division
John J. Pollock 39 Vice President - Corporate Marketing
Lee A. Schafer 38 Vice President - Corporate Planning
Stephen P. Weisbrod 58 Vice President - Corporate Technology
Paul H. Askegaard 47 Treasurer
Mr. Levesque has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since 1986. From 1973 to 1986,
Mr. Levesque served in various capacities and most recently as Executive Vice
President of Micro Component Technology, Inc., a manufacturer of integrated
circuit testers and test handlers. Mr. Levesque is also a director of TSI Inc.,
a publicly held maker of measurement and instrumentation equipment, and serves
on its compensation committee.
Mr. Boehm has served as Chief Financial Officer, Secretary and as a
director of the Company since 1986. From December 1994 until July 1995, Mr.
Boehm had also assumed executive management responsibilities for the Company's
San Diego Division. Mr. Boehm is also the principal of Darnell L. Boehm &
Associates, a management consulting firm. Mr. Boehm is also a director of
Rochester Medical Corporation, a public company, and serves on the audit and
compensation committees of such company. Mr. Boehm is also a director of Versa
Companies, a privately held company, and serves on its compensation and audit
committees.
Mr. Hemer has served as a director of the Company since 1986, and
has served as Group Vice President of the Company since August 1998. Prior to
this appointment, he served as the President of the San Diego Division of the
Company since February 1997. From May 1, 1996 until February 1, 1997, Mr. Hemer
served as the Company's Chief Administrative Officer. Mr. Hemer was a partner in
the law firm of Oppenheimer Wolff & Donnelly LLP for more than 15 years before
joining the Company. Mr. Hemer is also a director of Versa Companies, a
privately held company, and serves on its compensation and audit committees.
16
<PAGE>
Mr. Koch has served as the Company's Vice President - Worldwide
Sales since March 1991. From March 1990 to March 1991, Mr. Koch served as the
Vice President of Sales of Summation, Inc., a company involved with the testing
of integrated circuit boards. From December 1973 to March 1990, Mr. Koch served
in various sales positions and most recently as Vice President of Sales of Micro
Component Technology, Inc.
Mr. Clemens has served as the Company's Vice President - Reliability
Test Products since July 1995. From September 1993 to July 1995, Mr. Clemens
served as Vice President-Engineering. Mr. Clemens is also the principal of
Clemens Associates, a consulting firm. From August 1991 to September 1992, Mr.
Clemens was a Vice President at Vectorvision, Inc., a software company. From
June 1990 to April 1991, Mr. Clemens was a Vice President at Elke Corporation, a
software company.
Mr. Lee has served as President of the Lawrence Division since April
1997, and had served in executive management with that division as a consultant
since January 1996. Mr. Lee previously was a principal of Marlboro Associates, a
consulting practice. Mr. Lee was a co-founder of Aseco Corporation and served in
a number of capacities at Aseco Corporation from 1982 to 1994, most recently as
Vice President of Engineering.
Mr. Sabounchi has served as the President of the Grand Prairie
Division since April 1, 1997, when Aetrium completed its acquisition of FSA. Mr.
Sabounchi founded FSA in 1990 and served as its President and CEO until it was
acquired by the Company in April 1997. Prior to founding FSA, Mr. Sabounchi
served in various engineering and engineering management roles in the
semiconductor process equipment group of Teccor Electronics Inc.
Mr. Williams has served as the President of the Aetrium WEB
Technology Division since April 1, 1998, when Aetrium completed its acquisition
of the equipment business of WEB. Mr. Williams co-founded WEB in 1982, and
served as its President and CEO from its inception until it was acquired by the
Company in April 1998. Pursuant to a letter agreement dated April 1, 1998, the
Company offered, and Mr. Williams accepted, the position of President of Aetrium
WEB Technology for a minimum period of three years. Such letter also provides
that Mr. Williams cannot compete with the Company for the three year period of
the agreement.
Mr. Pollock has served as the Vice President - Corporate Marketing
since August 1998. He served previously as the General Manager of the Arden
Hills Division, and general manager of the North St. Paul Division. From
September 1996 to September 1997, Mr. Pollock was the Business Unit Manager of
the IC Automation products group. From September 1995 to September 1996, Mr.
Pollock was a product director within the Company's IC Automation products
group. From 1985 to 1995 Mr. Pollock was employed in various product engineering
and product marketing positions at Rosemount Aerospace Inc., a supplier of
measurement and instrumentation products to the aerospace industry.
Mr. Schafer has served as the Vice President - Corporate Planning
since August 1997. From August 1996 to August 1997, Mr. Schafer served as the
Company's Director of Investor Relations. From June 1990 to July 1996, Mr.
Schafer was senior editor and financial columnist for CORPORATE REPORT
MINNESOTA, a monthly business magazine published in Minneapolis, Minnesota.
Mr. Weisbrod has served as the Vice President - Corporate Technology
since March 1998. From 1994 to 1998, Mr. Weisbrod was Vice President for
systems, and a member of the board of directors, of Game Financial Corporation,
a provider of financial services to the gaming industry. From 1992 to 1994 Mr.
Weisbrod was President and Chief Operating Officer for Coda Music Technology, a
producer of technology-based music instruction systems. From 1992 to 1998 he was
also a principal of S. Weisbrod
17
<PAGE>
Consulting.
Mr. Askegaard has served as the Company's Treasurer since February
1992. From October 1986 to February 1992, Mr. Askegaard served as the Company's
Corporate Controller.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information under the caption "Price Range of the Company's
Common Stock" on page 24 of the Company's 1998 Annual Report is incorporated
herein by reference. The prices reflected in the table presented in the 1998
Annual Report do not include adjustments for retail mark-ups, mark-downs or
commissions.
The Company did not have any unregistered sales of equity securities
during the fourth quarter of 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The information under the caption "Selected Consolidated Financial
Data" on page 24 of the 1998 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 8 through 13
of the Company's 1998 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements of the Company and
the Independent Auditor's Report thereon are incorporated herein by reference
from the pages indicated in the Company's 1998 Annual Report:
Report of Independent Accountants--page 13.
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996--page 14.
18
<PAGE>
Consolidated Balance Sheets as of December 31, 1998 and 1997--page
15.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996--page 16.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996--page 17.
Notes to Consolidated Financial Statements--pages 18 to 23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the captions "Election of
Directors--Information About Nominees" and "Election of Directors--Other
Information About Nominees" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
The information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Election of
Directors--Compensation of Directors" and "Executive Compensation and Other
Benefits" in the Company's 1999 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1999 Proxy Statement is incorporated herein by
reference.
19
<PAGE>
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 of the Company and
the Independent Auditor's Report thereon are incorporated herein by reference
from the pages indicated in the Company's 1998 Annual Report:
Report of Independent Accountants--page 13.
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996--page 14.
Consolidated Balance Sheets as of December 31, 1998 and 1997--page
15.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996--page 16.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996--page 17.
Notes to Consolidated Financial Statements--pages 18 to 23.
(a) 2. FINANCIAL STATEMENT SCHEDULES OF REGISTRANT.
The following financial statement schedule is included herein and
should be read in conjunction with the financial statements referred to above:
Financial Statement Schedule:
II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Aetrium Incorporated
Our audits of the consolidated financial statements referred to in our report
dated January 29, 1999, appearing on page 13 of the 1998 Annual Report to
Shareholders of Aetrium Incorporated (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, such Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
20
<PAGE>
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
Schedule II
AETRIUM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND ACQUISITION BALANCE AT END OF
DESCRIPTION PERIOD EXPENSES RELATED(1) DEDUCTIONS PERIOD
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1996 287,200 515,467 0 (3,267) 799,400
1997 799,400 0 50,000 (589,800) 259,600
1998 259,600 545,000 50,000 (317,600) 537,000
INVENTORY OBSOLESCENCE RESERVE:
1996 3,307,744 488,000 0 (1,780,611) 2,015,133
1997 2,015,133 1,076,296 10,000 (1,116,329) 1,985,100
1998 1,985,100 3,290,200 0 (1,646,500) 3,628,800
WARRANTY RESERVE:
1996 585,000 631,535 0 (605,959) 610,576
1997 610,576 25,000 235,000 (308,376) 562,200
1998 562,200 661,000 120,000 (448,400) 894,800
</TABLE>
(1) Reserve increases related to the inclusion of newly acquired businesses.
(a) 3. EXHIBITS.
The exhibits to this Report are listed in the Exhibit Index attached
hereto.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 25, 1999, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to Aetrium
Incorporated, 2350 Helen Street, North St. Paul, Minnesota 55109; Attn.:
Shareholder Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual 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 the Company's Form
10-KSB for the year ended December 31, 1993) (File No.
0-22166).
2. Form of Non-Statutory Stock Option Agreement
(incorporated by reference to Exhibit 10.7 to the
Company's Form 10-KSB for the year ended December 31,
1993) (File No. 0-22166).
21
<PAGE>
3. 1993 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for year ended December 31, 1997) (File No.
0-22166).
4. Salary Savings Plan (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on
Form SB-2 (File No. 33-64962C)).
5. Employee Stock Purchase Plan (incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement
on Form S-8 (File No. 33-74616)).
6. Employment Agreement dated April 1, 1986 between Joseph
C. Levesque and the Company (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement
on Form SB-2 (File No. 33-64962C)).
7, Letter Agreement dated April 1, 1998 between the Company
and Keith E. Williams (filed herewith electronically).
(b) REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AETRIUM INCORPORATED
Date: March 27, 1998 By: /s/ Joseph C. Levesque
------------------------------------
Joseph C. Levesque
Chief Executive Officer and President
(principal executive officer)
By: /s/ Darnell L. Boehm
------------------------------------
Darnell L. Boehm
Chief Financial Officer and Secretary
(principal financial and accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 27, 1998 by the following 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
/s/ Terrance J. Nagel Director
- ---------------------------------
Terrance J. Nagel
23
<PAGE>
AETRIUM INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
- -------- ---- ----------------
<S> <C> <C>
3.1 The Company's Restated Articles of Incorporated by reference to Exhibit
Incorporation, as amended. 3.1 to the Company's Registration
Statement on Form SB-2 (File No.
33-64962C).
3.2 Articles of Amendment to the Company's Incorporated by reference to Exhibit
Articles of Incorporation, as amended 3.2 to the Company's Quarterly Report
for the quarter ended September 30,
1998 (File No. 0-22166).
3.3 The Company's Bylaws, as amended. Incorporated by reference to Exhibit
3.2 to the Company's Registration
Statement on Form SB-2 (File No.
33-64962C).
4.1 Specimen Form of the Company's Common Incorporated by reference to Exhibit
Stock Certificate. 4.1 to the Company's 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 the Company's 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 the Company's Registration
Statement on Form SB-2 (File No.
33-64962C).
10.3 Form of Incentive Stock Option Incorporated by reference to Exhibit
Agreement. 10.6 to the Company's Annual Report on
Form 10-KSB for the year ended
December 31, 1993 (File No. 0-22166).
10.4 Form of Non-Statutory Option Incorporated by reference to Exhibit
Agreement. 10.7 to the Company's Annual Report on
Form 10-KSB for the year ended
December 31, 1993 (File No. 0-22166).
10.5 Employment Agreement dated April 1, Incorporated by reference to Exhibit
1986, between the Company and Joseph 10.6 to the Company's Registration
C. Levesque. Statement on Form SB-2 (File No.
33-64962C).
10.6 Credit Agreement dated August 11, Incorporated by reference to Exhibit
1989, between Harris Bank and the 10.7 to the Company's Registration
Company. Statement on Form SB-2 (File No.
33-64962C).
10.7 Lease Agreement, dated July 19, 1995, Incorporated by reference to Exhibit
between KAMKO Investments and the 10.12 to the Company's Registration
Company Statement on Form SB-2 (File No.
33-98040).
10.8 Amendment to Lease Agreement, dated Incorporated by reference to Exhibit
September 26, 1995, between KAMKO 10.13 to the Company's Registration
Investments and the Company Industrial Statement on Form SB-2 (File No.
Lease Agreement between Parken 33-98040).
Investment Company
10.9 No. One N.V. and Sym-Tek Systems, Incorporated by reference to Exhibit
Inc., dated as of July 7, 1994 10.14 to the Company's Registration
Statement on Form SB-2 (File No.
33-98040).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
- -------- ---- ----------------
<S> <C> <C>
10.10 First Amendment to Industrial Lease Incorporated by reference to Exhibit
dated July 7, 1994 by and between 10.15 to the Company's Registration
Parken Investment Co. No. One N.V. c/o Statement on Form SB-2 (File No.
CBS Investment Realty Inc. and Aetrium 33-98040).
Incorporated
10.11 Asset Purchase Agreement, dated as of Incorporated by reference to Exhibit
December 29, 1995, between Aetrium 2.1 to the Company's Current Report on
Incorporated and E.J. Systems, Inc. Form 8-K dated January 16, 1996 (File
No. 0-22166).
10.12 Amendment No. 1 to Asset Purchase Incorporated by reference to Exhibit
Agreement, dated as of December 29, 2.2 to the Company's Current Report on
1995, between Aetrium Incorporated and Form 8-K dated January 16, 1996 (File
E.J. Systems, Inc. No. 0-22166).
10.13 Employee Stock Purchase Plan. Incorporated by reference to Exhibit
99.1 to the Company's Registration
Statement on Form S-8 (File No.
33-74616).
10.14 Agreement of Sublease, dated January Incorporated by reference to Exhibit
16, 1990, by and between General 10.19 to the Company's Annual Report
Signal Technology Corporation and E.J. on Form 10-KSB for year ended December
Systems, Inc. 31, 1995 (File No. 0-22166).
10.15 Asset Purchase Agreement, dated as of Incorporated by reference to Exhibit
March 28, 1997, between Aetrium 10.16 to the Company's Annual Report
Incorporated and Forward Systems on Form 10-K for year ended December
Automation, Inc. 31, 1997 (File No. 0-22166).
10.16 Asset Purchase Agreement, dated as of Incorporated by reference to Exhibit
November 3, 1997, between Aetrium 10.17 to the Company's Annual Report
Incorporated and Advantek Inc. on Form 10-K for year ended December
31, 1998 (File No. 0-22166).
10.17 Asset Purchase Agreement, dated as of Incorporated by reference to Exhibit
March 20, 1998, between Aetrium 2.1 to the Company's Current Report on
Incorporated and WEB Technology, Inc. Form 8-K dated April 15, 1998 (File
No. 0-22166).
10.18 Letter Agreement dated April 1, 1998 Filed herewith electronically.
between Aetrium Incorporated and Keith
E. Williams.
10.19 Indenture dated June 25, 1998 between Filed herewith electronically.
KAMKO Investments and the Company.
13.1 Excerpts from 1998 Annual Report to Filed herewith electronically.
Shareholders.
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit
21.1 to the Company's Annual Report on
Form 10-K for year ended December 31,
1997 (File No. 0-22166).
23.1 Independent Auditors' Consent. Filed herewith electronically.
27.1 Financial Data Schedule. Filed herewith electronically.
</TABLE>
25
April 1, 1998
Mr. Keith E. Williams
10501 Markison Road
Dallas, TX 75238
Dear Keith:
On behalf of Aetrium Incorporated, we are pleased to confirm our offer and your
acceptance of employment as President, Aetrium/WEB Technology. This agreement
includes your agreement to stay with the Company for a minimum period of three
years. In this role you will report to Joseph C. Levesque, President and Chief
Executive Officer.
Your salary will be $125,000 ($4,807.69 per biweekly pay period).
The Compensation Committee of the Aetrium Board of Directors has granted you an
option for 50,000 shares of Aetrium stock at an exercise price of $14.875 per
share, vesting equally on your anniversary date over the next three years.
Your employment will become effective today. In addition to your signing this
letter agreement, your employment is conditioned upon your signing the
Aetrium/WEB Technology Confidentiality Agreement, a copy of which has been
provided to you for your review and signature. Please return a signed copy of
that agreement together with a signed copy of this letter agreement to Joe
Levesque.
You have been provided with a complete Aetrium employee benefits package. This
package includes information on each of Aetrium's employee benefits including
health, dental, life, supplemental life, and disability insurance programs.
Information on the Company's 401(k) and flexible plans has also been included.
Although you and all other Aetrium executives are not eligible to participate in
the Company's Employee Stock Purchase Plan, information on this plan has been
included for future reference. Your position at Aetrium will put you in the
situation of being an "insider" for stock transaction purposes and you will be
subject to the same limitations and procedures as other executives at Aetrium.
We need you to complete an Insider Stock Trading Agreement for our records.
<PAGE>
Mr. Keith E. Williams
April 1, 1998
Page 2
You agree that for the three (3) year period of this agreement, you will not,
directly or indirectly, as an owner, operator, employee, agent, consultant or
otherwise, be involved in any business which competes with any of the businesses
of Aetrium Incorporated, or which solicits the employment of any personnel
employed in any such business during such three (3) year period or (with respect
to employees of Aetrium/WEB Technology) within twelve (12) months prior to this
date.
We acknowledge and agree that you may continue to devote time to the WEB
Technology, Inc. fluids business and the machine shops in which WEB Technology,
Inc. owns an interest, consistent with your responsibilities as President of
Aetrium/WEB Technology.
This offer and the referenced supplementary agreements represent the sole
agreement, and constitutes and expresses the entire agreement and understanding,
between you and Aetrium Incorporated regarding your employment.
We are confident that your association with Aetrium will prove to be mutually
challenging and rewarding, and we look forward to having you join our team.
Sincerely,
/s/ Michael J. Jaeb /s/ Joseph C. Levesque
Michael J. Jaeb Joseph C. Levesque
Vice President Corporate Human Resources President and Chief Executive Officer
and Administration
Accepted:
/s/ Keith E. Williams
Keith E. Williams
EXHIBIT 10.19
THIS INDENTURE, made in duplicate this 25 day of June, 1998.
PARTIES
by and between Kamko Investments, a Minnesota General Partnership
hereinafter designated and referred to as lessor, and Aetrium Incorporated, a
Minnesota Corporation hereinafter designated and referred to as tenant,
WITNESSETH: THAT said lessor in consideration of the rents and
covenants hereinafter mentioned, to be paid and performed by said tenant, does
hereby demise, lease and let unto the said tenant, and the said tenant does
hereby hire and take from the said lessor, the following described premises
situate in the City of North St. Paul County of Ramsey State of Minnesota
DESCRIPTION OF PREMISES.
to-wit: A 30,382 square foot building located at 2342, 2346, 2348 Helen Street
North St. Paul, Ramsey County, Minnesota, situated on acreage, the legal
description of which is: Lots 8, 9, 10, 11, and 12, Block 18, North
St. Paul Proper, Ramsey County.
TERM.
TO HAVE AND TO HOLD the above premises just as they are, without any liability
or obligation on the part of said lessor of making any alterations, improvements
or repairs of any kind on or about said premises or the building or buildings of
which they are a part, or the equipment, fixtures, plumbing, appliances, or
machinery in, upon or serving same, or the streets, alleys, areas, area-ways or
passages adjoining or appurtenant thereto, for the term of from and after the 15
day of March, 1998, to the 14 day of February 2006, both dates inclusive, for
the following purposes and for no other purposes, to-wit:
office space, manufacturing, sales, and services
NATURE OF OCCUPANCY.
RENT.
And the said tenant agrees to and with said lessor to pay the lessor as rent for
the above mentioned premises the sum of One million five hundred eighty-two
thousand three hundred sixty-eight and no/100------ Dollars ($1,582,368.00) in
monthly payments of Sixteen thousand four hundred eighty-three and no/100------
Dollars ($16,483.00), payable in advance on the first day of each and every
month for and during the full term of this lease, at the office of 5232
Glenbrook Avenue North, Oakdale, Minnesota 55128. (Prorated for the first and
last month if the term does not start on the first day of a month.)
TENANT TO MAINTAIN AND SURRENDER PREMISES IN GOOD ORDER.
The said tenant also covenants and agrees with the lessor as
follows: That the tenant will keep at his own expense said demised premises and
the equipment, plumbing, drains, fixtures, appliances and machinery in, upon,
serving or appurtenant to said demised premises, in good repair and in good
sanitary condition during said term, and that he will replace at his own expense
promptly any and all glass broken in or about said premises with glass of the
same quality; that he will make no alterations in or additions to said premises,
without first obtaining the lessor's written consent, and that he will not use
or permit anything upon said premises that will increase the rate of insurance
thereon, or anything that may be dangerous to life or limb, and that he will not
in any manner deface or injure said demised premises, or any part thereof, or
overload the floors, or do or permit anything to be done upon said premises or
in the passageways, alleys, areas, area-ways, sidewalks or streets adjacent
thereto, that will amount to or create a nuisance; and that he will not use said
premises or permit the same or any part thereof to be used for lodging or
sleeping purposes, or for any purpose contrary to the laws, ordinances or
regulations of the United States of America or the State of Minnesota, or the
City of North St. Paul or of any rules or regulations of the City of North St.
Paul, or of any boards or officers of said city; and the tenant agrees to return
said premises peaceably and promptly so the lessor at the end of the term of
this lease, or at any previous termination thereof, in as good condition as the
same are now in or may hereafter be put in, loss by fire and ordinary wear
excepted.
ICE AND SNOW.
UTILITIES.
And the tenant further covenants and agrees to keep the sidewalks
bordering on said demised premises (where the leased space borders upon a
sidewalk or passageway) and the roof of said demised premises at all times free
from ice and snow and other obstructions, and to neither waste nor misuse water,
electricity, gas, steam, or any other utilities or agencies which are or may be
furnished by the lessor, and to promptly pay all rates, costs and charges for
the same, except as to such of the same, if any, as the lessor has specifically
agreed herein to furnish free of charge.
SIGNS.
Lessee shall not erect or permit to be erected on said premises, any
signs on the exterior of the premises or buildings without the written consent
or lessor endorsed hereon nor place or permit to be placed in any portion of any
of the demised premises any weight or weights in excess of the reasonable or
safe carrying capacity of the structure.
SUBLEASING.
The tenant agrees that he will not sublet the demised premises, or
any part thereof, and will not assign this lease or any interest therein, nor
permit such lease to become transferred by operation of law or otherwise, and
that no act or acts will be done or suffered whereby the same may be or become
sublet or assigned in whole or in part, unless the written consent of the lessor
endorsed thereon shall be first obtained in each and every case of underletting
or assignment, as they shall from time to time occur to be desired, and that
nothing whatever shall be held to be a waiver of or supersede the necessity of
such endorsement.
BANKRUPTCY.
Any assignment, sale in bankruptcy or insolvency of the lessee may,
at the option of the lessor, be considered an assignment within the meaning of
this lease and as a breach of the covenants hereof.
*Such consent not to be unreasonably withheld
<PAGE>
NOTICE TO CLEAN PREMISES.
The tenant further covenants and agrees that the service of notice
by any officer of the City of N. St. Paul upon either party to this lease to
clean said premises, or to do any other act in connection therewith, shall be
conclusive evidence as between the parties hereto of the breach by the tenant of
the covenant with respect to the non-performance of which by the tenant such
notice has been served.
Any notice from the lessor to the tenant, relating to the demised
premises or the occupancy thereof, shall be deemed duly served if left at the
demised premises addressed to the tenant.
TENANT TO COMPLY WITH CITY REGULATIONS.
The tenant further covenants and agrees at its own expense to
observe and keep all regulations and requirements of the city of N. St. Paul or
other public authorities in force at the time of the taking possession by the
tenant of the demised premises or which may thereafter be made regarding the
condition and conduct of said demised premises, any part thereof, and the
sidewalks adjacent thereto, including all building, fire, sanitary, police or
other regulations.
QUIET ENJOYMENT.
The lessor agrees and covenants that the tenant, on paying the rent
and performing the covenants aforesaid, shall and may peaceably and quietly
have, hold and enjoy the said demised premises for the term aforesaid, except as
in this lease otherwise provided.
BOND AGAINST LIENS.
*by Tenant
It is understood and agreed with respect to all alterations and
repairs, improvements or alterations* to said demised premises, or any part
thereof, which shall only be with the written consent of the lessor, that tenant
shall and will in each instance save said lessor and said premises forever
harmless and free from all costs, damages, loss and liability of every kind and
character which may be claimed, asserted or charged, including liability to
adjacent owners based upon the acts of negligence of said tenants or their
agents, contractors or employees, or upon the negligence of any other person or
persons in or about said premises or upon the failure of any or either of them
to observe and comply with the requirement of the law or with the regulations of
the authorities in the said city of N. St. Paul and will preserve and hold the
lessor and said premises forever free and clear from liens for labor and
material furnished. And the tenant agrees that it will from time to time before
making any such repairs, improvements or alterations furnish the lessor with a
bond in an amount and with sureties satisfactory to the lessor conditioned for
the performance by the tenant of the matters and things in this paragraph
required to be done by the tenant.
RIGHT OF RE-ENTRY.
SUBLEASING.
TERMINATION OF LEASE UNDER BANKRUPTCY.
It is further agreed between the lessor and tenant this lease is
made upon the condition that if the tenant shall neglect or fail to keep,
observe and perform any of the covenants and agreements contained in this lease,
which are to be kept, observed or performed by the tenant, or if the leasehold
interest of the tenant shall be taken on execution or other process of law, or
if the tenant shall petition to be or be declared bankrupt or insolvent
according to law, or if the tenant shall vacate said premises or abandon the
same during the term of this lease, then and in any of said cases the lessor may
immediately or at any time thereafter, and without further notice or demand,
enter into and upon said premises, or any part thereof, in the name of the
whole, and take absolute possession of the same fully and absolutely, without
such re-entry working a forfeiture of the rents to be paid and the covenants to
be performed by the lessee for the full term of this lease, and may at the
lessor's election lease or sublet said premises, or any part thereof, on such
terms and conditions and for such rents and for such time as the lessor may
elect, and after crediting the rent actually collected by the lessor from such
reletting on the rentals stipulated to be paid under this lease by the tenant
from time to time, collect from the tenant any balance remaining due from time
to time on the rent reserved under this lease, charging to the tenant such
reasonable expenses as the lessor may expend in putting the premises in
tenantable condition. Or the lessor may at his election and upon written notice
to the tenant declare this lease forfeited and void, and may thereupon re-enter
and take full and absolute possession of said premises as the owner thereof, and
free from any right or claim of the tenant, or any person or persons claiming
through or under the tenant; and such election and re-entry last mentioned shall
be and constitute an absolute bar to any right to enter by the tenant upon the
payment of all arrearages of rent and costs after a dispossession under any suit
or process for breach of any of the covenants of this lease, and the
commencement by the lessor of any action to recover possession of said premises
aforesaid shall be deemed a sufficient notice of election of said lessor to
treat this lease as void and terminated, without the written notice above
specified, unless the lessor shall in writing, before beginning such proceeding,
notify the tenant that after obtaining such possession the lessor will continue
to look to the tenant for the performance of this lease and will submit the
premises on the tenant's account, in the manner as above provided.
<PAGE>
It is further agreed between the parties to this lease:
See attached Addendum to Lease Agreement for additional provisions. Also see
Exhibit "A"
Lessee, upon leaving the premises hereby leased, shall at his own
expense remove all ashes, dirt, rubbish and refuse, and upon lessee's failure so
to do, lessor may immediately without further notice to lessee do the same at
lessee's expense, which the lessee shall immediately pay upon receipt of a bill
for same from lessor.
NOTICE OF VACANCY (ILLEGIBLE) TO TERMINATE.
The tenant further agrees to give the lessor written notice 120
days before the expiration of this lease of his intention to vacate at the end
of this lease otherwise the lessor will have the option of continuing this lease
for one year from and after the expiration of this lease without notice to the
tenant. If, however, the lessor does not elect to so continue this lease and the
tenant remains in said premises after the expiration of the term of this lease,
such remaining in possession shall not, except at the option of the lessor,
extend the term of this lease, and the tenant shall promptly vacate said
premises; and if for any reason the tenant does not promptly vacate the premises
at the end of the term, the tenant agrees to pay the lessor, for such time as
elapses between the end of the term of this lease and the time when the tenant
actually vacates the premises, a pro rata rental equal to one and one-half (1
1/2) times the rent provided to be paid during the term of the lease.
The tenant agrees that no assent, express or implied, by the lessor
to any breach of any of the tenant's covenants or agreements shall be deemed or
taken to be a waiver of any succeeding breach of such covenant.
RIGHT OF ENTRY.
The lessor shall at all times have the right to enter upon said premises to
inspect their condition, and at his election to make reasonable and necessary
repairs thereon for the protection and preservation thereof, but nothing herein
shall be construed to require the lessor to make such repairs, and the lessor
shall not be liable to the tenant, or any other person or persons, for failure
or delay in making said repairs, or for damage or injury to person or property
caused in or by the making of such repairs, or the doing of such work. The
lessor shall have the right during the last 30 days of the term of this lease to
place and maintain on the demised premises and in the windows thereof the usual
notice of "To Let" or "To Rent," and to show said premises to prospective
tenants.
HEIRS AND OTHERS.
Each of the covenants, provisions, terms and agreements of this
lease shall inure to the benefit of and shall be obligatory upon the respective
heirs, executors, administrators, successors and assigns of the lessor and
tenant respectively.
There are no understandings or agreements outside of this lease.
IN TESTIMONY WHEREOF the lessor and tenant have hereunto set their
hands and seals the day and year first written. We, the tenant, hereby
acknowledge that at the time of making and delivery of this lease and mortgage
lien, the Lessor delivered to us a full, true and complete copy of same.
Signed, sealed and delivered in presence of:
/s/ Michael J. Jaeb
- ---------------------
Michael J. Jaeb As to Tenant
Vice President, Corporate Administration
/s/ G.T. Mulcahy, Sr.
- ---------------------
As to Lessor
COUNTY OF _________________}
} ss.
STATE OF __________________}
ON THIS ________DAY OF _________19__, BEFORE ME, A NOTARY PUBLIC WITHIN AND
FOR SAID COUNTY, PERSONALLY APPEARED _______________________ TO ME PERSONALLY
KNOWN, WHO, BEING BY ME DULY SWORN, DID SAY THAT THEY ARE THE VICE-PRESIDENT AND
SECRETARY OF THE CORPORATION NAMED IN THE FOREGOING INSTRUMENT, AND THAT THE
SEAL AFFIXED TO SAID INSTRUMENT IS THE CORPORATE SEAL OF SAID CORPORATION, AND
THAT SAID INSTRUMENT WAS SIGNED AND SEALED IN BEHALF OF SOLD CORPORATION BY
AUTHORITY OF ITS BOARD OF ___________ AND SAID ___________ ACKNOWLEDGED SAID
INSTRUMENT TO BE THE FREE ACT AND DEED OF SAID CORPORATION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COUNTY OF _________________}
} ss.
STATE OF __________________}
ON THIS ________DAY OF _________19__, BEFORE ME, A ________________
WITHIN AND FOR SAID COUNTY, PERSONALLY APPEARED
--------------------------------------------------------------
--------------------------------------------------------------
TO ME KNOWN TO BE THE PERSON DESCRIBED IN AND WHO EXECUTED THE FOREGOING
INSTRUMENT, AND ACKNOWLEDGED THAT HE EXECUTED THE SAME AS _________ FREE ACT AND
DEED.
--------------------------------------------------------------
--------------------------------------------------------------
ASSIGNMENT
For value received, the undersigned
,Tenant,
hereby sells, assigns, transfers, and sets over unto all h____ right, title and
interest to the within lease and premises therein described; It being
understood, however, that this transfer in no way releases said tenant from h___
liability for the performance of all the terms, covenants and payment of rental
under said lease.
__________________________________________
For value received, ________________ hereby assumes all the
obligations under the terms of the within lease and agrees to perform all of the
terms, covenants and conditions and pay the rent as therein stipulated, pursuant
to the above agreement. __________________________________________
The within landlord hereby consents to the above assignment.
__________________________________________
__________________________________________
Dated this ___________ day of _____________ A. D. 19__
BUSINESS LEASE
FROM
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Premises -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amount -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date __________________________, 19 _________
Expiration _____________________, 19 _________
================================================================================
<PAGE>
Addendum to Lease Agreement Dated June 25, 1998 between KAMKO Investments, a
Minnesota General Partnership and Aetrium Incorporated, a MN Corporation
PROPERTY TAXES AND ASSESSMENTS
Tenant shall pay all property taxes and assessments due and payable in the
calendar year of 1998 and each year thereafter throughout the term of the lease
and extensions thereof which are assessed against the legal description set
forth in Exhibit "A" attached hereto. Said taxes and assessments shall be paid
by tenant when due and payable to the assessing authority.
RIGHT OF FIRST REFUSAL
Should Lessor opt to sell the Demised Premises at any time after the initial
term of the lease for so long as the lease remains in effect, Tenant shall have
Right of First Refusal.
EMINENT DOMAIN
If the whole of the Demised Premises shall be taken by any public authority
under the power of eminent domain, then the term of this lease shall cease as of
the day possession shall be taken by such public authority, and the rent shall
be paid up to that date with a proportionate refund by Lessor of such rent as
shall have been paid in advance. In the event that more than twenty percent
(20%) of the floor area of the building or the parking areas in the Demised
Premises be so taken, the Lessor shall have the right to terminate this lease at
the time and with the rent adjustment as above in this article provided, by
giving Tenant written notice of termination within thirty (30) days after the
taking of possession by such public authority.
If twenty percent (20%) or more of the floor area of the building in the Demised
Premises or twenty percent (20%) or more of the parking areas shall be so taken,
then Tenant shall have the right either to terminate this lease, or, subject to
Lessor's right of termination as set forth above in this Article, to continue in
possession of the remainder of the Demised Premises upon notice in writing to
Lessor of Tenant's intention within thirty (30) days after such taking of
possession. In the event Tenant elects to remain possession, and Lessor does not
so terminate, all of the terms herein provided shall continue in effect except
that the rent shall be proportionately and equitably abated based on the area of
the Demised Premises, if any, taken and Lessor shall make all necessary repairs
of alterations to the building.
All damages awarded for such taking under the power of eminent domain, whether
for the whole or a part of the Demised Premises, shall be the property of Lessor
whether such damages shall be awarded as compensation for diminution in value of
the leasehold or to the fee of the Demised Premises; provided, however, that
Lessor shall not be entitled to any separate award made to Tenant for loss of
business, depreciation to, and cost of removal of stock and fixtures, and
relocation of its business.
1
<PAGE>
INDEMNITY AND INSURANCE
INDEMNITY. To the fullest extent permitted bv law, the Tenant agrees to
indemnify and hold harmless Lessor, Lessor's agents, and employees of any of
them, from and against all claims, damages, losses and expenses including but
not limited to attorneys fees, arising from or resulting from any accident,
injury or damage whatsoever caused to any person or to the property of any
person during the term hereof in or about the Demised Premises and not arising
or resulting in connection with the construction cIff the Demised Premises or
arising from or resulting from any accident,injury or damage during the term
hereof outside of the Demised Premises but within the legal description set
forth on Exhibit "A" attached hereto where such accident, injury or damage
results from a negligent act or omission on the part of Tenant or Tenant's
officers, agents, and emplofees of any of them.
ASSUMPTION OF RISK. Tenant agrees to use and occupy the Demised Premises and to
use all other nar-ts of the land in the legal description as set forth in
Exhibit "A" attached hereto at its own risk, and further aarees that Lessor
shall have no reszonsibilitv or liabilitv for ~ny loss or damage to fixtures,
equipment, merchandise or other personal property c"F Tenant not covered by
construction casualty insurance, which Lessor agrees to carry during the
course of construction of the De,.aised Premises with coverage limits reasonably
acceptable to Tenant.
LIABILITY INSURANCE. Tenant shall maintain in effect at all times during the
term of the Lease and any extension thereof a "Commercial General Liability
insurance" policy (Insurance Services Office form title), providing coverage on
an "occurrence," rather than on a "claims made" basis, which policy shall
include, but not be limited to, coverage for Bodily Injury, Property Damage,
Personal Injury, Contractual Liability (applying to this Document), Independent
Contractors, and Products-Complete Ozerations liability, or an equivalent form
(or forms), so long as such eauivalent form (or forms) affords coverage which
is at least as broad. An Insurance Sez-vices Office "Comprehensive General
Liability" policy which includes a Broad Form Endorsement GL 0404 (Insurance
Services Office designation) shall be considered to be an acceptable equivalent
policy form. Such policy shall name Lessor as an Additional Insured thereunder.
Tenant agrees to maintain at all times during the term of this Lease and any
extensions thereof, a combined liability policy limit of at least $2,000,000.00
each occurrence applying to liability for Bodily Injury, Personal Injury, and
Property Damage, WHICH combined limit may be satisfied by the limit afforded
under its Commercial General Liability Policy, or equivalent policy, or by such
policy in combination with the limits afforded by an Umbrella or Excess
Liability Policy (or policies); provided, that the coverage afforded under any
such Umbrella or Excess Liability Policy is at least as broad in all material
respects as that afforded by the underlying Commercial General Liability Policy
(or equivalent
2
<PAGE>
underlying policy), and further, that Lessor is included as an Additional
Insured thereunder.
Such Comprehensive General Liability Policy and Umbrella or Excess Liability
Policy (or policies) may provide aggregate limits for some or all of the
coverages afforded thereunder, so long as such aggregate limits have not, as of
the beginning of the lease term or at any time during the lease term, been
reduced to less than the total required each occurrence limit stated above, and
further, that the Umbrella or Excess Liability Policy provides coverage from the
point that such aggregate limits in underlying Umbrella or Excess Liability
Policy which "drops down" to respond immediately over reduced underlying limits,
or in place of exhausted underlying limits, but subject to a deductible or
"retention" amount shall be acceptable in this regard so long as such deductible
or "retention" amount does not cause Tenan-t's total deductible or retention for
each occurrence to exceed the amount shown in the provision immediately below.
Tenant's liability insurance coverage may be subject to a deductible,
"retention" or "participation" provision) requiring the Tenant to remain
responsible for a stated amount or percentage of each covered loss; provided,
however, that such deductible, retention, or participation amount shall not
exceed $5,000.00 each occurrence.
At least 10 days prior to the beginning of the term, Tenant shall provide Lessor
with evidence that the insurance coverage required under this paragraph will be
in full force and effect at the beginning of the term. At least 10 days prior to
termination of any such coverage, Tenant shall provide Lessor with evidence that
such coverage will be renewed or replaced upon termination with insurance that
complies with these provisions. Such evidence of insurance shall be in the form
of a standard certificate of Insurance, or in such other form as Lessor may
reasonably request, and shall contain sufficient information to allow Lessor to
determine whether there is compliance with these provisions. At the request of
Lessor, Tenant shall, in addition to providing such evidence of insurance,
promptly furnish lessor with a complete (and if so requested, insurer-certified)
copy of each insurance policy intended to provide coverage required hereunder.
All such policies shall be endorsed to require that the Insurer provide at least
60-day notice to Lessor prior to the effective date of policy cancellation,
nonrenewal, or material adverse change in coverage terms.
All policies of insurance required under this paragraph shall be issued by
financially responsible insurers, and all such insurers must be acceptable to
Lessor. Such acceptance by Lessor shall not be unreasonably withheld or delayed.
An insurer with a current A.M. Best Company rating of at least A:VII shall be
conclusively deemed to be acceptable. In all other instances, Lessor shall have
1O business days from the date of receipt of Tenant's evidence of insurance to
advise Tenant in writing of any insurer that is not
3
<PAGE>
acceptable to Lessor. If Lessor does not so respond in writing within such
10-day period, Tenant's insurer(s) shall be deemed to be acceptable to Lessor.
At the request of Lessor, Tenant shall promptly furnish loss information
concerning all liability claims brought against Tenant (or any other Insured
under Tenant's required policies), that may affect the amount of liability
insurance available for the benefit and protection of Lessor under this
provision. Such loss information shall include such specifics and be in such
form as Lessor may reascnably require.
If Lessor's mortgagee should require additional insurance coverage than that
required herein, Tenant shall procure such insurance at its own expense.
PROPERTY INSURANCE.
(a) Risks to be Insured. Tenant, at its sole ccst and expense,
will maintain the following insurance:
(i) insurance on land and buildings described in
Exhibit "A" and "C" attached hereto against
loss by fire and other hazards covered by
the so-called "a11 risk" form of policy, and
including Earthquake coverage and
"Contingent Liability from Operation of
Building Laws" coverage, in an amount equal
to the actual replacement cost thereof
(exclusive of foundations and excavations)
without deduction for physical depreciation.
While any building or other improvement Is
in the course of being constructed or
rebuilt on the Land (other than the
Addition, as hereinafter defined, during
initial construction), the aforesaid hazard
insurance shall be in builder's risk
completed value form, including coverage
available on the so-called "all-risk"
non-reporting form of policy, for an amount
equal to 100% of the insurable replacement
value of such building or other improvement.
Such insurance shall include Valuable Papers
and Records coverage, providing for
Reproduction Cost measure of recovery, and
coverage for damage to Electronic Data
Processing Equipment and Media, including
coverage for the perils of mechanical
breakdown and electronic disturbance.
(ii) If the Property includes steam boilers or
other equipment excluded from coverage
pursuant to a Boiler and Machinery
exclusion, Boiler and Machinery insurance in
an amount satisfactory to Lessor.
(iii) If the Land or any part thereof is located
in a designated official flood-hazardous
area, flood insurance insuring the buildings
and improvements now existing or hereafter
erected on the Land in an amount equal to
the maximum limit of coverage made available
with respect to
4
<PAGE>
such buildings and improvements under the Federal flood
Disaster Protection Act of 1973, as amended, and the
regulations issued thereunder.
(iv) Insurance against interruption of business in respect of
the property in an amount sufficient to pay one (1)
year's rent insurance, taxes, and utilities that are
required to be paid by the Tenant by the terms of this
lease.
(b) Policy Provisions. All insurance policies and renewals thereof
required herein shall:
(i) be written by an insurance carrier satisfactory to
Lessor;
(ii) contain a loss payee and standard mortgage clause in
favor of and in favor form acceptable to Lessor.
(iii) contain an agreement of the insurer that it wi11 not
cancel or modify the policy except after 30 days' prior
written notice to Lessor.
(iv) have an "agreed amcunt" endorsement or otherwise exclude
co-insurance participation by the insured; and
(v) be reasonably satisfactory to Lessor in all other
respects.
(c) Delivery of policy. Tenant will deliver to the Lessor's
Mortgagee copies of policies satisfactory to the Mortgagee
evidencing the insurance which is required herein, and Tenant
shall promptly furnish copies of all renewal notices and all
receipts of paid premiums received by it. At least 30 days
prior to the expiration date of a required Policy, Tenant
shall deliver to Lessor a copy of a renewal policy in form
satisfactory to Lessor. Lessor may from time to time, but not
more often than every 3 years require an insurance appraisal
reasonably satisfactory to Lessor, confirming the replacement
cost of the insured property. If Tenant has a blanket
insurance policy in force providing coverage for several
properties of Tenant, including the subject Property, Lessor
will accept a certificate of such insurance together with a
copy of such blanket insurance policy; provided the
certificate sets forth the amounts of insurance and coverage,
and such amounts are at least equal to the amounts required
hereinabove, and otherwise complies with the requirements
hereof.
(d) If Lessor's mortgagee should require additional insurance coverage than
that required herein, Tenant shall procure such insurance at its own
expense.
5
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WAIVER OF SUBROGATION. Lessor hereby waives and releases all claims, liabilities
and causes or act on against Tenant and its agents, servants and employees for
loss or damage to, or destruction of, the buildings and other improvements
situated in the Demised Premises and land area in the legal description set
forth in Exhibit "A" attached hereto resulting from fire or other perils
included in standard coverage insurance, whether caused by the negligence of any
of said persons or otherwise. This waiver shall remain in force so long as
Lessor/Tenant's insurer shall consent thereto without additional premium, and if
additional premium is charged, Tenant shall pay said add additional premium.
Tenant hereby waives and releases all claims, liabilities and causes of action
against Lessor and its agents, servants and emmployees for loss or damage to, or
destruction of, any of the improvements, fixtures, euqipment, supplies,
merchandise andother property whether that of Tenant or of others in, upon or
about the Demised Premises, and land within legal description as set forth in
Exhibit "A" attached hereto or the buildings orimporvements of which the Demised
Premises are a part resulting from fire or the other perils included in standard
extended coverage insurance, whether caused by the negligence of any of said
persons or otherwise.
DAMAGE BY FIRE OR OTHER CASUALTY
In the case the building in which the Demised Premises are situated shall be
partially or totally destroyed by fire or other casualty so as to become
partially or totally untenantable, the same shall, be repaired as soon as
reasonably possible by the Lessor and in any event within one hundred twenty
(120) days after repairs are commenced, unless Lessor shall elect not to rebuild
or Tenant shall elect to terminate this lease, as hereinafter provided, and a
just and proportionate part of the rent shall be abated until so repaired based
upon the time and to the extent the Demised Premises are untenantable.
in case the Demised Premises shall be destroyed or so damaged by fire or other
casualty as to render more than twenty-five ercent (25%) thereof untenantable or
in case of any substantial destruction or damage not covered by
Lessor's/Tenant's insurance, or in the event Lessor's mortgagee shall apply the
insurance proceeds to prepay its mortgage rather than to rebuild said building,
the Lessor may, if it so elects, rebuild or restore said buildings to good
condition and fit for occupancy within a reasonable time after such destruction
or damage, or may at its election, by notice in writing within thirty (30) days
after such destruction or damage, terminate this lease. If Lessor elects to
rebuild or restore said buildings, it shall, within said thirty (30) day period,
give Tenant thereof notice of its intention so to do and proceed w th the
rebuilding and restoration promptly as may be reasonable, and a just and
proportionate part of the rent shall be abated until so repaired based upon the
time and to the extent the Demised Premises are untenantable. In case the
Demised Premises shall be destroyed or so damaged by fire or other casualty
6
<PAGE>
as to render more than twenty-five percent (25%) thereof untenantable, Tenant
may at its election, by notice in writing within thirty (30) days after such
destruction or damage, terminate this lease.
In no event in the case of any such destruction shall Lessor be required to
repair or replace Tenant's stock in trade, leasehold improvements or other
property. Tenant covenants to make such repairs and replacements.
SUBORDINATION OF LEASE
Tenant agrees that Tenant's rights under this lease are and shall always be
subordinate to the lien of any mortgage or mortgages or trust deed now or
hereafter placed from time to time upon the security thereof. Tenant shall,
upon written notice from Lessor, execute such other and further instruments or
assurances subordinating this lease to the lien or liens of any such mortgage
or mortgages or trust deed or should the Lessor so request, this lease shall be
prior in right to any such lien, mortgage or deed of trust and Tenant shall
upon Lessor's request execute such instruments as may be required to
establish such priority.
Tenant shall receive a non-disturbance agreement from any mortgage or
subsequent holder of a deed of trust or lien. If Tenant shall fail to execute
any such document within twenty (20) days after demand in writing, the tenant
will be in default of this lease.
ESTOPPEL CERTIFICATES
DELIVERY OF STATEMENT. At any time, and from time to time, after the
Commencement Date each party shall, within twenty (20) days after written
request therefor from the other party, deliver to such party a statement in
writing certifying that this lease is in full force and effect, setting forth
all modifications or amendments which exist with respect thereto, the dates to
which rent, taxes, insurance, and utilities have been paid, the balance of any
security deposit held by other party, all known breaches by the other party of
the terms, covenants and conditions hereof, and other matters reasonable
requested by the other party.
RELIANCE UPON STATEMENT. Any statement delivered to Lessor as required by this
Article may be relied upon by any purchaser, mortgagee or assignee of all or any
part of Lessor's interest in the Demised Premises. Any such statement delivered
to Tenant may be relied upon by any subtenant, assignee or mortgagee of all or
any part of Tenant's interest in the Demised Premises, provided such sublease,
assignment or mortgage is made with the consent of Lessor as elsewhere in this
lease provided.
FAILURE TO FURNISH STATEMENTS. The failure of either party to furnish the
statement required hereby within the said twenty (20) day period shall be deemed
to be an acknowledgment by the party requested to give such statement that this
lease is in full force
7
<PAGE>
and effect, without modification or amendment, that rent, taxes, insurance, and
utilities have been paid in full to and including the respective due dates
therefor immediately preceding the date of such request, that no rent has been
paid in advance of the due date therefor as set forth herein, that no security
deposit is held by the party requesting such statement and that the party
requesting such statement has performed all of the terms, covenants and
agreements required of it hereunder.
OPTION TO RENEW
Provided that the Tenant is not in default and upon not less than ninety (90)
days written notice by Tenant to Lessor given prior to expiration of the initial
term of this lease of Tenant's intent to exercise said option to extend the term
of this lease for a period of five (5) additional years commencing on the date
following expiration of the initial term of this lease on the same terms and
conditions as provided in the Lease except that the annual rent for the first
year during said option term shall be equal to the sum of (a) $160,500
plus a percentage increase of the product of said $160,500 and the overall
percentage increase of the Consumer Price Index - Minneapolis, St. Paul
(all-items index) over the initial term of this lease, and the rent for each
year thereafter for the remainder of the option renewal period shall also be
adjusted upward from said rent payable in prior year of the said option period
by any annual percentage increase in said CPI. Monthly rent shall be so adjusted
at the beginning of the option term and at the beginning of each year thereafter
until said option period expires.
UTILITIES
Lessee shall pay the cost of all utilities and public services including but not
limited to, gas, water, electric, sanitary sewer, surface water removal, tree
trimming, snow removal, lawn and garden maintenance and upkeep.
8
<PAGE>
OPTION TO PURCHASE
Provided that the Tenant is not in default and upon not less than one hundred
twenty (120) days written notice by Tenant to Lessor given prior to expiration
of the initial term off this lease of Tenant's intent to exercise said option,
Lessor hereby grants to Tenant an option to purchase the Demised Premises on
expiration of such initial term. The purchase price for the Demised Premises
(the "Purchase Price") will be determined by appraisal of the fair premises as
or option exercise, as follows. The Demised Premases will be appraised by an
appraiser designated by Lessor, an appraiser designated by Tenant, and an
appraiser mutually designated by the parties, or failing that, designated by the
Ramsey County District Court upon application of either party. All appraisers
will be MAI appraisers having at least five (5) years experience in the
appraisal of commercial properties in the Twin Cities metropolitan area. The
appraisers will be directed to submit their appraisals in writing to the parties
thirty (30) days prior to expiration of the initial term of this lease. The
Purchase Price will be the average of the two closest appraisals. The Purchase
Prices will be the average of two appraisals if the third appraisal is not
received within fifteen days after receipt of the first two appraisals. Each
party will pay for the appraisal of the appraiser designated by such party, and
the parties will bear equally the cost of the third appraisal. Lessor will,
within thirty (30) days after option exercise, furnish a complete abstract of
title for the Demised Premises certified to date to include propler searches
covering bankruptcies, and state and federal judgments and liens and levied and
pending special assessments. The Tenant will be allowed thirty (30) days after
receipt thereof for examination of said title and the making of any objections
thereto, said objections to be made in writing or deemed to be waived. If any
objections are so made Lessor will be allowed sixty (60) days to make such title
marketable. If said title is not marketable and is not made so within sixty (60)
days from the date of written objections as above provided, Tenant's option
exercises will be null and void, at, Option of the Tenant, and neither party
will be liable for damages hereunder to the other party. If the title to the
Demised Premises is found marketable or is so made within said time, and Tenant
defaults in payment of the Purchase Price as provided hereunder, then Lessor may
terminate the sale of the Demised Premises, time being of the essence hereof.
This provision will not deprive either party of the right of enforcing the
specific performance of the sale of the Demised Premises provided such sale is
not terminated as aforesaid, and provided action to enforce such specific
performance is commenced within six (6) months after such right of action
arises, nor will it deprive either party of the right of enforcing a claim for
money damages resulting from the other party's default hereunder.
9
<PAGE>
Closing will be held at Tenant's offices or other mutually agreed upon location
on the expiration date of the initial term of this lease or, if later, fifteen
(15) days after receipt by the parties of the second appraisal submitted
hereunder. At the closing, the Purchase Price will be paid in immediately
available funds by wire transfer, and Lessor will execute and deliver an
affidavit, in the customary form, relative to 10 judgments, federal tax liens,
mechanic's liens, bankruptcy and outstanding interests in the Demised Premises
and a warranty deed conveying marketable title to the Demised Premises subject
only to the following exceptions:
Building and zoning laws, ordinances, State and Federal
regulations;
Reservation of any minerals or mineral rights to the State of
Minnesota; and
Utility, drainage and flowage easements and road right of way of record.
Lessor will pay for any real estate transfer tax and the cost of recording any
documents necessary to establish marketable and record title in Lessor. Lessor
will execute any further instruments, documents or agreement reasonably
necessary to effectuate the sale contemplated hereunder.
In the event closing is delayed beyond the expiration of the initial term of
this lease, this lease will continue until closing, provided that no rent will
accrue after the first two months of such hold over period if such delay
results from objections to title timely made or other reasons within the control
of Lessor.
10
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MISCELLANEOUS
WAIVER. One or more waivers of any covenant, term or condition of this lease by
either party shall not be construed by the other party as a waiver of a
subsequent breach of the same covenant, term or condition. The consent or
approval of either party to or of any act by the other party of a nature
requiring consent or approval shall not be deemed to waive or render unnecessary
consent to or approval of any subsequent similar act. The failure or delay on
the part of either party to enforce or exercise at any time any of the
provisions, rights or remedies in the lease shall in no way be construed to be a
waiver thereof, nor in any way to affect the validity of this lease or any
part thereof, or the right of the party thereafter enforce each and every
such provision, right or remedy.
RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed or construed
by the parties hereto or by any third party to create the relationship of
principal and agent or of partner ship or of joint venture or of any association
whatsoever between Lessor and Tenant, it being expressly understood and agreed
that neither the method of commutation of rent nor any other provisions
contained in this lease nor any act or acts of the parties hereto shall be
deemed to create any relationship between Lessor and Tenant other than the
relationship of Lessor and Tenant.
GOVERNING LAW. The laws of the State of Minnesota shall govern the validity,
performance and enforcement of this lease.
MARGINAL HEADINGS. The paragraph titles herein are for convenience only and do
not define, limit or construe the contents of such paragraphs.
ACCORD AND SATISFACTION. No payment by Tenant or receipt by Lessor of a lesser
amount than the Rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated unpaid installment thereof, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, and Lessor may accept such
check or
11
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payment without prejudice to Lessor's right to recover an amount due hereunder
or pursue any other remedy in this lease provided.
SHORT FORM LEASE. At the request of either party to this lease, the other party
shall enter into a Short Form lease for the purpose of recording the same in
lieu of recording this lease.
ENTIRE AGREEMENT. This lease and the exhibits attached hereto and forming a part
hereof set forth all the covenants, promises, agreements, conditions and
undertakings between the Landlord and Tenant concerning the Demised Premises,
and there are no covenants, promises, agreements, conditions or undertakings,
either oral or written, between them except those herein set forth. Except as
herein otherwise provided, no subsequent alteration, amendment, change or
addition to this lease shall be binding upon Lessor or Tenant unless reduced to
writing and signed by other parties hereto.
FORCE MAJEURE. Except as otherwise provided herein, in the event that either
party hereto is delayed or hindered in or prevented from the performance of any
act required hereunder by reason of strikes, lockouts, labor troubles,
inability to procure materials, failure of power, restrictive government laws
or regulations, riots, insurrection, war or other reason of a like nature not
the fault of the party delayed in performing work or doing act required under
the terms of this lease, then performance of such act shall be excused for
the period of the delay and the period for the performance of any such act
shall be extended for the period equivalent to the period of such delay.
EXECUTION AND COPIES. This lease shall not be binding upon the parties hereto
until duly executed by an authorized officer or official of both parties and
delivered to the other party. This lease may be executed in multiple
counterparts, each of which shall be deemed an original; and it shall not be
necessary in making proof of this lease to produce or account for more than one
such counterpart.
COVENANT TO BIND SUCCESSORS. The terms, covenants, and conditions hereof shall
bind and inure to the benefit of the heirs, legal
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<PAGE>
representatives and permitted successors, and assigns of the respective parties
hereto.
KAMKO Investments, a
MN General Partnership
by: /s/ G.T. Mulcahy, Sr.
---------------------------
Partner
Aetrium Incorporated, a
MN Corporation
by: /s/ Michael J. Jaeb
-----------------------
Vice President, Corporate Adminstration
13
<PAGE>
Exhibit A
LEGAL DESCRIPTION OF PROPERTY FOR LEASE
"THE DEMISED PREMISES"
That part of Lots 1 through 7 inclusive and that part of Lots 15 through 18
inclusive and that part of Lots 25 & 26 all in Block 18, North St. Paul Proper,
Ramsey County, Minnesota described as beginning at the southwest corner of said
Lot 7; thence on an assumed bearing of North 88 degrees 31 minutes East along
the south line of said Lot 7 and its easterly extension and along the south line
of Lot 15 a distance of 402.56 feet to the west line of the east 200 feet of
said Lots 15 through 18; thence North 0 degrees 23 seconds West along said 43
minutes 08 seconds West 181 feet to the southeasterly line of the northwesterly
16 feet of said Lot 1; thence southwesterly along said southeasterly line to the
east-west centerline of Section 12, Township 29, Range 22; thence North 88
degrees 31 minutes East 14.87 feet to the northwesterly line of said Lots 3 & 4;
thence South 51 degrees 16 minutes 52 seconds West along said northwesterly line
159.11 feet to the west line of said Block 18; thence South 0 degrees 24 minutes
26 seconds East along said west line to the point of beginning.
Together with right of ingress and egress over and across the three following,
parcels:
Lots 15, 14 and the north 10 feet of Lot 13 all in Block 3 the
North St. Paul Land Co.'s Re-arrangement No. 1 in Blocks 14,
15 & 18 of North St. Paul Proper, Ramsey County, Minnesota.
That part of Lot 28, Block 3, The North St. Paul Land Co.'s
Re-arrangement No. 1 in Blocks 14, 15 & 18 of North St. Paul
Proper, Ramsey County, Minnesota, which lies between the
westerly extensions of the north line of Lot 15 and the north
line of Lot 13 all in said Block 3.
The north 45 feet of the west 80 feet of the east 200 feet of
Lot 18 and the south 20 feet of the west 80 feet of the east
200 feet of Lot 19 all in Block 18, North St. Paul Proper,
Ramsey county, Minnesota.
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following table sets forth certain statements of operation items as a
percentage of net sales for 1998, 1997 and 1996:
1998 1997 1996
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 59.6 48.7 44.9
- --------------------------------------------------------------------------------
Gross profit 40.4 51.3 55.1
- --------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 34.6 21.2 20.8
Research and development 20.4 15.5 13.1
Non-recurring charges 10.9 14.0 --
- --------------------------------------------------------------------------------
Total operating expenses 65.9 50.7 33.9
- --------------------------------------------------------------------------------
Income (loss) from operations (25.5) .6 21.2
Other income, net 1.6 1.7 1.9
- --------------------------------------------------------------------------------
Income (loss) before income taxes (23.9) 2.3 23.1
Income tax benefit (provision) 8.1 (.4) (7.3)
- --------------------------------------------------------------------------------
Net income (loss) (15.8)% 1.9% 15.8%
================================================================================
NET SALES:
The following table sets forth the various components of net sales by product
line as a percentage of total sales:
1998 1997 1996
- --------------------------------------------------------------------------------
Test handlers 48% 54% 59%
IC Automation products 26 24 15
Reliability and environmental test products 12 10 13
Change kits and spare parts 14 12 13
- --------------------------------------------------------------------------------
100% 100% 100%
================================================================================
Net sales decreased 12% to $59.6 million in 1998, compared with $67.6
million in 1997 and $58.4 million in 1996. Equipment sales decreased in 1998 due
to extremely difficult industry conditions during the final nine months of 1998.
Net sales for mature product models decreased most significantly, due to excess
capacity at many customer sites. Test handler sales decreased in 1998 due to the
industry downturn. Test handler sales increased during 1997 due to higher unit
volume, increased average selling prices and new customer penetration. The
acquisition of Forward Systems Automation (FSA) in April 1997 contributed to the
sales growth of test handler products during the last three quarters of 1997.
Net sales of IC Automation products declined slightly in 1998 due in part to a
decision on the part of a significant customer to exit the business as part of a
settlement of litigation with an unrelated third party, and to excess inventory
at original equipment manufacturers (OEMs) due to poor industry conditions.
These factors were mostly offset by sales of the IC Automation product line
acquired from WEB Technology Inc. on April 1. Sales of environmental test
equipment products increased in 1998, offset by a decline in reliability test
products sales due to poor industry conditions. Sales of environmental and
reliability test equipment declined slightly in 1997.
Sales of change kits and spare parts decreased slightly in 1998
primarily due to poor industry conditions during the final three quarters of the
year. Sales of change kits and spare parts increased in 1997 due to an increase
in the company's installed base and an overall improvement in market conditions
during the year.
GROSS PROFIT:
Gross profit decreased 31% to approximately $24.1 million in 1998,
compared with $34.7 million in 1997 and $32.2 million in 1996. As a percentage
of net sales, gross profits were 40.4% in 1998, including a second quarter
inventory charge of $3.7 million related primarily to the suspension of
marketing efforts for certain older, less profitable products. This compares
with gross profits, as a percentage of net sales, of 51.3% and 55.1% in 1997 and
1996, respectively. Excluding the one-time charge, gross profit was 46.6% of net
sales in 1998. Excluding the one-time charge
8 Aetrium 1998
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of $3.7 million, the decrease in the gross margin in 1998 is primarily due to
the inclusion of sales of the product line acquired in the Advantek Handler
Division acquisition in November 1997; the significant shift in the sales mix to
more pick-and-place test handlers, which tend to have lower margins than
gravity-feed test handlers; the costs associated with the production ramp of new
products; and under-absorbed manufacturing overhead due to lower volumes at the
North St. Paul and San Diego facilities during the final three quarters of the
year. These factors were partially offset by cost containment efforts
implemented during the latter half of the year, improved gross margins of
environmental test products, and the inclusion of relatively high-margin sales
of the IC Automation product line acquired from WEB Technology on April 1. Gross
profit margins for the North St. Paul product lines declined slightly in 1997
due to a product mix shift to significantly more IC Automation modules, which
are generally sold at slightly lower gross margins than the North St. Paul test
handler products. The consolidated gross margin declined in the fourth quarter
of 1997 due to the inclusion of lower margin shipments of the product line
acquired from Advantek in November 1997. As a result of these factors, the
consolidated gross margin declined in 1997 to 51.3%, compared with 55.1% for
1996.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses increased 44% to $20.7 million in
1998, compared with $14.3 million in 1997 and $12.2 million in 1996. The
increase is primarily attributable to higher general and administrative expenses
to support the businesses acquired during 1997 and 1998. The increase is also
due to a significant increase in amortization expense related to the
amortization of intangible assets capitalized in these business acquisitions.
Selling expenses increased in 1998 due to expenses to support the sales and
service activities of the acquired businesses. Selling expenses increased in
1997 due to higher commissions and other expenses associated with increased
orders and shipments. As a percentage of net sales, selling, general and
administrative expenses were 34.6%, 21.2% and 20.8% in 1998, 1997 and 1996,
respectively.
RESEARCH AND DEVELOPMENT:
Research and development expenses increased 16% to $12.2 million in 1998,
compared with $10.5 million in 1997 and $7.6 million in 1996. The increase in
1998 is attributable to the inclusion of expenses for continued development of
the product lines acquired from WEB Technology Inc. in April and includes the
cost of completing certain development projects that were in process at the time
of the acquisition. The increase is due also to a full year of inclusion of the
results of FSA and the product line acquired from Advantek, both in 1997. These
factors were partially offset by cost containment measures implemented in the
second and third quarters of 1998, including a reduction of engineering
personnel. The increase in 1997 is due to the expenses of FSA and the expenses
associated with the product line acquired from Advantek, as well as to generally
higher levels of product development activity. As a percentage of net sales,
research and development expenses amounted to 20.4%, 15.5% and 13.1% in 1998,
1997 and 1996, respectively. Over time, the company expects that research and
development spending will generally average between 13% and 15% of net sales.
NON-RECURRING CHARGES:
In the second quarter of 1998, the company recorded special charges totaling
$10.2 million, as follows (in thousands):
Write down of inventories to net realizable value $3,696
Write-off of purchased technology 2,080
Employee severance and related costs 547
In-process research and development 3,900
- --------------------------------------------------------------------------------
$10,223
================================================================================
Restructuring Charge:
Of the $10.2 million, $6.3 million was related to actions taken in response to a
major downturn in the current and forecasted business outlook for the
semiconductor and semiconductor equipment industries that took place during the
period. The company reduced employee headcount by approximately 50 people and
suspended the active marketing of certain product models. Concurrent with these
decisions, a determination was made that certain purchased thermal control
technology was impractical for use in the company's products and thus would not
be commercially successful. The impact of this downturn and these decisions is
that a certain amount of the company's inventories and capitalized technology
were impaired. Of the $6.3 million restructuring charge, $3.7 million is
included in cost of goods sold and $2.6 million is included in operating
expenses under non-recurring charges. Cash expenditures associated with the
special charges during 1998 were approximately $468,000, relating primarily to
severance costs.
Aetrium 1998 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In-Process Research and Development:
On April 1, 1998, the company acquired certain assets and assumed certain
liabilities of WEB Technology Inc. for a total purchase price of $23.6 million
and accounted for the acquisition as a purchase. Fair values of the intangible
assets acquired were determined by an independent third party appraisal firm.
The fair value of acquired intangible assets was determined to be $20.7 million,
which included developed technology, core technology, customer-related
intangibles, assembled workforce, and in-process research and development. Of
this amount, $3.9 million was allocated to in-process research and development
and was charged against income in 1998 because the underlying research and
development projects had not yet reached technological feasibility and had no
alternative future uses.
The company is using the acquired in-process research and development
to complete the following new products: high-speed burn-in board
loader/unloader; a pick-and-place test handler; and an offline
sorter/binner/media transfer system for semiconductor devices. The third party
appraiser estimated that the stage of completion, based upon costs incurred as
of the date of acquisition, the company's estimate of cost and time to complete,
and the company's estimate of complexity factors, to be 64%, 79% and 26%,
respectively. As of the date of acquisition, the estimated cost to complete
these projects to a point of technological feasibility was $755,000, to be
incurred in 1998 and 1999. As of December 31, 1998, the company believed that
the estimate of time and cost had not materially changed.
As of the date of acquisition, the company anticipated the initial
products developed from the acquired in-process research and development to be
introduced in the latter part of 1998 and in 1999. The company expects that all
the acquired in-process research and development will reach technological
feasibility and has introduced and profitably sold certain products during 1998.
However, there can be no assurance that the commercial viability of the acquired
in-process research and development projects will achieve management
expectations.
The nature of the efforts required to complete development of the
acquired in-process research and development into commercially viable products
principally relates to the completion of all designing, prototyping,
verification, testing and documentation activities necessary to establish that
the products can be manufactured to meet design specifications, including
functions, features, technical performance requirements and product cost.
The value assigned to purchased in-process research and development was
determined by an independent third party appraiser, which projected cash flows
related to future products expected to be derived once technological feasibility
is achieved. Projected cash flows recognized the contribution of core technology
and other supporting assets and were discounted back to their present value at a
rate of 30%. The resulting net cash flows from such projects are based on
estimates made by the company's management of revenue, cost of sales, research
and development costs, selling, general and administrative costs, and income
taxes resulting from such projects. These management estimates are based on
expected trends in technology, historical margin and expense levels of
comparable products, and the nature and expected timing of completion of
acquired in-process research and development. If these products are not
successfully developed or do not achieve market acceptance, the sales and
profitability of the combined company may be adversely affected in future
periods. Since the date of acquisition, the semiconductor capital equipment
market has undergone a very severe downturn, which, depending on duration, could
have a material impact on the net cash flows realized from the acquired
in-process research and development projects.
Effective October 31, 1997, the company acquired certain assets and
assumed certain liabilities of the Handler Division of Advantek Inc. Effective
April 1, 1997, the company acquired substantially all of the assets and assumed
substantially all of the liabilities of Forward Systems Automation Inc.(FSA).
In these acquisitions, valuations of the intangible assets acquired
were determined by an independent third party appraisal firm and consisted of
developed and core technology, assembled workforce, and in-process research and
development. Fair values assigned to in-process research and development were
$2.3 million for the Advantek acquisition and $7.2 million for the FSA
acquisition. These amounts were charged against income in 1997 because the
underlying research and development projects had not yet reached technological
feasibility and had no alternative future uses.
The company is using the acquired in-process research and development
to complete new products. With respect to FSA, the products under development
are high-speed test handlers for discrete components and small IC packages, such
as micro small outline packages. With respect to Advantek, the principal product
line is a dual site, tri-temperature, pick-and-place test handler for logic
semiconductor devices.
10 Aetrium 1998
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The nature of the efforts required to complete development of the
acquired in-process research and development into commercially viable products
principally relates to the completion of all designing, prototyping,
verification and testing activities, and documentation necessary to establish
that the products can be manufactured to meet design specifications, including
functions, features, technical performance requirements and product cost. The
company has incurred expenses of approximately $465,000 in 1997 and
approximately $1,050,000 in 1998 to complete the purchased in-process research
and development projects acquired in the FSA and Advantek acquisitions.
As of the date of acquisition, the company anticipated the initial
products developed from the in-process research and development related to FSA
to have been introduced in the latter part of 1997 and in 1998. As of the date
of acquisition, the company anticipated the initial products developed from the
acquired in-process research and development related to Advantek to have been
introduced in 1998. In the case of the FSA acquisition, versions of products
based upon the acquired in-process research and development have been
introduced, but the revenue from these products to date has been less than
anticipated, due in large part to very difficult industry conditions in 1998.
The product that resulted from the in-process research and development acquired
in the Advantek acquisition was actively marketed and sold in 1998.
The value assigned to purchased in-process research and development was
determined by an independent third party appraiser, which projected cash flows
related to future products expected to be derived once technological feasibility
is achieved. These projections included costs to complete the development of
technology and the future revenue and costs which are expected to result from
commercialization of the products. Cash flows were discounted back to their
present value at a rate of 30% with respect to the in-process research and
development acquired in the Advantek acquisition and 25% with respect to FSA.
The resulting net cash flows from such projects were based on estimates made by
the company's management of revenue, cost of sales, research and development
costs, selling, general and administrative costs, and income taxes resulting
from such projects. These management estimates were based on expected trends in
technology, historical margin and expense levels for comparable products, and
the nature and expected timing of completion of acquired in-process research and
development. The extremely difficult industry conditions experienced by
semiconductor equipment suppliers in 1998 has had a significant impact on the
revenue and cash flows for products resulting from the in-process research and
development projects acquired in the FSA acquisition, and, to a lesser extent,
the Advantek acquisition. While management continues to believe that the
products originating from the acquired research and development projects in the
FSA and Advantek acquisitions are important and commercially viable, there is no
assurance that these products will achieve management's expectations.
See note 7 to the accompanying notes to consolidated financial
statements.
OTHER INCOME, NET:
Other income, net, decreased 16% to $964,000 in 1998, versus $1.1 million in
each of 1997 and 1996. The decline is due to lower invested cash balances
primarily as a result of the $7.8 million used to acquire the equipment business
of WEB Technology Inc., the $4.2 million used in the Advantek acquisition in
late 1997, and $2.0 million used to repurchase company shares in 1998.
INCOME TAXES:
The company recorded an income tax benefit of approximately $4.9 million in 1998
compared with income tax expense of approximately $.3 million and $4.3 million
in 1997 and 1996, respectively. The tax benefit in 1998 resulted from the
significant operating loss reported for the year compared with a relatively
modest operating profit in 1997 and a significantly higher profit in 1996. In
general, the company's effective income tax rate compares favorably with federal
and state statutory rates primarily due to benefits associated with the
company's foreign sales corporation, research tax credits and the investment of
excess funds in tax-exempt securities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES:
Cash and short-term investments decreased by approximately $9.5 million in 1998
to $18.1 million. The decrease was primarily the result of the $7.8 million used
to acquire the equipment business of WEB Technology Inc. and $2.0 million used
to repurchase company shares. A $7.2 million decrease in cash and cash
equivalents in 1997 was primarily the result of the $8.2 million used to acquire
FSA in April 1997 and the Advantek Handler Division in November 1997. Cash
generated from 1998 operations was $2.6 million. Approximately $1.4 million was
used for capital expenditures in 1998. As of December 31, 1998, there was no
long-term debt. Accounts receivable decreased 43% to $7.2 million at December
31, 1998, compared with $12.7 million at December 31, 1997 primarily because
1998 fourth quarter net sales were 50% less than fourth quarter
Aetrium 1998 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1997 net sales. Inventories decreased to $14.3 million at December 31, 1998 from
$16.8 million at December 31, 1997, as a result of sales decreasing throughout
1998.
The company has a $5.0 million line of credit agreement with Harris
Trust and Savings Bank of Chicago, Ill. Borrowings under this agreement are
secured by receivables, inventory and general intangibles. Borrowing is limited
to a percentage of eligible receivables and inventory. There were no line of
credit advances outstanding as of December 31, 1998 or 1997.
The company believes its cash and short-term investments of $18.1
million at December 31, 1998, funds generated from operations, and borrowings
available under its credit facility will be sufficient to meet capital
expenditure and working capital needs for at least 24 months. The company may
acquire other companies, product lines or technologies that are complementary to
the company's business and the company's working capital needs may change as a
result of such acquisitions.
BUSINESS RISKS AND UNCERTAINTIES:
A number of risks and uncertainties exist which could have an impact on the
company's future operating results. Any statements contained in this Annual
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words such as "may,"
"will," "expect," "believe," "anticipate," "estimate" or "continue" or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors,
including the following: the company's dependence on the microelectronics market
and the capital expenditures of electronic component manufacturers; the ability
of the company to manage its growth and to integrate and assimilate recent and
future acquisitions; new product development cycles and market acceptance of new
products; potential fluctuations in the company's operating results based on
factors such as cancellation or rescheduling of orders, seasonal fluctuations in
business activity, and product announcements by the company or by competitors;
the impact of competition in the test handler, IC Automation, reliability test
equipment and environmental test equipment markets; the effect of customer
concentration and the loss of any significant customer on the company's sales;
and volatility of the company's stock price based on factors including
developments in the microelectronics industry and high-technology industries
generally, as well as fluctuations in the company's quarterly operating results.
The company undertakes no obligation to update the information, including the
forward-looking statements, in this Annual Report.
YEAR 2000 ISSUES:
Many existing computer programs use only two digits to identify a year in the
date field, with the result that data referring to the year 2000 and subsequent
years may be misinterpreted by these programs. If present in the computer
applications of the company or third parties (such as customers, financial
institutions and suppliers) and not corrected, this problem may cause computer
applications to fail or to create erroneous results and could cause a disruption
in operations and have an adverse effect on the company's business and results
of operations.
The company has adopted a formal plan to evaluate its state of
readiness for the Year 2000 and to address any deficiencies. The plan
encompasses 1) information technology (IT) systems 2) non-IT systems 3) company
products and 4) systems of third parties, including key suppliers.
INFORMATION TECHNOLOGY: The company's principal computer systems that
it uses for financial accounting, manufacturing, inventory control, purchasing,
sales administration, engineering and other business functions have been
determined to be substantially Year 2000 compliant. The company intends to
monitor such principal computer systems throughout the balance of 1999 for any
Year 2000 issues.
NON-IT SYSTEMS: By the end of the second quarter of 1999, the company
expects to have completed an evaluation of its telephone, manufacturing
equipment, facility heating and cooling, and other non-IT systems for Year 2000
readiness and promptly take remedial action as necessary.
COMPANY PRODUCTS: The company has completed a series of tests,
utilizing industry standards, of the electronics systems of its products,
including certain product lines no longer being manufactured but remaining in
use at customer sites. Certain products that are no longer being manufactured
may require a minor software adjustment to address Year 2000 issues. Such
software has been developed at a cost of approximately $4,000, and the company
is in the process of providing that software to affected customers.
THIRD PARTIES: The company has distributed a survey to its key vendors
and suppliers to assess their plans for bringing any non-compliant systems into
Year 2000 compliance. This study is focused on suppliers of materials and
services who are either the sole source or one of a limited number of potential
suppliers. To date, more than 250 suppliers have been surveyed in connection
with such study, which is expected to be completed by the end of the second
quarter of 1999. The company will require any supplier
12 Aetrium 1998
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
found to have non-compliant systems to demonstrate compliance during the third
and fourth quarters of 1999. The company has determined that its key
distributors are Year 2000 compliant.
Substantially all of the efforts to evaluate the company's Year 2000
readiness have been made using internal personnel, and therefore expenses have
been less than $50,000, excluding the time of the company's personnel. Any
employee costs associated with the company's Year 2000 readiness program have
been expensed as incurred. The company has achieved substantial compliance on
Year 2000 issues on its principal computer systems in the course of normally
planned hardware and software upgrades and thus has not incurred any significant
expense to date specifically to address Year 2000 issues. The company has not
incurred any material expenses in connection with its evaluation of non-IT
systems and does not expect material expenses in the future, although the
evaluation of non-IT systems is not yet complete. The company has not incurred
material expenses to date in connection with the evaluation of its products and
the status of its vendors and suppliers with respect to Year 2000 issues, and
does not anticipate material expenses in the future, although the evaluation of
key vendors and their Year 2000 readiness is not yet complete.
The only formal contingency plan adopted by the company concerns
certain purchased parts and materials for its products that, should there be an
interruption of deliveries from vendors, could cause a disruption of the
company's product build schedules. The company, however, will consider
implementing or adopting additional contingency plans as it continues to monitor
its Year 2000 readiness, as new information becomes available. At this stage of
the process, the company has identified certain purchased parts and materials
for its products that, should there be an interruption of deliveries from
vendors, could cause a disruption of the company's product build schedules. The
company believes that the most likely worst case Year 2000 scenario would result
from a disruption of prompt deliveries of such purchased parts and materials
used to manufacture the company's products. This concern is being addressed by
the materials contingency plan mentioned above, and the company continues to
monitor the status of its supplier base to qualify additional sources of supply
for key materials and purchased parts. The company will determine the need for
such additional plans as part of its assessment of vendors and suppliers,
products and internal systems.
Due to the complexity and pervasiveness of the Year 2000 issue and, in
particular, the uncertainty regarding the Year 2000 compliance programs of third
parties, no assurances can be given that there will not be material adverse
effects on the business or its results from operations.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Aetrium Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aetrium Incorporated and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
Aetrium 1998 13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 59,618,971 $ 67,574,834 $ 58,387,108
Cost of goods sold 35,541,356 32,916,692 26,218,862
- ------------------------------------------------------------------------------------------------
GROSS PROFIT 24,077,615 34,658,142 32,168,246
- ------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 20,657,065 14,323,138 12,161,441
Research and development 12,169,846 10,492,301 7,630,572
Non-recurring charges 6,527,000 9,459,351 --
- ------------------------------------------------------------------------------------------------
Total operating expenses 39,353,911 34,274,790 19,792,013
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (15,276,296) 383,352 12,376,233
Other income, net 964,292 1,146,594 1,116,197
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (14,312,004) 1,529,946 13,492,430
Income Tax Benefit (Provision) 4,862,000 (301,000) (4,250,000)
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (9,450,004) $ 1,228,946 $ 9,242,430
================================================================================================
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (1.00) $ .14 $ 1.10
Diluted $ (1.00) $ .14 $ 1.08
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,423,000 8,668,000 8,370,000
Diluted 9,423,000 8,923,000 8,591,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14 Aetrium 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,132,794 $ 27,584,416
Accounts receivable, net of allowance for doubtful accounts
of $537,000 and $259,600, respectively 7,190,424 12,709,266
Refundable income taxes 3,182,172 --
Inventories 14,334,620 16,785,448
Deferred taxes 1,946,084 783,814
Other current assets 361,180 614,447
- --------------------------------------------------------------------------------------------------------------
Total current assets 45,147,274 58,477,391
- --------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and fixtures 1,948,547 1,351,206
Equipment 5,718,247 5,282,002
- --------------------------------------------------------------------------------------------------------------
7,666,794 6,633,208
Less accumulated depreciation and amortization (3,903,049) (2,989,995)
- --------------------------------------------------------------------------------------------------------------
Property and equipment, net 3,763,745 3,643,213
- --------------------------------------------------------------------------------------------------------------
Noncurrent deferred taxes 6,037,230 4,950,500
Intangible and other assets, net 17,495,332 3,823,110
- --------------------------------------------------------------------------------------------------------------
Total assets $ 72,443,581 $ 70,894,214
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 721,361 $ 2,610,525
Accrued compensation and commissions 1,932,493 2,250,027
Other accrued expenses 3,004,686 2,807,152
Income taxes payable -- 734,509
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 5,658,540 8,402,213
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; 30,000,000 shares authorized;
9,471,642 and 8,786,740 shares issued and outstanding, respectively 9,472 8,787
Additional paid-in capital 60,304,164 46,561,805
Retained earnings 6,471,405 15,921,409
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 66,785,041 62,492,001
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 72,443,581 $ 70,894,214
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Aetrium 1998 15
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Total
---------------------- Additional Shareholders'
Shares Amount Paid-in Capital Retained Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE DEC. 31, 1995 8,302,810 $ 8,303 $ 42,962,964 $ 5,450,033 $ 48,421,300
Exercise of stock options 289,071 289 1,703,584 -- 1,703,873
Repurchase of common stock in
connection with exercise of
stock options (142,461) (143) (2,398,173) -- (2,398,316)
Tax benefit related to exercise of
stock options -- -- 1,010,969 -- 1,010,969
Net income -- -- -- 9,242,430 9,242,430
- --------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1996 8,449,420 8,449 43,279,344 14,692,463 57,980,256
Exercise of stock options 285,998 286 2,274,890 -- 2,275,176
Repurchase of common stock in
connection with exercise of
stock options (134,678) (134) (2,697,355) -- (2,697,489)
Common stock issued in connection
with the purchase of a business 186,000 186 2,499,654 -- 2,499,840
Tax benefit related to exercise
of stock options -- -- 1,205,272 -- 1,205,272
Net income -- -- -- 1,228,946 1,228,946
- --------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1997 8,786,740 8,787 46,561,805 15,921,409 62,492,001
Exercise of stock options 57,383 57 406,082 -- 406,139
Repurchase of common stock in
connection with exercise of
stock options (28,631) (28) (468,267) -- (468,295)
Common stock issued in connection
with the purchase of a business 900,000 900 15,411,600 -- 15,412,500
Repurchase of common stock (243,850) (244) (1,770,775) -- (1,771,019)
Tax benefit related to exercise of
stock options -- -- 163,719 -- 163,719
Net income (loss) -- -- -- (9,450,004) (9,450,004)
- --------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1998 9,471,642 $ 9,472 $ 60,304,164 $ 6,471,405 $ 66,785,041
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16 Aetrium 1998
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,450,004) $ 1,228,946 $ 9,242,430
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,078,486 1,183,792 903,992
Acquisition-related charges 3,900,000 9,459,351 --
Write-off of intangibles 2,080,000 -- --
Deferred taxes (2,249,000) (2,206,000) 80,000
Changes in assets and liabilities,
net of effects of acquired businesses:
Accounts receivable, net 7,755,820 (4,393,864) 2,410,107
Refundable income taxes (3,182,172) -- --
Inventories 4,382,566 (4,240,752) (1,671,245)
Other current assets 253,525 (244,221) 85,224
Intangible and other assets (114,204) 45,992 2,484
Trade accounts payable (2,545,942) 1,169,205 (691,521)
Accrued compensation and commissions (807,273) 580,248 (310,817)
Other accrued expenses 85,877 (320,177) (323,613)
Income taxes payable (570,790) 2,140,485 358,594
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,616,889 4,403,005 10,085,635
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses and technology, net of cash acquired (8,835,000) (9,167,763) --
Payment of acquisition-related indebtedness -- -- (7,287,323)
Purchase of property and equipment (1,400,336) (1,720,537) (1,435,583)
Sale (purchase) of short-term investments -- 1,028,201 (1,028,201)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,235,336) (9,860,099) (9,751,107)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 127,936 785,780 355,724
Repurchases of common stock (1,961,111) (1,208,093) (1,050,167)
Principal payments on debt -- (1,292,395) (175,067)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,833,175) (1,714,708) (869,510)
- -----------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (9,451,622) (7,171,802) (534,982)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,584,416 34,756,218 35,291,200
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,132,794 $ 27,584,416 $ 34,756,218
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Aetrium 1998 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS DESCRIPTION
The company specializes in the design, development, manufacturing and marketing
of a variety of electromechanical equipment used by the semiconductor and
electronic component industry to handle and test integrated circuits and other
electronic components.
NOTE 2: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
Short-term investments include highly liquid investments purchased with an
original maturity greater than three months and less than one year and are
stated at cost which approximates market value. Short-term investments which
have a maturity of three months or less at the time of purchase are considered
cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost or market, with cost determined on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization are
generally computed for financial statement and tax purposes using accelerated
methods over the shorter of the estimated useful lives or the applicable lease
terms. Maintenance and repairs are charged to expense as incurred.
INTANGIBLES:
Goodwill, representing the excess of purchase price over the fair value of net
assets of acquired businesses, is amortized on a straight-line basis over 15
years. Costs associated with the purchase of product and patent rights and other
intangibles are capitalized and amortized on a straight-line basis over their
respective useful lives, which generally range from three to ten years. The
company periodically assesses the potential impairment of its intangible assets
based on anticipated undiscounted cash flows from operations.
WARRANTY COSTS:
Estimated product warranty costs are accrued at the time of shipment.
REVENUE RECOGNITION:
Revenue is generally recognized upon the shipment of products.
RESEARCH AND DEVELOPMENT:
Expenditures for research and development are expensed as incurred.
INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes." Deferred tax
assets are recognized for deductible temporary differences and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
NET INCOME (LOSS) PER COMMON SHARE:
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding during each year.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares and common stock equivalent shares
outstanding during each year. Common stock equivalents include stock options and
warrants using the treasury stock method. For periods in which the company
reports a net loss, common stock equivalents have been excluded from the
computations because they are antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The company must adopt this standard no later than January
1, 2000. Management believes the adoption of SFAS No. 133 will not have a
material effect on the company's financial statements.
NOTE 3: NON-RECURRING CHARGES
The statements of operations include the following unusual charges:
Year Ended December 31, 1998 1997
- -----------------------------------------------------
Restructuring charges:
Inventory write downs $ 3,696,000 $ --
Write-off purchased
technology 2,080,000 --
Employee severance and
related costs 547,000 --
In-process research
and development 3,900,000 9,459,351
- -----------------------------------------------------
$10,223,000 $9,459,351
=====================================================
In the second quarter of 1998, the company recorded restructuring charges
related to actions taken in response to
18 Aetrium 1998
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a severe industry downturn. The company discontinued marketing certain products
resulting in an inventory write down of $3,696,000, which amount is included in
cost of goods sold. In addition, the company determined that certain capitalized
technology used in such discontinued products was impaired, resulting in a
write-off of $2,080,000. The company also completed a workforce reduction
resulting in a charge of $547,000. These amounts are included in the caption
"Non-recurring charges." Non-recurring charges also include acquisition-related
costs related to in-process research and development amounting to $3,900,000 in
1998 and $9,459,351 in 1997. See note 7.
NOTE 4: SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows:
Year Ended Dec. 31, 1998 1997 1996
- -----------------------------------------------------
Interest paid $ 12,104 $ 18,314 $ 13,871
Income taxes
paid, net $1,140,894 $114,453 $4,063,286
- -----------------------------------------------------
During the years ended December 31, 1998, 1997 and 1996, employees
surrendered 17,293 ($278,203 fair market value), 73,636 ($1,489,396 fair market
value), and 79,310 ($1,348,149 fair market value) shares of Common Stock,
respectively, as payment for the exercise prices of stock options.
NOTE 5: INVENTORIES
A summary of the composition of inventories is as follows:
December 31, 1998 1997
- -------------------------------------------------------
Purchased parts and
completed subassemblies $ 7,292,168 $ 9,306,685
Work-in-process 4,221,054 5,488,399
Finished goods, including
demonstration equipment 2,821,398 1,990,364
- -------------------------------------------------------
Total inventories $14,334,620 $16,785,448
=======================================================
NOTE 6: INTANGIBLE AND OTHER ASSETS
Intangible and other assets comprise the following:
December 31, 1998 1997
- ---------------------------------------------------------
Goodwill $ 10,436,049 $ 1,269,937
Acquisition-related
intangibles 9,507,597 3,673,339
Other 162,284 37,225
- ---------------------------------------------------------
20,105,930 4,980,501
Accumulated amortization (2,610,598) (1,157,391)
- ---------------------------------------------------------
Total intangible and
other assets, net $ 17,495,332 $ 3,823,110
========================================================
Acquisition-related intangibles include amounts capitalized in connection
with the acquisitions of businesses and product lines, including customer lists,
assembled workforces, product technology and patents.
During 1998, the company determined that certain acquired capitalized
technology used in discontinued products was impaired. The net carrying value of
the abandoned technology amounted to $2,080,000, which amount was charged
against operations in 1998. Amortization expense related to intangibles amounted
to $1,671,260, $337,842 and $145,799 for 1998, 1997 and 1996, respectively.
NOTE 7: ACQUISITIONS
WEB TECHNOLOGY:
On April 1, 1998, the company acquired substantially all of the assets and
assumed certain liabilities of the Equipment Division of WEB Technology Inc., a
privately held company. The Equipment Division specializes in the design,
development, manufacturing and marketing of automatic burn-in board
loaders/unloaders and a variety of other electromechanical equipment used by the
semiconductor industry to handle and test integrated circuits. The purchase
price totaled $23,567,500 including $7,835,000 of cash, 900,000 shares of the
company's common stock valued at $15,412,500 and $320,000 of acquisition-related
costs. The acquisition was accounted for as a purchase and, accordingly, the net
assets acquired were recorded at their estimated fair values at the effective
date of the acquisition.
The estimated fair value of acquired intangibles, as determined by third
party appraisal, amounted to $20,698,423. Of this amount, $3,900,000 was
allocated to in-process research and development, which amount was expensed in
1998 as the underlying research and development projects had not yet reached
technological feasibility.
HANDLER DIVISION OF ADVANTEK INC.:
Effective October 31, 1997, the company acquired certain assets and assumed
certain liabilities of the Handler Division of Advantek Inc. The Handler
Division's products include integrated circuit test handlers which utilize
"pick-and-place" technology. The purchase price totaled $4,565,298 including
$4,170,298 of cash and $395,000 of acquisition-related costs. The acquisition
was accounted for as a purchase and, accordingly, the net assets acquired were
recorded at their estimated fair values at the effective date of the
acquisition. The acquisition included $2,268,542 related to in-process research
and development, as determined by a third party appraisal, which was charged
against income in 1997 as the underlying research and development projects had
not yet reached technological feasibility.
FORWARD SYSTEMS AUTOMATION:
On April 1, 1997, the company acquired substantially all of the assets and
assumed certain liabilities of Forward Systems Automation Inc. (FSA), a
privately held manufacturer of equipment for the semiconductor and electronic
component industry. The purchase price totaled $9,132,869 including $4,000,000
of cash, 186,000 shares of the company's common stock valued at $2,499,840,
$250,000 of acquisi-
Aetrium 1998 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tion-related costs and $2,383,029 of assumed liabilities. The acquisition was
accounted for as a purchase and, accordingly, the net assets acquired were
recorded at their estimated fair values at the effective date of the
acquisition. The acquisition included $7,190,809 related to in-process research
and development, as determined by a third party appraisal, which was charged
against income in 1997 as the underlying research and development projects had
not yet reached technological feasibility.
The application of purchase accounting to the acquisitions described above
was based on independent third party appraisals using valuation techniques
commonly applied to attribute fair value to acquired assets. The appraisals
incorporated management's best estimates for future revenue and profitability
from products in the process of development at the time of acquisition. As is
the case with all projections of future events, actual results could differ.
Additionally, the SEC has challenged valuations incorporating in-process
research and development. If the assumptions or valuation methods used were
changed, the company's financial statements could be affected because
allocations to in-process research and development which have been expensed
could be reallocated to intangible assets which require amortization against
income in future periods.
PRO FORMA INFORMATION:
The company's consolidated financial statements include the results of the
WEB Technology Equipment Division operations since April 1, 1998; the Advantek
Handler Division operations since October 31, 1997; and FSA operations since
April 1, 1997. The following table presents the consolidated results of
operations of the company on an unaudited pro forma basis as if the acquisitions
had taken place at the beginning of each year (in thousands, except per share
data):
Year Ended Dec. 31, 1998 1997 1996
- -----------------------------------------------------------
Unaudited pro forma
Net sales $ 62,613 $78,458 $69,489
Net income (loss) (6,882) 5,762 6,288
Net income (loss)
per diluted share $ ( .71) $ .58 $ .65
- -----------------------------------------------------------
Reported net income
(loss) per diluted
share before
acquisition-related
charges $ ( .75) $ .88 $ 1.08
- -----------------------------------------------------------
The acquisition-related charges for in-process research and development are
not reflected in the pro forma results presented above. The unaudited pro forma
results of operations are for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at
the beginning of the periods presented or the results which may occur in the
future.
NOTE 8: LONG-TERM DEBT AND CREDIT AGREEMENT
As of December 31, 1998, the company had no outstanding long-term debt. In
connection with the FSA acquisition, the company assumed certain FSA notes
payable obligations of $1,292,395 which were paid on April 1, 1997, concurrent
with the closing of the acquisition.
The company has a line of credit with a bank which provides for borrowings
up to the lesser of $5,000,000, or 80% of eligible accounts receivable and 50%
of eligible inventory. The line of credit is secured by receivables, inventory
and general intangibles. There were no line of credit advances outstanding as of
December 31, 1998 and 1997.
NOTE 9: LEASE OBLIGATIONS
The company leases two adjacent buildings in North St. Paul, Minn. from a
partnership controlled by certain shareholders of the company under two separate
lease agreements which each expire in 2006. None of the shareholders in the
partnership are either directors or officers of the company. The company leases
its Grand Prairie, Texas facility from a partnership controlled by an officer
shareholder. The company believes the terms of these leases are competitive with
comparable local properties. The company also leases certain equipment and other
facilities under various operating leases. Rent expense under all operating
leases was as follows:
Year Ended Dec. 31, 1998 1997 1996
- -----------------------------------------------------------------------
Paid to shareholders $ 529,268 $336,927 $231,575
Paid to others 803,672 631,069 457,501
- -----------------------------------------------------------------------
Total rent expense $1,332,940 $967,996 $689,076
=======================================================================
Future minimum annual lease payments under operating leases are as follows:
- ------------------------------------------------------------------------
1999 $1,476,000
2000 1,077,000
2001 1,016,000
2002 1,025,000
2003 961,000
Thereafter 4,147,000
- ------------------------------------------------------------------------
Total minimum lease payments $9,702,000
========================================================================
NOTE 10: COMMON STOCK
In connection with the April 1, 1998 acquisition of the Equipment Division of
WEB Technology Inc. ("WEB"), the company entered into agreements with certain
WEB shareholders whereby the company received a right of first refusal on common
shares issued to such shareholders. During 1998, the company repurchased 243,850
shares of its common stock for $1,771,019 pursuant to such agreements.
20 Aetrium 1998
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: STOCK OPTIONS
In 1993, the company's shareholders approved the adoption of the 1993 Stock
Incentive Plan (the Plan). Employees, officers, directors, consultants and
independent contractors providing services to the company are eligible to
receive awards under the Plan. The number of shares available for issuance under
the Plan is equal to 17.5% of the aggregate number of shares of common stock
outstanding less the total number of shares of common stock issuable upon the
exercise or conversion of any stock options, warrants or other stock rights. The
Plan is administered by the Compensation Committee of the Board of Directors and
provides for the granting of: (a) stock options; (b) stock appreciation rights;
(c) restricted stock; (d) performance awards; and (e) stock awards valued in
whole or in part by reference to or otherwise based upon the company's stock.
Options granted under the Plan may be incentive stock options or nonqualified
stock options. The Plan will terminate on June 8, 2003.
As required, the company adopted Statement of Financial Accounting Standards
(FAS) No. 123, "Accounting for Stock-Based Compensation" in 1996. As permitted
by FAS No. 123, the company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plan and, accordingly, does
not recognize compensation expense related thereto. If the company had elected
to recognize compensation expense based on the fair value of the options granted
at grant date as prescribed by FAS No. 123, net income (loss) and net income
(loss) per share would have been as reflected in the pro forma amounts indicated
below (in thousands, except per share amounts):
1998 1997 1996
- -----------------------------------------------------------------------
Net income (loss)
- as reported $ (9,450) $ 1,229 $ 9,242
- pro forma $ (10,444) $ 389 $ 8,662
Net income (loss)
per diluted share
- as reported $ (1.00) $ .14 $ 1.08
- pro forma $ (1.11) $ .04 $ 1.01
The fair value of options granted in 1998, 1997 and 1996 were estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
- -----------------------------------------------------------------------------
Expected dividend level 0% 0% 0%
Expected stock price volatility 49% 42% 44%
Risk-free interest rate 5.2% 6.2% 6.0%
Expected life of options (years) 3.5 3.5 3.5
The following table summarizes activity under the company's stock option plans:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------------------
Weighted Average
Number of Shares Exercise Prices Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,145,692 $ 1.39 to 16.50 $ 8.59
Options granted 172,500 10.25 to 18.81 12.46
Options exercised (289,071) 1.39 to 11.50 5.89
Options canceled (29,939) 11.50 to 16.50 15.51
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 999,182 1.39 to 18.81 9.59
Options granted 360,000 16.63 to 17.19 16.71
Options exercised (285,998) 1.39 to 10.25 7.96
Options canceled (22,840) 6.58 to 10.25 8.33
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,050,344 6.58 to 18.81 12.50
Options granted 1,026,000 5.63 to 14.88 7.63
Options exercised (57,383) 6.58 to 10.25 7.08
Options canceled (572,897) 6.58 to 17.18 15.18
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,446,064 $ 5.63 to 18.81 $ 8.15
=======================================================================================================================
Options exercisable as of December 31, 1998 465,698 $ 5.63 to 18.81 $ 10.16
=======================================================================================================================
</TABLE>
The following table summarizes information related to stock options outstanding
at December 31, 1998, all of which are nonqualified options which become
exercisable over a four- to five-year period and expire five years after the
grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------- ----------------------------------
Number Weighted Number Weighted
Range of Oustanding Average Remaining Weighted Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- ---------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.63 to 8.34 968,071 4.4 years $ 6.56 139,634 $ 7.03
10.25 to 18.81 477,993 2.1 years 11.37 326,064 11.50
- ---------------------------------------------------------------------------- ----------------------------------
$ 5.63 to 18.81 1,446,064 3.6 years $ 8.15 465,698 $10.16
============================================================================ ==================================
</TABLE>
Aetrium 1998 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 1998, 1997 and 1996 in connection with
certain stock option exercises, employees surrendered 28,631 ($468,295 fair
market value), 134,678 ($2,697,489 fair market value), and 142,461 ($2,398,316
fair market value) shares of common stock as payment for the exercise prices of
such options and related withholding tax obligations.
The company recorded a tax benefit of $163,719, $1,205,272 and $1,010,969
for the years ending December 31, 1998, 1997 and 1996, respectively, related to
the exercise of nonqualified stock options, which amounts have been credited to
Additional Paid-in Capital.
NOTE 12: EMPLOYEE SAVINGS 401(k) AND STOCK PURCHASE PLANS
The company has a 401(k) employee savings plan which covers all employees
who are at least 21 years of age and have at least three months of service.
Company contributions to the plan were $406,539, $312,803, and $271,190 in 1998,
1997 and 1996, respectively.
The company has a nonqualified employee stock purchase plan. Full-time
eligible employees may purchase shares of common stock by contributing to the
plan through payroll deductions. Employee contributions to the plan are limited
to 10% of each employee's base compensation. The plan purchases shares on the
open market at fair market value. At its discretion, the company may choose to
contribute to the plan. The company contributed $12,828, $10,444 and $14,966 to
the plan in 1998, 1997 and 1996, respectively.
NOTE 13: INCOME TAXES
The provision (benefit) for income taxes is made up of the following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision (benefit):
Federal $(2,797,000) $ 2,205,000 $3,585,000
State 184,000 302,000 585,000
- ----------------------------------------------------------------------------------------
Total current provision (benefit) (2,613,000) 2,507,000 4,170,000
- ----------------------------------------------------------------------------------------
Deferred tax provision (benefit):
Federal (1,896,000) (1,941,000) 69,000
State (353,000) (265,000) 11,000
- ----------------------------------------------------------------------------------------
Total deferred provision (benefit) (2,249,000) (2,206,000) 80,000
- ----------------------------------------------------------------------------------------
Total provision (benefit) for income taxes $(4,862,000) $ 301,000 $4,250,000
========================================================================================
</TABLE>
An analysis of the effective tax rate on earnings and a reconciliation from the
expected statutory rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $(14,312,004) $ 1,529,946 $ 13,492,430
Statutory federal tax rate 34% 34% 35%
Tax expense (benefit) computed at federal statutory rate $ (4,866,081) $ 520,182 $ 4,722,351
State taxes, net of federal benefit (111,540) 24,420 387,400
Increase (decrease) in tax from:
Goodwill amortization 19,368 19,368 19,938
Foreign sales corporation benefit -- (204,000) (315,000)
Tax-exempt interest income (108,869) (313,480) (388,909)
Business meals and entertainment 44,200 40,834 31,102
Other, net 160,922 213,676 (206,882)
- ------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (4,862,000) $ 301,000 $ 4,250,000
===========================================================================================================
</TABLE>
22 Aetrium 1998
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable, principally due to allowances
for returns and doubtful accounts $ 182,588 $ 88,271 $ 287,784
Inventories, principally due to reserves for obsolescence
and additional costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 955,270 341,352 318,552
Employee compensation and benefits accrued for financial
reporting purposes 92,142 135,496 69,093
Amortization of intangibles 6,593,709 5,595,033 2,928,326
Other, net 159,605 (425,838) (75,441)
- ---------------------------------------------------------------------------------------------------------
Net deferred tax asset $7,983,314 $ 5,734,314 $ 3,528,314
=========================================================================================================
</TABLE>
NOTE 14: BUSINESS SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION,
AND CONCENTRATION OF CREDIT RISK
The company operates in one industry segment supplying electromechanical
equipment to the semiconductor and electronic component industry. The following
table sets forth the various components of net sales by product line as a
percentage of total sales:
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
Test handlers 48% 54% 59%
IC Automation products 26 24 15
Reliability and environmental test products 12 10 13
Change kits and spare parts 14 12 13
- -------------------------------------------------------------------
100% 100% 100%
==================================================================
Foreign sales from the United States were as follows:
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Asia $ 9,065,000 $11,990,000 $12,552,000
Europe 4,933,000 7,720,000 3,597,000
Other 1,133,000 50,000 8,000
- --------------------------------------------------------------------------------
$15,131,000 $19,760,000 $16,157,000
================================================================================
Sales to a single customer represented 19.7% and 10.1% of total net sales in
1998 and 1997, respectively. Sales to a second customer represented 11.5% of
total net sales in 1998. Sales to a third customer represented 18.2% and 16.0%
of total net sales in 1997 and 1996, respectively. Sales to a fourth customer
represented 14.0% of total net sales in 1997. Sales to a fifth customer
represented 11.8% and 10.0% of total net sales in 1997 and 1996, respectively.
The company sells its products principally to manufacturers of integrated
circuits, other electronic components, and semiconductor equipment. Its accounts
receivable balance is concentrated with customers principally in one industry;
however, the company regularly monitors the creditworthiness of its customers
and credit losses have historically been minimal.
Aetrium 1998 23
<PAGE>
Selected Consolidated Financial Data
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 59,619 $ 67,575 $ 58,387 $ 47,631 $ 26,091
Income (loss) from operations (15,276) 383 12,376 4,359 1,238
Net income (loss) (9,450) 1,229 9,242 3,356 1,131
Net income (loss) per diluted share (1.00) .14 1.08 .46 .16
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets $ 72,444 $ 70,894 $ 61,718 $ 61,600 $ 25,210
Long-term debt, less current portion -- -- -- 135 --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 Net sales $ 20,481 $16,108 $ 12,009 $ 11,021
Gross profit before unusual items 10,283 7,652(1) 4,965 4,874
Income (loss) from operations before unusual items 3,004 (1,367)(1) (3,372) (3,318)
Net income (loss) before unusual items 2,383 (830)(1) (2,216) (1,847)
Net income (loss) per diluted share before unusual items .27 (.09)(1) (.23) (.19)
Net income (loss) 2,383 (7,770) (2,216) (1,847)
Net income (loss) per diluted share .27 (.80) (.23) (.19)
- ----------------------------------------------------------------------------------------------------------------------------
1997 Net sales $ 11,936 $14,921 $ 18,683 $ 22,035
Gross profit 6,118 7,626 9,858 11,056
Income from operations before unusual items 1,274 1,928(1) 3,041 3,600(1)
Net income before unusual items 1,110 1,594(1) 2,344 2,803(1)
Net income per diluted share before unusual items .13 .18(1) .26 .31(1)
Net income (loss) 1,110 (3,440) 2,344 1,215
Net income (loss) per diluted share .13 (.40) .26 .13
- ----------------------------------------------------------------------------------------------------------------------------
(1) BEFORE RESTRUCTURING AND ACQUISITION-RELATED CHARGES
</TABLE>
PRICE RANGE OF THE COMPANY'S COMMON STOCK
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 High $ 19.00 $ 17.50 $ 9.50 $ 11.50
Low $ 12.75 $ 7.25 $ 4.50 $ 3.63
- ----------------------------------------------------------------------------------------------------------------------------
1997 High $ 16.25 $ 19.50 $ 26.25 $ 28.25
Low $ 12.88 $ 12.50 $ 18.50 $ 15.13
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of March 13, 1999, there were approximately 200 shareholders of record. The
company estimates that an additional 5,500 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
DIVIDENDS
The company has never paid cash dividends on common stock. The company currently
intends to retain any earnings for use in its operations and does not anticipate
paying cash dividends in the foreseeable future.
24 Aetrium 1998
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Numbers 33-72656 and 33-74616) and on Form S-3
(File Number 333-49577) of Aetrium Incorporated of our report dated January 29,
1999, appearing on page 13 of the 1998 Annual Report to Shareholders which is
incorporated in this Annual Report on Form 10-K. We also consent to
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 20 of this Form 10-K.
/S/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,133
<SECURITIES> 0
<RECEIVABLES> 7,191
<ALLOWANCES> 0
<INVENTORY> 14,335
<CURRENT-ASSETS> 45,147
<PP&E> 7,667
<DEPRECIATION> 3,903
<TOTAL-ASSETS> 72,444
<CURRENT-LIABILITIES> 5,659
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 66,775
<TOTAL-LIABILITY-AND-EQUITY> 72,444
<SALES> 59,619
<TOTAL-REVENUES> 59,619
<CGS> 35,541
<TOTAL-COSTS> 24,078
<OTHER-EXPENSES> 12,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,312)
<INCOME-TAX> (4,862)
<INCOME-CONTINUING> (9,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,450)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
