AETRIUM INCORPORATED

(Exact name of registrant as specified in its charter)

MINNESOTA (State of incorporation)		41-1439182 (I.R.S. employer identification no.)
2350 Helen Street North St. Paul, Minnesota (Address of principal executive offices)	55109 (Zip code)	(651) 770-2000 (Registrant’s telephone number)

PART I

 

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  For this purpose, any statements contained in this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, including those set forth under Item 1A below. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise.  You are advised, however, to consult any future disclosures we may make on related subjects in future filings with the Securities and Exchange Commission.  References in this Annual Report on Form 10-K to “Aetrium,” “the company,” “we” and “our,” unless the context otherwise requires, refer to Aetrium Incorporated and its consolidated subsidiary and their respective predecessors.

 

ITEM 1.                       BUSINESS.

 

Overview

 

We design, manufacture and market a variety of electromechanical equipment used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry.  Our primary focus is on high volume ICs and on the latest IC package designs.  Our products are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors.  Our products are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing.  Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.

 

We have two principal equipment product lines:

 

·

Test Handler Products .  In terms of revenue, this is our largest product line.  Our broad line of test handler products incorporates thermal conditioning, contacting and automated handling technologies to provide automated handling of ICs during production test cycles.  We also offer change kits to adapt our test handlers to different IC package configurations or to upgrade installed equipment for enhanced performance.  Change kits represent a significant part of our revenue.

 

·

Reliability Test Equipment .  The primary focus of our reliability test equipment is to provide semiconductor manufacturers with structural performance data to aid in the evaluation and improvement of IC designs and manufacturing processes to increase IC yield and reliability.

 

Test handler products accounted for 69% and 67% of our net sales in 2007 and 2006, respectively.  Reliability test equipment accounted for 17% and 15% of our net sales in 2007 and 2006, respectively.  Change kits and spare parts accounted for 14% and 18% of our net sales in 2007 and 2006, respectively.

 

Industry conditions for the semiconductor equipment industry were strong in the first half of 2006.  However, by the third quarter of 2006, bookings in the TAP segment of the semiconductor equipment industry began a significant decline in the face of increasing inventories in the semiconductor industry, and the bookings decline continued through the fourth quarter of 2006, exacerbated by a decline

 

 

 

---

 

in IC unit sales. IC unit sales continued to decline into 2007 but resumed growth by the end of the first quarter and continued to grow until tailing off at the end of 2007. However, average selling prices for ICs declined during 2007. While bookings in the TAP segment of the semiconductor equipment industry, and in particular for test related equipment, improved somewhat in early 2007, they then steadily declined for the remainder of 2007, and revenues for test related equipment in 2007 declined 21% from 2006 revenues.

 

Our results in 2006 were similar in pattern. In the first half of 2006, our revenues continued an upward trend that began in the fourth quarter of 2005.  Our revenues continued to be strong in the third quarter of 2006, but our bookings declined significantly.  Our bookings continued to decline in the fourth quarter of 2006 and our revenues followed.

 

In 2007 we significantly outperformed our industry segment, with our revenues matching our 2006 revenues. However, our bookings declined significantly in the fourth quarter, due in part to substantial bookings we received at the end of our third quarter that we expected in the fourth quarter, but due as well to a cautiousness among our customers as they assessed the potential impact of risks to the U.S. economy.

 

Analysts of the semiconductor industry are generally forecasting continued unit growth in that industry in 2008.  Forecasts predict a decline for the semiconductor equipment industry as a whole in 2008, but predict solid growth for the TAP segment within it, and in particular for test related equipment.  We believe that our line of product offerings, including our newest product introductions, coupled with our lean cost structure and our strong working capital base, position us to again outperform our industry segment, and we are planning for revenue growth of at least 20% in 2008.

 

Our strategy has focused on revenue growth through product line expansion, by both internally developing and acquiring complementary technologies, businesses or product lines.  Technologies, businesses and product lines that we have acquired in the past pursuant to this strategy have since been assimilated and consolidated into our current operations.

 

On December 31, 2006, we completed the sale of the product lines being manufactured at our Dallas, Texas facility to WEB Technology, Inc., a privately held company that is owned in part by former senior management of our Dallas operation.  The divested product lines, which included our burn-in board loaders and turret-based test handlers, were some of our lowest revenue and less strategic product lines and had been unprofitable for several quarters.  It had become clear as 2006 progressed that the divested product lines were no longer a good long term strategic fit.  The divestiture allowed us to concentrate all of our product development and customer support efforts on our higher revenue, more strategic and more successful gravity feed test handlers and reliability test equipment.   See Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding these discontinued operations.

 

We were incorporated in Minnesota in December 1982.  Our executive offices are located at 2350 Helen Street, North St. Paul, Minnesota 55109.  Our telephone number is (651) 770-2000.  Our website address is www.aetrium.com .  We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  Our website is not intended to be a part of, nor are we incorporating it by reference into, this Annual Report on Form 10-K.

 

 

2

---

 

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 automatically during the final test stage of the manufacturing process.  ICs are loaded into the test handler from bowls, tubes or trays and then, if required, transported to a temperature chamber within the test handler where they are thermally conditioned to the required testing temperature.  The ICs are then placed into a contactor, which provides an electrical connection between the IC and the tester.  After testing, the test handler sorts the ICs according to test performance as provided by the tester.  In some cases, additional process steps are completed by the test handler system.  These include marking or inspection of the IC packages, and automatic placement of the ICs into a tube, tray or tape for shipment to the end user.  Test handlers must meet industry criteria for thermal conditioning, contactor integrity and minimization of damage to the IC during the test handling cycle.

 

ICs are multi-function semiconductor devices that may contain millions of individual transistors, and include microprocessors, microcontrollers, digital signal processors and memory devices. ICs come in a wide range of sizes and package types, depending upon their application.

 

In the testing of ICs, the device package type being tested often dictates the type of test handler used. Small outline packages, or SOPs, constituting the largest IC package segment, have leads, or electrical contacts, extending from two sides and are typically tested with gravity feed test handlers. Micro leadless packages, or MLPs (and sometimes referred to as MLF TM s, SONs or QFNs), have electrical contact pads flush with the sides and bottoms of the ICs. MLPs are typically tested with gravity feed or turret based test handlers, particularly for analog and linear applications. MLPs constitute one of the fastest growing new IC package types.

 

More complex ICs are sometimes packaged in IC package families with leads more easily damaged in handling. These package families are typically tested with pick-and-place test handlers.

 

Our primary focus continues to be on the newest device and package types, and the largest volume and fastest growing markets, in the IC side of the semiconductor industry.  Our test handler products are complementary with minimal overlap of application, and we distribute and service them through a common organization for efficiency.  Our primary test handler product line is our gravity feed test handlers.

 

Gravity Feed Test Handlers

 

Traditionally, test handlers have used gravity to move ICs from tubes or trays through the handler system and back into tubes or trays.  Typically, in gravity feed systems ICs are halted at necessary points in the handling process by stopping against other ICs or singulation mechanisms, which can result in lead damage to IC packages with more fragile leads.  Accordingly, gravity feed handlers are best suited for leadless packages and IC packages with more rugged leads, which include MLPs and most SOPs.

 

Our gravity feed test handlers compete most favorably in high-volume applications and their high throughput rates are an added advantage in relatively short test time applications.  These handlers adapt to “plunge-to-board”-type contacting and third party contactors, as well as our internally developed proprietary contactors, providing cost-effective solutions to a wide range of customer test requirements. In “plunge-to-board”-type contacting, the IC is placed directly against the test head with no intermediary sockets or connections, which is particularly well suited for high performance ICs.  Our gravity feed test handlers can heat or cool the ICs being tested to test temperatures ranging from -55 degrees Celcius to

 

 

3

---

 

+155 degrees Celcius.  They use mechanical refrigeration to cool ICs, which is more economical and less dangerous than liquid nitrogen, commonly used as a refrigerant in competing handlers.

 

Our 55V Series is our principal and newest line of gravity feed test handlers.  The 55V Series focuses on analog and logic IC applications and addresses a wide range of IC packages, including SOPs and MLFs.  The 55V Series offers a small footprint, a vertical backplane that can accommodate any size of test head, and our high speed test site actuator that we believe offers significant throughput advantages over our competition, depending upon device test times and thermal conditioning requirements.  We offer the 55V Series in single, dual, quad and eight test site configurations.  Each of our 55V Series multi-site test handlers can simultaneously test devices in each of their sites to increase productivity and reduce testing costs in certain applications.

 

We first introduced our 55V6 single and dual site test handler in 2002 and our 55V8 quad site test handler in 2004, and these handlers constituted the majority of our test handler sales in 2006. In the last half of 2006, we successfully completed an extensive evaluation of our 55V16 eight site test handler at a large U.S. headquartered integrated device manufacturer with production facilities in southeast Asia, and received our first purchase order for the 55V16 from that customer. In 2007 we started volume production of the 55V16 and expanded evaluations of our 55V series of test handlers to additional potential new customers.

 

Change Kits, Upgrades and Spare Part s

 

We have an ongoing demand for IC package change kits for our installed test handler products, including test handlers no longer in our active product lines.  Change kits consist of the parts necessary to reconfigure a test handler for another type or size of device package. We sell a variety of change kits to accommodate the growing variety of device packages used in the semiconductor industry.  The demand for change kits is driven by the introduction of new IC package types and increased production volumes experienced by our end customers.  Also included in change kits are upgrade kits to enhance the performance of installed equipment.  We sell spare parts with new equipment orders as kits or separately as piece parts or in kit form as required.

 

Reliability Test Equipment

 

The IC industry’s demand for higher performance devices through smaller circuit geometries has led to significant technological changes in the materials and processes used to manufacture ICs, including a continuing migration to copper materials for the increasingly minute circuitry of devices.  These changes in technology, along with IC user demand for increased reliability, have created a need for increasingly sophisticated reliability testing of IC designs and manufacturing processes.  Our reliability test equipment product line enables IC manufacturers to force and measure precise levels of voltage and current through ICs, collect and analyze relevant data, and predict lifetime performance of ICs.  This equipment can be utilized to perform reliability testing of packaged and unpackaged ICs.

 

In 1998, we introduced our 1164 Series of reliability test equipment, including a suite of applications for customers to perform a variety of tests.  We have since added many new features, including the full reliability test functionality necessary for testing an IC manufacturer’s entire copper process.  The 1164 Series features a modular design that allows for great flexibility in performing reliability tests, and can test up to 4,096 devices at a time and perform numerous simultaneous tests on batches of ICs.  Sixteen of the top 20 semiconductor manufacturers in the world are using our 1164 Series of reliability test equipment for copper and related advanced process technologies.

 

 

4

---

 

Competition

 

The semiconductor capital equipment market is highly competitive.  In the market for test handler products, we compete with a number of companies ranging from very small businesses to large companies, some of which have substantially greater financial, manufacturing, marketing and product development resources than we have.  Some of these companies manufacture and sell both testers and test handlers.  The particular companies with which we compete vary with our different test handler product lines, with no one company dominating the overall test handler market.  The companies with which we compete most directly in the test handler market include Multitest Electronic Systems GmbH, Rasco AG and Yokogawa Electric Corporation.

 

We compete for test handler sales primarily on the basis of effective handler throughput, cost of ownership, temperature accuracy and other performance characteristics of our products, the breadth of our product lines, the effectiveness of our sales and distribution channels, the effectiveness of our post-sale support and our customer relationships.  We believe we compete favorably on all of these factors.

 

The market for our reliability test equipment is also highly competitive and our competitors include QualiTau, Ltd., Chiron Technology Pte. Ltd., ESPEC Corp. and Reedholm Instruments Co.  We compete for reliability test system sales on the basis of technology, price, delivery, system flexibility and overall system performance.  We believe we compete favorably on all of these factors.

 

Manufacturing and Supplies

 

Our manufacturing operations consist of procurement and inspection of components and subassemblies, assembly and extensive testing of finished products.

 

We emphasize quality and reliability in both the design and manufacture of our products.  We or our suppliers inspect all components and subassemblies for mechanical and electrical compliance to our specifications.  We test all finished products against our specifications, and customer specifications where applicable, 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.

 

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

 

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

 

Customers

 

We rely on a limited number of customers for a substantial percentage of our net sales.  In 2007, our top two customers accounted for 40% and 36% of our net sales, respectively. In 2006, those same customers accounted for 51% and 20% of our net sales, respectively. The loss of or a significant reduction in orders by these or other significant customers, including reductions due to market, economic or

 

 

5

---

 

competitive conditions in the semiconductor industry, would likely have a negative impact on our financial condition and results of operations.

 

Sales and Marketing

 

We market our products through a combination of direct salespeople, domestic independent sales representatives and international distributors.  Our direct sales organization, comprised of four salespeople, is responsible for most domestic sales, and coordinates the activities of our domestic independent sales representatives and international distributors and actively participates with them in selling efforts.  This enables us to establish strong direct ties with our customers.

 

We maintain sales and service locations in North St. Paul, Minnesota, Santa Clara and San Diego, California, and Kuala Lumpur, Malaysia.  As of December 31, 2007, we had international distributors located in the United Kingdom, France, Germany, Italy, Korea, Japan, Taiwan, Hong Kong, China, Thailand, Malaysia, Singapore and the Philippines.

 

Our marketing efforts include participation in industry trade shows and production of product literature and sales support tools.  These efforts are designed to generate sales leads for our domestic independent sales representatives, international distributors and direct salespeople.

 

International shipments accounted for 76% and 64% of our net sales in 2007 and 2006, respectively.  In addition, it is not uncommon for U.S. customers to take delivery of products in the United States for subsequent shipment to international sites.  Most of our international shipments are made to international sites of U.S. semiconductor manufacturers, although there is a growing foreign customer base included in our international sales.

 

We invoice all of our international sales in U.S. dollars and, accordingly, have not historically been subject to fluctuating currency exchange rates.  We establish credit limits, if appropriate, on our international distributors, who purchase products from us and resell to end-users.  We may also require irrevocable letters of credit from our end-user international customers to minimize credit risk and to simplify the purchasing/payment cycle.

 

Research and Development

 

We believe we must continue to enhance, broaden and modify our existing product lines to meet the constantly evolving needs of the semiconductor equipment market.  To date, we have relied both on internal development and acquisitions of technology and product lines to extend our product lines, increase our customer base and avoid reliance on any single semiconductor equipment market segment.  We focus our new product development efforts on what we believe to be the most compelling requirements in the largest and fastest growing segments of the IC side of the semiconductor industry, with emphasis on near term revenue potential.

 

Product development expenses include new product development and continuation engineering. Our continuation engineering efforts include the development of additional change kits to meet the expanding families of IC package types, further advancement of contactor technologies, and the addition of features and performance options for existing equipment.

 

We expense all research and development costs, including costs for software development, as incurred.  In 2007 and 2006, our expenses relating to research and development were approximately $3.5 million and $3.4 million, respectively, or 12.9% and 11.9% of our net sales, respectively. Over time, our objective is to invest approximately 12% to 15% of our net sales in research and development.  However, the percentage may be higher in periods of reduced sales.

 

 

6

---

 

 

Intellectual Property

 

We attempt to protect the proprietary aspects of our products with patents, copyrights, trade secret law and internal nondisclosure safeguards.  We currently hold several U.S. patents ranging in remaining terms from one to nine years covering certain features of our handling systems and reliability test systems, the contactor elements incorporated in certain of our test handlers, and elements of our proprietary conductive thermal technology.  The source code for the software contained in our products is considered proprietary, and we typically do not furnish source code to our customers.  We have also entered into confidentiality agreements with our employees.  Despite these restrictions, it may be possible for competitors or users to copy aspects of our products or to obtain information that we regard as a trade secret.

 

There is a rapid pace of technological change in the semiconductor industry, which in turn compels us to continually enhance and extend our product lines.  We believe that patent, trade secret and copyright protection is less significant to our competitive position than factors such as the knowledge, ability and experience of our personnel, new product development, frequent product enhancements, name recognition and ongoing, reliable product maintenance and support.

 

Employees

 

As of December 31, 2007, we had 78 employees, four of which were part-time. They consisted of 36 in manufacturing, 18 in engineering and product development, 16 in sales, marketing and customer service, and 8 in general administration and finance.  None of our employees is represented by a labor union or is subject to any collective bargaining agreement.  We have never experienced a work stoppage, and we believe that our employee relations are satisfactory.

 

ITEM 1A.                       RISK FACTORS.

 

Several important risks and uncertainties exist which could have an impact on our future operating results.  These factors could cause our actual results to differ materially from our anticipated results or results that are reflected in any forward-looking statements in this Annual Report on Form 10-K. These factors, and their impact on the success of our operations and our ability to achieve our goals, include the following:

 

Market Fluctuations in the Semiconductor Industry

 

Our business and results of operations depend upon capital expenditures by manufacturers of ICs.  As a result, our operating results are materially dependent upon economic and business conditions in the semiconductor industry.  This industry has been subject to significant market fluctuations and has experienced periodic downturns, which often have had a disproportionate effect on capital equipment suppliers, such as Aetrium.  In periods of excess capacity, the semiconductor industry sharply reduces purchases of capital equipment, such as our products.  A downturn or slowdown in the semiconductor industry could substantially reduce our revenues and operating results and could harm our financial condition.  Bookings trended down in the TAP segment of the semiconductor equipment industry in the last three quarters of 2007. A continuation of this trend could have a material and adverse impact on our operations.

 

 

7

---

 

Successful Development and Introduction of New Products and Product Improvements

 

We operate in an industry that is highly competitive with respect to timely product innovations.   The market for our products is characterized by rapid technological change and evolving industry standards.  The development of more complex ICs has driven the need for new equipment and processes to produce such devices at an acceptable cost.  We believe that our future success will depend in part upon our ability to anticipate and respond rapidly to changes in technologies, IC package types, market trends and industry standards.  If we cannot successfully develop and introduce new and enhanced cost-effective products on a timely basis that are accepted in the marketplace, our business and operating results will likely suffer.

 

Reliance on Significant Customers

 

We rely on a limited number of customers for a substantial percentage of our net sales.  A reduction, delay or cancellation of orders from one or more of these significant customers, or the loss of one or more of these customers, would likely have a negative impact on our operating results.

 

Impact of Competitive Markets

 

The markets for our main product lines are highly competitive.  Some of our competitors have substantially greater financial, manufacturing, marketing and product development resources than we have.  For most of our customers, we are not the sole supplier of our type of equipment.  In addition, it is common for customers to evaluate more than one supplier’s equipment for their emerging requirements.  Accordingly, we are at significant risk to lose orders to competing suppliers, and even to being displaced as a supplier to potentially significant customers, which would likely have a negative impact on our operating results.

 

Fixed Cost Constraints on Reduction of Expenses

 

Many of our expenses, particularly those relating to properties, capital equipment and certain manufacturing overhead items, are fixed in the short term.  Reduced demand for our products and services causes our fixed production costs to be allocated across reduced production volumes, which negatively affects our gross margins and profitability.  Our ability to reduce expenses is further constrained because we must continue to invest in research and development to maintain our competitive position and to maintain service and support for our existing customer base.  Accordingly, in the event of a reduction in our revenues, resulting from an industry downturn or otherwise, we may not be able to maintain profitable operations.

 

Impact of Cost Reduction Actions

 

In the event of a sustained downturn and continuing decline in our revenues, we may implement cost reduction actions, such as workforce reductions, pay freezes and reductions, and reductions in other expenditures. In doing so, we would attempt to maintain the necessary infrastructures to allow us to take full advantage of subsequent improvements in conditions.  However, there can be no assurance that reductions we may have made in personnel and expenditure levels and the loss of the capabilities of personnel we may have terminated would not inhibit us in the timely completion of product development efforts, the effective service of and responsiveness to customer requirements, and the timely ramp up of production in response to improving market conditions.

 

 

8

---

 

Reduction in the Sales Efforts by our Current Distributors

 

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

 

Risks Inherent in our International Sales

 

We expect that international sales will continue to account for a significant portion of our net sales.  As a result, our operations are subject to a number of risks inherent in conducting business internationally, which if any of them mature could negatively impact our operating results.

 

Supply of Significant Components for our Products

 

Certain significant components used in our products, including certain contactor components, printed circuit boards and refrigeration systems, are currently available only from sole or limited sources.  We do not maintain long-term supply agreements with most of our suppliers, and we purchase most of our components through individual purchase orders.  Our inability to obtain components in required quantities or of acceptable quality could result in delays or reductions in our product introductions or shipments, which could damage our relationships with our customers and cause our operating results to suffer.

 

ITEM 1B.                       UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.                       PROPERTIES.

 

We conduct our corporate functions and manufacturing, product development, sales, marketing and field service activities in North St. Paul, Minnesota.  We currently occupy approximately 45,000 square feet in North St. Paul under a lease that expires in February 2011.  We consider our present facilities to be sufficient for our current operations.

 

In addition, as of December 31, 2007, we had the following lease obligations:

 

·

We vacated a 45,000 square foot facility in Poway, California in 2000.  This lease expires in January 2010.  This space is currently subleased to third parties.  We remain liable under the lease on a contingent basis in the event a sublessee is in default.

 

·

We vacated a 28,000 square foot facility in Dallas, Texas upon the sale of our operations there on December 31, 2006.  We assigned the lease of that facility, which expires in April 2008, to the buyer. We remain liable under the lease on a contingent basis in the event the assignee is in default.

 

ITEM 3.                       LEGAL PROCEEDINGS.

 

We are not a party to, and none of our property is the subject of, any material pending legal, governmental, administrative or other proceedings.

 

 

9

---

 

ITEM 4.                       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .

 

We did not submit any matter to a vote of our security holders during the fourth quarter of fiscal year 2007.

 

ITEM 4A.                       EXECUTIVE OFFICERS OF THE REGISTRANT.

 

Our executive officers, their ages and the offices they held as of March 1, 2008 are as follows:

 

Name	Age	Position
Joseph C. Levesque	63	Chairman of the Board, President and Chief Executive Officer
Douglas L. Hemer	61	Chief Administrative Officer, Secretary and Director
Daniel M. Koch	54	Vice President — Worldwide Sales
John J. Pollock	48	Vice President — General Manager
Paul H. Askegaard	56	Treasurer
Timothy G. Foley	48	Vice President — Manufacturing
Dean K. Hedstrom	58	Vice President — Technology
Timothy A. McMullen	40	Vice President — Reliability Test Systems
W. Charles Sletten, II	56	Vice President — Engineering

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

 

Mr. Hemer has served as one of our directors since 1986, and has served as our Secretary since May 2000 and as our Chief Administrative Officer since March 2001.  He served as our Group Vice President from August 1998 to March 2001, as the President of our former Poway, California operations from February 1997 to August 1998 and as our Chief Administrative Officer from May 1996 until February 1997.  Mr. Hemer was a partner in the law firm of Oppenheimer Wolff & Donnelly LLP for more than 15 years before joining Aetrium in May 1996.  Mr. Hemer is also a director of Versa Companies, a privately held company.

 

Mr. Koch has served as our Vice President - Worldwide Sales since March 1991.  From March 1990 to March 1991, Mr. Koch served as the Vice President of Sales of Summation, Inc., a company involved with the testing of IC boards.  From December 1973 to March 1990, Mr. Koch served in various sales positions and most recently as Vice President of Sales of Micro Component Technology, Inc.

 

Mr. Pollock has served as the Vice President and General Manager of our North St. Paul operations since December 2001.  From August 1998 to December 2001, Mr. Pollock served as our Vice President of Product Development and Marketing.  From April 1998 to August 1998, Mr. Pollock served as interim general manager of our North St. Paul operations.  From November 1997 to May 1998, Mr. Pollock served as interim general manager of a test handler product line we had recently acquired.  From September 1996 to August 1997, Mr. Pollock served as a Business Unit Manager.

 

 

10

---

 

Mr. Askegaard has served as our Treasurer since February 1992.  From October 1986 to February 1992, Mr. Askegaard served as our Corporate Controller.

 

Mr. Foley has served as the Vice President – Manufacturing of our North St. Paul operations since December 2001. Prior to that, he served at our North St. Paul Operations as Vice President – Operations from August 1998 to December 2001, Vice President – Manufacturing from October 1996 to August 1998, and in various other positions since joining us in 1988.

 

Mr. Hedstrom has served as the Vice President – Technology since June 2007. Prior to that, he served as the Vice President – Engineering of our North St. Paul operations since joining us in September 2004. From 1993 to 1998 Mr. Hedstrom was a co-founder, director, and later President of CariTech, Inc., a manufacturer of carrier tape materials for the IC industry.  Following the acquisition of CariTech by Illinois Tool Works in August 1998, he served as Engineering Manager – World Wide Operations for Illinois Tool Works until May 2001.  Prior to founding CariTech and subsequent to his retirement from Illinois Tool Works, Mr. Hedstrom served as President and a Principal of Hedstrom Engineering Co., a consulting firm specializing in industrial automation and controls.

 

Mr. McMullen has served as the Vice President – Reliability Test Systems since April 2007. Prior to that, he served at our North St. Paul Operations as Vice President – Marketing/Applications from February 2002 until April 2007, as Product Director of our reliability test equipment from March 2000 until February 2002, and as an electrical engineer since joining us in 1994.

 

Mr. Sletten has served as the Vice President – Engineering since joining us in January 2008. Prior to that, he served as President of EnergyFlo Corporation from 2003 to 2007, as Vice President, General Manager of Goodall Mfg. Llc. From 2002 to 2003, and in various capacities including Chief Engineer, Vice President and Senior Vice President at Nilfisk-Advance from 1984 to 2001.

 

 

11

---

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock is quoted on The Nasdaq Global Market under the symbol “ATRM.”  The following table summarizes the high and low closing sale prices per share of our common stock for the periods indicated, as reported on The Nasdaq Global Market.  These prices do not include adjustments for retail mark-ups, markdowns or commissions.

 

			First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2007	High		$	4.70			$	4.70			$	5.00			$	6.24
	Low		$	3.25			$	3.62			$	3.90			$	4.56
Fiscal 2006	High		$	6.20			$	5.79			$	5.69			$	6.23
	Low		$	4.05			$	4.16			$	3.70			$	2.87

Holders

 

As of March 14, 2008, there were 116 shareholders of record.  We estimate that an additional 3,200 shareholders beneficially own stock held for their accounts at brokerage firms and financial institutions.

 

Dividends

 

We have never paid cash dividends on our common stock.  We currently intend to retain any earnings for use in our operations and do not anticipate paying cash dividends in the foreseeable future.

 

Recent Sale of Unregistered Securities

 

We did not have any unregistered sales of equity securities during fiscal year 2007.

 

Issuer’s Purchases of Equity Securities

 

We did not make any purchases of our common stock during the fourth quarter of fiscal 2007.

 

 

12

---

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

On December 31, 2006, as discussed in Note 3 to our Consolidated Financial Statements, we sold our product lines and operations located in Dallas, Texas.  Operating results for fiscal year 2006 related to those operations are presented as discontinued operations and, unless otherwise indicated, the following management discussion and analysis refers to our continuing operations only.

 

Overview:

 

Aetrium designs, manufactures and markets a variety of electromechanical equipment used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry.  Our primary focus is on high volume ICs, the latest IC package designs, and the latest IC manufacturing processes.  Our test handler products are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors and are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing. Our reliability test products are used to validate IC designs and monitor semiconductor wafer fabrication processes.  Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.

 

As an equipment supplier to the semiconductor industry, Aetrium’s results are driven primarily by worldwide demand for ICs, which in turn depend on end-user demand for electronic products.  The demand for our products can fluctuate significantly from period to period due to the direct or indirect impact of numerous factors, including but not limited to, changes in the supply and demand for ICs, changes in IC manufacturing capacity, advancements in industry technologies, changes in U.S. and worldwide economic conditions and competitive factors.  For these and other reasons, our operating results for 2007 and 2006 may not be indicative of future operating results.

 

Semiconductor industry conditions were generally favorable in the first half of 2006 but weakened in the second half of the year.  Aetrium’s revenues were strong during this period and our net sales increased to $6.9 million, $8.0 million, and $8.2 million in the first three quarters of 2006, respectively. Although our revenues increased sequentially in the third quarter of 2006, our new order activity decreased significantly from second quarter levels, which was consistent with generally weakening demand for equipment in the TAP segment of the semiconductor equipment industry. Order activity remained weak in the fourth quarter of 2006, and our revenues decreased to $5.1 million, or 38% below third quarter levels.  Despite the slowdown late in the year, our 2006 revenues were $28.2 million, an increase of 117% over the prior year

 

Semiconductor industry conditions in general continued to be relatively weak in the first half of 2007 although conditions improved for some segments where the demand for certain IC device types increased.  Aetrium experienced increasing order activity in the first three quarters of 2007 for some of our test handler models, particularly those that are used in analog device-type applications.  This led to sequential increases in quarterly net sales in 2007 to $5.1 million, $5.9 million, $7.7 million and $9.3 million, respectively.  Although our revenues increased sequentially to $9.3 million in the fourth quarter of 2007, new orders decreased significantly from third quarter levels, which was consistent with generally weakening demand for equipment in the TAP segment of the semiconductor equipment industry.  Business conditions have continued to be slow in early 2008 and, in the short term, we expect semiconductor manufacturers will continue to be cautious regarding capital expenditures. There can be no assurance that changes in semiconductor industry conditions, general domestic and global economic conditions, and/or other factors will not adversely impact Aetrium’s future operating results.

 

 

13

---

 

Off-Balance Sheet Arrangements:

 

We did not have any off-balance sheet arrangements as of December 31, 2007 or 2006.

 

Critical Accounting Policies and Estimates:

 

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the critical accounting policies that require the most significant judgments and estimates used in the preparation of our consolidated financial statements are those related to share-based compensation, revenue recognition, accounts receivable, inventories, warranty obligations and income tax accounting.

 

Share-Based Compensation

 

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires the measurement and recognition of all share-based compensation under the fair value method.  In accordance with SFAS 123R, we began recognizing compensation expense in 2006 for all share-based awards granted in 2006 plus the unvested portion of awards granted prior to 2006.

 

We determine the fair value of share-based awards on the grant date by using the Black-Scholes option valuation model.  We also use the Black-Scholes model to determine the fair value of modifications to awards by determining and comparing the fair value of the modified award with the fair value of the award immediately before the modification.  Option valuation models, including Black-Scholes, require the input of subjective assumptions, and changes in the assumptions used can materially affect the calculation of the fair value of an award. These assumptions include expected stock price volatility, risk-free interest rate, expected dividend yield, and the expected life of the award.  We estimate future stock price volatility based primarily on historical daily stock price observations of our common stock.  Risk-free interest rate is estimated based on U.S. Treasury bill rates consistent with the expected term of an award.  We assume an expected dividend yield of zero based on our intention to retain any future earnings for use in our operations.  Expected life of an award is estimated primarily based on vesting provisions, the contractual term of the award, and historical experience of previous awards with similar terms or, if appropriate in the circumstances, we use the simplified method for estimating the expected life of an award, as permitted by Staff Accounting Bulletin No. 107.  SFAS 123R also requires that estimated forfeitures be considered in the calculation of future compensation expense at the date of grant.  We use historical data, as adjusted if deemed appropriate, to estimate future option forfeiture rates for purposes of recognizing share-based compensation expense.

 

 

14

---

 

Revenue Recognition

 

Our policy is to recognize revenue on product sales upon shipment if contractual obligations have been substantially met, collection of the proceeds is assessed as being reasonably assured, and title and risk of loss have passed to the customer, which is generally the case for sales of spare parts, accessories, change kits and some equipment and equipment upgrades.  In instances where title does not pass upon shipment, revenue is recognized upon delivery or customer acceptance based upon the terms of the sales agreement.  In instances where equipment or equipment upgrade sales contracts include significant post-shipment obligations to be performed by Aetrium, revenue for the entire transaction is deferred until such obligations have been completed or, if applicable, the transaction is accounted for as a multiple-element arrangement.  For arrangements containing multiple elements, the amounts allocated to delivered and undelivered elements are based on their fair value and revenue is recognized upon delivery of each element.  In instances where contractual terms can only be satisfied after shipment, such as meeting customer-specified acceptance requirements at the customer’s site, revenue is not recognized until there is objective evidence that the applicable contract terms have been met.  Due to the high selling prices of certain types of equipment, the timing of revenue recognition of a relatively small number of transactions may have a significant impact on our quarterly results.

 

Accounts Receivable

 

We maintain an allowance for doubtful accounts that reflects our estimate of losses that may result from the uncollectibility of accounts receivable.  Our allowance for doubtful accounts is based primarily on an analysis of individual accounts for which we have information indicating the customer may not be able to pay amounts owed to us.  In these cases, based on the available facts and circumstances, we estimate the amount that will be collected from such customers.  We also evaluate the collectibility of our accounts receivable in the aggregate based on factors such as the aging of receivable amounts, customer concentrations, historical experience, and current economic trends and conditions.  We adjust our allowance for doubtful accounts when additional information is received that impacts the amount reserved.  If circumstances change, our estimates of the recoverability of accounts receivable could be reduced or increased by a material amount.  Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.

 

Inventories

 

We adjust our inventories for estimated excess and obsolete inventory equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future product demand and market conditions.  If actual product demand or market conditions are less favorable than those projected by management, additional inventory adjustments may be required.

 

Warranty Obligations and Equipment Improvement Costs

 

We accrue estimated warranty costs in the period that the related revenue is recognized.  Our warranty cost estimates and warranty reserve requirements are determined based upon product performance, historical warranty experience and costs incurred in addressing product performance issues. Should product performance or cost factors differ from our estimates, adjustments to our warranty accrual may be required.  On occasion, we may provide no-charge equipment improvements for customers at our discretion.  Such costs are accrued when identified, quantified and approved by management.

 

 

15

---

 

Income Tax Accounting

 

We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets” which are included in the caption “Deferred income taxes” on our consolidated balance sheet.  In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” we record a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. At December 31, 2006, we provided a valuation allowance of approximately $26.5 million to fully reserve our deferred tax assets.  At December 31, 2007, we reduced the valuation allowance to approximately $22.8 million based on our assessment of the realizability of our deferred tax assets at that date.  We will continue to assess the assumptions used to determine the amount of our valuation allowance and we may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors.  If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional income tax expense.

 

Results of Operations :

 

Selected statement of operations data as a percentage of our net sales for 2007 and 2006 were as follows:

 

		2007				2006
Net sales			100.0	%			100.0	%
Cost of goods sold			49.7				48.7
Gross profit			50.3				51.3
Operating expenses:
Selling, general and administrative			23.3				22.7
Research and development			12.7				11.9
Total operating expenses			36.0				34.6
Income from operations			14.3	%			16.7	%

 

Net Sales:

 

Our net sales by product line as a percentage of total sales for 2007 and 2006 were as follows:

 

		2007				2006
Test handler products			69	%			67	%
Reliability test equipment products			17				15
Change kits and spare parts			14				18
Total			100	%			100	%

 

Net sales were $27.9 million in 2007 compared with $28.2 million in 2006, a 1% decrease. Net sales of test handlers, representing 69% of total net sales, were $19.1 million in 2007, compared with $19.0 million in 2006.  Net sales of reliability test equipment, representing 17% of total net sales, were $4.8 million in 2007 compared with $4.3 million in 2006, an increase of 11%.  Net sales of change kits and spare parts, representing 14% of total net sales, were $4.0 million in 2007 compared with $4.9 million in 2006, a decrease of 18%.  Net sales of change kits and spare parts in 2007 decreased from 2006 levels in part because certain customers, in anticipation of weakening business conditions, increased their purchases of change kits in late 2006 to expand their equipment flexibility rather than buy additional test handlers.

 

 

16

---

 

Gross Profit:

 

Aetrium’s gross profit as a percentage of net sales can fluctuate based on a number of factors, including but not limited to product mix sold, distribution channel mix, sales discounting, product maturity, inventory writedowns, and utilization of manufacturing capacity associated with varying production levels. Gross profit was 50.3% of net sales in 2007 compared with 51.3% of net sales in 2006.  Gross margins decreased in 2007 primarily due to a higher mix of distributor sales and a $179,000 inventory obsolescence charge related to a discontinued product, offset in part by a slightly more favorable product mix.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative, or SG&A, expenses consist primarily of employee compensation and related costs, independent representative commissions, travel, warranty and no-charge equipment improvement costs.  SG&A expenses were $6.5 million in 2007 compared with $6.4 million in 2006. Employee compensation increased $0.4 million primarily due to increased wages and share-based compensation expense.  Representative commission expense increased $0.3 million due to a higher average commission rate on commissionable direct sales. These expense increases were offset by a $0.6 million decrease in warranty and no-charge equipment improvement costs.

 

Research and Development Expenses:

 

Research and development expenses consist primarily of employee compensation and related costs, contractor services, engineering materials and travel costs. Research and development expenses were $3.5 million in 2007 compared with $3.4 million in 2006.  Employee compensation increased $0.2 million primarily due to increased wages and share-based compensation expense, which was partially offset by a $0.1 million decrease in materials expense. New product development is an essential part of our strategy to gain market share. As a percentage of net sales, our research and development expenses were 12.7% and 11.9% of net sales in 2007 and 2006, respectively. Over time, we expect to invest approximately 12% to 15% of our revenues in research and development.

 

Interest Income, Net:

 

Interest income, net, amounted to $436,000 and $244,000 in 2007 and 2006, respectively.  These amounts consisted primarily of interest income from the investment of excess funds. Interest income increased in 2007 primarily due to our higher average cash balances partially offset by generally declining interest rates, particularly in the second half of the year.

 

Income Tax Expense (Benefit):

 

We recorded an income tax net benefit of $2,247,000 in 2007, which included a tax benefit of approximately $2.3 million related to a reduction in our deferred tax asset valuation allowance.  At December 31, 2006, we had provided a valuation allowance of approximately $26.5 million to fully reserve our deferred tax assets.  At December 31, 2007, we reduced the valuation allowance to approximately $22.8 million based on our assessment of the realizability of our deferred tax assets at that date.  We estimated the realizable amount of our deferred tax assets at December 31, 2007 to be approximately $2.3 million and reduced our valuation allowance accordingly.  We will continue to assess the assumptions used to determine the amount of our valuation allowance and we may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors.  If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional

 

 

17

---

 

income tax expense.  We recorded income tax expense of $5,000 in 2006 primarily related to minimum state taxes.

 

Discontinued Operations:

 

On December 31, 2006, as discussed in Note 3 to our Consolidated Financial Statements, we sold our product lines and operations located in Dallas, Texas. We recorded a loss of $4.0 million on the sale.  In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” results for fiscal year 2006 related to those operations are presented as discontinued operations.  Condensed results of discontinued operations for the year ended December 31, 2006 are summarized below (in thousands):

 

Net sales		$	3,260
Cost of goods sold			2,063
Gross profit			1,197
Operating expenses			2,682
Loss from discontinued operations		$	(1,485	)

 

Financial Condition, Liquidity and Capital Resources:

 

Cash and cash equivalents increased by approximately $3.7 million in the year ended December 31, 2007.  We generated $3.0 million in cash from operating activities during this period. The major components of cash flows from operating activities were net income of $6.7 million, $0.5 million in non-cash depreciation, amortization and share-based compensation expense, a $0.2 million non-cash inventory obsolescence charge, a $0.3 million increase in accounts payable and a $0.3 million increase in accrued compensation, partially offset by a $2.3 million increase in deferred income taxes, a $1.4 million increase in accounts receivable, a $0.5 million increase in inventories, a $0.1 million increase in other current assets, and a $0.5 million decrease in other accrued liabilities. Inventories and accounts payable increased as we increased purchases to support anticipated sales levels, demo equipment needs, and customer delivery requirements.  Deferred income taxes increased due to a reduction in our deferred tax asset valuation allowance.  Accrued compensation increased primarily due to higher incentives based on the profits achieved in the fourth quarter of 2007 compared with the fourth quarter of 2006.  Accounts receivable increased primarily due to the higher net sales level in the fourth quarter of 2007 compared with the fourth quarter of 2006.  The decrease in other accrued liabilities includes primarily the payment of $0.6 million in severance and related costs associated with the sale of our Dallas operations.  Net cash provided by investing activities in 2007 was not significant.  Net cash provided by financing activities amounted to $0.6 million in 2007, consisting primarily of proceeds from employee stock option exercises.

 

Cash and cash equivalents increased by $4.3 million in 2006.  We generated $3.2 million from operating activities during the year.  The major components of cash flows generated by operating activities were $3.5 million income before a non-cash loss on the sale of discontinued operations, $0.5 million in non-cash depreciation, amortization and share-based compensation expense, a $1.9 million decrease in accounts receivable and a $0.2 million increase in other accrued liabilities, partially offset by a $1.9 million increase in inventories and a $1.1 million decrease in accounts payable.  Accounts receivable decreased due to the favorable timing of cash collections just prior to December 31, 2006 and lower shipment levels in the fourth quarter of 2006 compared with 2005.  The increase in other accrued liabilities included a $0.2 million increase in accrued warranty and no-charge equipment improvement costs.  Although inventory purchases and levels decreased in the fourth quarter of 2006 as business slowed, inventory levels increased from the prior year due to purchases to support new product introductions and our decision to carry higher inventories of some models to meet customer delivery requirements.  Accounts payable decreased primarily due to a reduction in inventory purchases in the

 

 

18

---

 

fourth quarter of 2006 compared with the fourth quarter of 2005.  Net cash used in investing activities in 2006 amounted to $0.1 million for capital expenditures.  During 2006, we generated $1.2 million from financing activities, primarily from employee stock option exercises.

 

Historically we have supported our capital expenditure and working capital needs with cash generated from operations and our existing cash and cash equivalents.  We believe our cash and cash equivalents of $12.1 million at December 31, 2007 will be sufficient to meet capital expenditure and working capital needs at least through 2008. In addition, we have a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million.  The credit agreement expires in October 2008.  We believe we will be able to extend the agreement at that time or obtain similar financing, if needed.  However, there can be no assurance that such financing will be available with terms favorable to us or at all. We experienced a significant reduction in order activity in the fourth quarter of 2007 and business conditions have continued to be soft in early 2008.  A prolonged continuation of weak business conditions in our industry or future industry downturns could negatively impact the demand for and prices of our products and adversely affect future cash flows.  Also, we may acquire other companies, product lines or technologies that are complementary to our business, and our working capital needs may change as a result of such acquisitions.

 

Recent Accounting Pronouncements:

 

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159).  This pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value which were not previously required to be measured at fair value.  SFAS 159 is effective for Aetrium at the beginning of fiscal year 2008.  We do not expect the implementation of SFAS 159 to have a material impact on our financial position or results of operations.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 becomes effective for Aetrium beginning in the first quarter of fiscal year 2008.  We do not expect the implementation of SFAS 157 to have a material impact on our financial position or results of operations.

 

ITEM 8.                       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The information required by this Item is included in our Consolidated Financial Statements and the report of our independent registered public accounting firm, which are included in this Annual Report on Form 10-K beginning on page F-1.  The index to this report and the financial statements is included in Item 15(a)(1) below.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

 

 

19

---

 

ITEM 9A(T).                                 CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures:

 

Our President and Chief Executive Officer, our Chief Administrative Officer and our Treasurer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on their evaluation, they concluded that our disclosure controls and procedures were effective as of December 31, 2007, the end of the period covered by this annual report.

 

Management’s Report on Internal Control over Financial Reporting:

 

Aetrium’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our President and Chief Executive Officer, our Chief Administrative Officer and our Treasurer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

 

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting:

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, Aetrium’s internal control over financial reporting.

 

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting:

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In designing and operating a control system, one must consider the potential benefits of controls relative to their costs and the reality of limited resources available to allocate to control activities, particularly in smaller companies.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any control will meet its objectives under all potential future conditions.  Because of such inherent limitations in any control system, there can be no absolute assurance that control issues, misstatements, and/or fraud will be prevented or detected.

 

ITEM 9B.                       OTHER INFORMATION.

 

None.

 

 

20

---

 

PART III

 

ITEM 10.                       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Directors of the Registrant

 

The information under the captions “Election of Directors — Information About Nominees,” “Election of Directors — Other Information About Nominees” and “Election of Directors—Additional Information About the Board and Its Committees” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

Executive Officers of the Registrant

 

The information under the caption “Item 4A. Executive Officers of the Registrant” located elsewhere in this Annual Report on Form 10-K is incorporated herein by reference.

 

Compliance with Section 16(a) of the Exchange Act

 

The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

Identification of Audit Committee; Audit Committee Financial Expert

 

The information under the caption “Audit Committee Report – Membership and Role of the Audit Committee” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

Code of Ethics

 

The information under the caption “Code of Ethics” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

ITEM 11.                       EXECUTIVE COMPENSATION.

The information under the captions “Election of Directors — Compensation of Directors,” “Executive Compensation and Other Benefits” and “Executive Compensation and Other Benefits—Compensation Committee—Compensation Committee Interlocks and Insider Participation” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information under the caption “Security Ownership of Certain Beneficial Owners and Management” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

ITEM 13.                       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information under the captions “Election of Directors—Additional Information About the Board and Its Committees” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

 

21

---

 

ITEM 14.                       PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information concerning principal accountant fees and services and the audit committee’s pre-approval polices and procedures under the captions “Independent Registered Public Accounting Firms—Audit and Non-Audit Fees” and “Independent Registered Public Accounting Firms—Pre-approval Policies and Procedures” in our 2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by reference.

PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) 1.                        Financial Statements of Registrant.

 

The following Consolidated Financial Statements of Aetrium Incorporated and the Independent Registered Public Accounting Firms’ Reports thereon are included herein:

 

Description	Page(s)
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Financial Statements:
Consolidated Statements of Operations	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Changes in Shareholders’ Equity	F-4
Consolidated Statements of Cash Flows	F-5
Notes to Consolidated Financial Statements	F-6 – F-20

 

(a) 2.  Financial Statement Schedule of Registrant.

 

Schedule II -  Valuation and Qualifying Accounts

S-1

 

All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

(a) 3.  Exhibits.

 

The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index beginning on page E-1 of this Annual Report on Form 10-K.

 

If you were one of our shareholders on March 31, 2008 and you want a copy of any of the exhibits listed or referred to in the Exhibit Index, we will furnish it to you at a reasonable cost upon your written request sent to Aetrium Incorporated, 2350 Helen Street, North St. Paul, Minnesota 55109, Attn.: Shareholder Relations.

 

22

---

 

The following is a list of each management contract or compensatory plan or arrangement we are required to file as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b):

 

1.	Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-KSB for the year ended December 31, 1993) (File No. 0-22166).
2.	Form of Non-Statutory Stock Option Agreement (incorporated by reference to Exhibit 10.7 to our Annual Report on Form 10-KSB for the year ended December 31, 1993) (File No. 0-22166).
3.	1993 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for year ended December 31, 1997) (File No. 0-22166).
4.	Salary Savings Plan (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form SB-2) (File No. 33-64962C).
5.	Employment Agreement dated April 1, 1986 between Joseph C. Levesque and us (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form SB-2) (File No. 33-64962C).
6.	2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2002) (File No. 0-22166).
7.	Form of Change of Control Agreement (incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K for the year ended December 31, 2003) (File No. 0-22166).
8.	Form of Amendments to Change of Control Agreement (filed herewith electronically).
9.	Sales Incentive Program (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the year ended December 31, 2003) (File No. 0-22166).
10.	Executive Officer Profit Sharing Program (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated January 23, 2007) (File No. 0-22166).

 

 

 

23

---

 

FINANCIAL STATEMENTS OF REGISTRANT

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Aetrium Incorporated

We have audited the accompanying consolidated balance sheets of Aetrium Incorpo­rated (a Minnesota corporation) (the “Company”) as of December 31, 2007 and 2006, and the related consolidated state­ments of opera­tions, changes in shareholders’ equity and cash flows for the years then ended.  Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15.  These finan­cial statements and financial statement schedule are the responsibility of the Company’s man­agement.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate­rial misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circum­stances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also 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, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aetrium Incorporated as of Decem­ber 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in confor­mity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

/s/ GRANT THORNTON LLP

 

Minneapolis, Minnesota

March 14, 2008

 

 

 

F-1

---

 

AETRIUM INCORPORATED

Consolidated Statements of Operations

 

 

Year Ended December 31,		2007				2006
Net sales		$	27,989,744			$	28,183,661
Cost of goods sold			13,918,687				13,713,846
Gross profit			14,071,057				14,469,815
Operating expenses:
Selling, general and administrative			6,522,170				6,405,651
Research and development			3,535,340				3,364,295
Total operating expenses			10,057,510				9,769,946
Income from operations			4,013,547				4,699,869
Interest income, net			436,159				244,295
Income from continuing operations before income taxes			4,449,706				4,944,164
Income tax expense (benefit)			(2,247,000	)			5,000
Income from continuing operations			6,696,706				4,939,164
Discontinued operations (see Note 3):
Loss from discontinued operations			—				(1,485,416	)
Loss on sale of discontinued operations			—				(4,004,798	)
Net income (loss)		$	6,696,706			$	(551,050	)
Basic income (loss) per share:
Continuing operations		$	0.64			$	0.49
Discontinued operations			—				(0.55	)
Net income (loss)		$	0.64			$	(0.05	)
Diluted income (loss) per share:
Continuing operations		$	0.62			$	0.47
Discontinued operations			—				(0.52	)
Net income (loss)		$	0.62			$	(0.05	)
Weighted average common shares outstanding:
Basic			10,396,000				10,028,000
Diluted			10,726,000				10,586,000

AETRIUM INCORPORATED

Consolidated Balance Sheets

 

 

December 31,		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	12,104,858			$	8,394,440
Accounts receivable, net of allowance for doubtfulaccounts of $46,000 in 2007 and 2006			3,542,426				2,164,376
Inventories			7,694,869				7,363,089
Deferred income taxes			315,000				—
Other current assets			588,730				336,229
Total current assets			24,245,883				18,258,134
Property and equipment:
Furniture and fixtures			527,433				535,928
Equipment			1,269,690				1,268,101
Less accumulated depreciation and amortization			(1,612,089	)			(1,610,316	)
Property and equipment, net			185,034				193,713
Deferred income taxes			2,002,000				—
Other assets			150,238				415,340
Total assets		$	26,583,155			$	18,867,187
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	44,838			$	41,561
Trade accounts payable			781,866				490,264
Accrued compensation			669,282				378,747
Other accrued liabilities			933,886				1,445,996
Total current liabilities			2,429,872				2,356,568
Long-term debt, less current portion			11,711				56,572
Commitments and contingencies (See Note 11)
Shareholders’ equity:
Common stock, $.001 par value; 30,000,000 shares authorized; 10,542,611 and 10,266,252 shares issued and outstanding, respectively			10,543				10,266
Additional paid-in capital			63,094,494				62,103,952
Accumulated deficit			(38,963,465	)			(45,660,171	)
Total shareholders’ equity			24,141,572				16,454,047
Total liabilities and shareholders’ equity		$	26,583,155			$	18,867,187

AETRIUM INCORPORATED

Consolidated Statements of Changes in Shareholders’ Equity

 

					Total
	Common Stock		Additional	Accumulated	Shareholders’
	Shares	Amount	Paid-in Capital	Deficit	Equity

Balance, December 31, 2005			9,649,425			$	9,649			$	60,672,384			$	(45,109,121	)		$	15,572,912
Exercise of stock options			616,827				617				1,241,839				—				1,242,456
Share-based compensation expense			—				—				189,729				—				189,729
Net loss			—				—				—				(551,050	)			(551,050	)
Balance, December 31, 2006			10,266,252				10,266				62,103,952				(45,660,171	)			16,454,047
Exercise of stock options			276,359				277				616,661				—				616,938
Share-based compensation expense			—				—				360,420				—				360,420
Tax benefit from stock option exercises			—				—				13,461				—				13,461
Net income			—				—				—				6,696,706				6,696,706
Balance, December 31, 2007			10,542,611			$	10,543			$	63,094,494			$	(38,963,465	)		$	24,141,572

 

 

 

 

 

 

 

 

 

AETRIUM INCORPORATED

Consolidated Statements of Cash Flows

 

 

Year Ended December 31,		2007				2006
Cash flows from operating activities:
Net income (loss)		$	6,696,706			$	(551,050	)
Loss on sale of discontinued operations			—				4,004,798
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			115,366				353,445
Share-based compensation expense			360,420				159,946
Deferred income taxes			(2,317,000	)			—
Tax benefit from stock option exercises			(13,461	)			—
Provision for excess and obsolete inventories			179,000				90,000
Loss on disposal of equipment			2,043				—
Changes in assets and liabilities:
Accounts receivable			(1,378,050	)			1,943,950
Inventories			(510,780	)			(1,912,938	)
Other current assets			(106,811	)			(67,948	)
Other assets			(71,801	)			—
Trade accounts payable			291,602				(1,121,538	)
Accrued compensation			290,535				62,764
Other accrued liabilities			(498,649	)			200,169
Net cash provided by operating activities			3,039,120				3,161,598
Cash flows from investing activities:
Purchase of property and equipment			(105,672	)			(108,121	)
Collection of note receivable			188,155				—
Net cash provided by (used in) investing activities			82,483				(108,121	)
Cash flows from financing activities:
Proceeds from exercise of stock options			616,938				1,242,456
Tax benefit from stock option exercises			13,461				—
Payments on long-term debt			(41,584	)			(35,024	)
Net cash provided by financing activities			588,815				1,207,432
Increase in cash and cash equivalents			3,710,418				4,260,909
Cash and cash equivalents at beginning of year			8,394,440				4,133,531
Cash and cash equivalents at end of year		$	12,104,858			$	8,394,440

		Accrual Balance at beginning of year				Accruals for warranties and no-charge improvements				Settlements made				Accrual Balance at end of year
2006		$	133			$	948			$	(715	)		$	366
2007			366				389				(479	)			276

Carrying value of net assets transferred to WEB:
- Receivables		$	634
- Inventories			3,252
- Equipment			39
- Intangible assets			138
- Accounts payable and accrued liabilities			(211	)
			3,852
Additional liabilities assumed by Aetrium:
- Severance costs for terminated employees			285
- Reimbursement of wages and related costs			360
- Transaction costs			30
			675
Net assets sold and additional liabilities assumed			4,527
Note receivable from WEB			522
Loss on sale of discontinued operations		$	(4,005	)

Net sales		$	3,260
Cost of goods sold			2,063
Gross profit			1,197
Operating expenses			2,682
Loss from discontinued operations		$	(1,485	)

Year ended December 31,		2007				2006
Expected dividend level			0	%			0	%
Expected stock price volatility			56	%			59	%
Risk-free interest rate			4.5	%			5.0	%
Expected life of options (years)			3.5				3.5

Year ended Dec. 31,		2007				2006
Continuing operations		$	3			$	11
Discontinued operations		$	—			$	191

NOTE 8: INVENTORIES

 

A summary of the composition of inventories is as follows (in thousands):

 

December 31,		2007				2006
Purchased parts and completed subassemblies		$	3,911			$	3,044
Work-in-process			2,336				1,847
Finished goods, including saleable demonstration equipment			1,343				2,372
Equipment shipped, subject to revenue deferral			105				100
Total inventories		$	7,695			$	7,363

NOTE 9: OTHER ACCRUED LIABILITIES:

 

Other accrued liabilities are comprised of the following (in thousands):

 

December 31,		2007				2006
Accrued commissions		$	114			$	6
Accrued warranty			276				366
Customer deposits and deferred revenue			189				199
Accrued severance and other related costs			93				645
Other			262				230
Total other accrued liabilities		$	934			$	1,446

2008		$	45
2009			12
Total		$	57

Year ended Dec. 31,		2007				2006
Leased from shareholder		$	295			$	316
Leased from others			508				487
Sublease/assigned lease income			(452	)			(416	)
Total net rent expense		$	351			$	387

		Number of  Shares				Weighted Average Exercise Price			Weighted Average Remaining Contract Term		Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2007			1,486,952			$	3.09
Granted			508,000				3.87
Exercised			(286,967	)			2.30
Forfeited			(6,421	)			2.98
Outstanding, December 31, 2007			1,701,564			$	3.45		2.9 years		$	4,315
Options at December 31, 2007:
Exercisable and expected to become exercisable			1,667,533			$	3.45		2.9 years		$	4,229
Exercisable			1,013,640			$	3.20		2.1 years		$	2,824

NOTE 15: INCOME TAXES

 

Income tax expense (benefit) from continuing operations consists of the following components (in thousands):

 

Year ended December 31,		2007				2006
Current tax expense (benefit):
Federal		$	62			$	—
State			8				5
Total current expense (benefit)			70				5
Deferred tax expense (benefit):
Federal			(2,213	)			—
State			(104	)			—
Total deferred expense (benefit)			(2,317	)			—
Total income tax expense (benefit)		$	(2,247	)		$	5

Year ended December 31,		2007				2006
Tax computed at federal statutory rate		$	1,513			$	1,681
State taxes, net of federal benefit			126				181
Increase (decrease) in tax from:
Business meals and entertainment			18				18
Tax credits			22				(114	)
Valuation allowance change			(3,964	)			(1,768	)
Other, net			38				7
Reported income tax expense (benefit)		$	(2,247	)		$	5

NOTE 16: PRODUCT LINE, GEOGRAPHIC, SIGNIFICANT CUSTOMER AND CONCENTRATION OF CREDIT RISK DATA

 

The following table sets forth the various components of net sales by product line as a percentage of total sales:

 

Year ended December 31,		2007				2006
Test handler products			69	%			67	%
Reliability test equipment products			17				15
Change kits and spare parts			14				18
Total			100	%			100	%

Year ended December 31,		2007				2006
United States		$	6,685			$	10,121
Malaysia			9,296				3,979
Philippines			5,948				6,586
Thailand			2,021				3,528
Other foreign countries			4,040				3,970
Total		$	27,990			$	28,184

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 31, 2008	By :  /s/ Joseph C. Levesque
	Joseph C. Levesque
	Chief Executive Officer and President
	(principal executive officer)
	By: /s/ Paul H. Askegaard
	Paul H. Askegaard
	Treasurer
	(principal financial and accounting officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 31, 2008 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

 

 

---

 

 

AETRIUM INCORPORATED

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

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

 

E-1

---

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

 

E-2

---

10.19	Assignment Agreement, dated January 20, 2004, by and between us and Littlefeet, Inc.	Incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-22166).
10.20	Sales Incentive Program.	Incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-22166).
10.21	Business Loan Agreement, dated October 25, 2007, between Bremer Bank and us.	Incorporated by reference to Exhibit 20.21 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (File No. 0-22166).
10.22	Note, dated October 25, 2007, issued by us to Bremer Bank.	Incorporated by reference to Exhibit 20.22 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (File No. 0-22166).
10.23	Commercial Lease dated February 24, 2006 between Kamko I, LLC and us.	Incorporated by reference to Exhibit 10.24 to our Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 0-22166).
10.24	Asset Purchase Agreement, dated December 28, 2006, between WEB Technology, Inc. and us.	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated January 5, 2007 (File No. 0-22166).
10.25	Executive Officer Profit Sharing Program.	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated January 23, 2007 (File No. 0-22166).
14.1	Code of Business Conduct and Ethics.	Incorporated by reference to Exhibit 14.1 to our Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-22166).
21.1	Subsidiaries of the Registrant.	Filed herewith electronically.
23.1	Independent Registered Public Accounting Firm’s Consent.	Filed herewith electronically.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith electronically.
31.2	Certification of Chief Administrative Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith electronically.
31.3	Certification of Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith electronically.

 

E-3

---

 

 

 

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed herewith electronically.

 

 

 

E-4

---

 

SCHEDULE II

 

Valuation and Qualifying Accounts

 

						Additions
Description		Balance at beginning of year				Charged (credited) to costs and expenses				Charged to other accounts				Deductions				Balance at end of year
Allowance for doubtful accounts:
2006		$	46			$	0			$	0			$	0			$	46
2007			46				0				0				0				46
Inventory excess and obsolescence reserve (1):
2006		$	2,257			$	0			$	0			$	(588	)		$	1,669
2007			1,669				179				0				(88	)			1,760
Valuation allowance on deferred tax assets (2):
2006		$	25,600			$	274			$	642			$	0			$	26,516
2007			26,516				(3,964	)			223				0				22,775