[PHOTO]
The Aetrium(R) SOIC Contactor shown is a
printing graphic image to enhance the effect of
the 1996 Annual Report and has nothing to do
with the copy.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS: The following table sets forth certain statements of
income items as a percentage of net sales for 1996, 1995 and 1994:
1996 1995 1994
- ---------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 44.9 42.9 37.3
- ---------------------------------------------------------------------------------------------
Gross profit 55.1 57.1 62.7
- ---------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 20.8 24.2 26.5
Research and development 13.1 10.4 12.4
Acquisition related charge -- 13.3 19.0
- ---------------------------------------------------------------------------------------------
Total operating expenses 33.9 47.9 57.9
- ---------------------------------------------------------------------------------------------
Income from operations 21.2 9.2 4.8
Other income, net 1.9 .9 1.4
- ---------------------------------------------------------------------------------------------
Income before income taxes 23.1 10.1 6.2
Provision for income taxes (7.3) (3.0) (1.9)
- ---------------------------------------------------------------------------------------------
Net income 15.8% 7.1% 4.3%
- ---------------------------------------------------------------------------------------------
NET SALES: The following table sets forth the various components of net sales by
product line as a percentage of total sales:
1996 1995 1994
- ---------------------------------------------------------------------------------------------
Test handlers 59% 53% 56%
Automation modules 15 18 20
Reliability and environmental test equipment 13 6 4
Change kits and spare parts 13 23 20
- ---------------------------------------------------------------------------------------------
100% 100% 100%
- ---------------------------------------------------------------------------------------------
Net sales increased 23% to $58.4 million in 1996, compared with $47.6 million in
1995 and $26.1 million in 1994. Equipment sales increased in 1996 across all
product lines, including test handlers, automation modules, and
reliability/environmental test equipment. Test handler sales increased during
the three year period due to higher unit volume, increased average selling
prices, new customer penetration, and a generally strong semiconductor industry
through early 1996. The company's acquisition in November 1994 of its test
handler product line manufactured in San Diego, California contributed
substantially to the increase in test handler sales in 1995. The acquisition in
December 1995 of the environmental test equipment product line located in
Lawrence, Massachusetts was the primary contributor to the increase in sales of
reliability and environmental test equipment in 1996. Sales of change kits and
spare parts increased significantly in 1995 primarily due to the inclusion of
the San Diego Division results, which were at particularly high levels in 1995
due to a focused effort to shorten lead times on spares orders and reduce the
elevated past due backlog which existed at the time of the acquisition in late
1994. Sales of change kits and spare parts declined in 1996 as spare parts sales
at the San Diego Division decreased to normal levels in the first half of 1996
and sales in general declined in the second half of 1996 due to a slowdown in
the semiconductor industry.
PAGE 12
[PHOTO]
The Aetrium(R) PLCC Contactor shown is a
printing graphic image to enhance the effect of
the 1996 Annual Report and has nothing to do
with the copy.
GROSS PROFIT: Gross profit increased 18% to approximately $32.2 million in 1996
compared to $27.2 million for 1995 and $16.4 million in 1994. As a percentage of
net sales, gross profit amounted to 55.1%, 57.1%, and 62.7% in 1996, 1995, and
1994 respectively. Gross profit margins for the St. Paul, Minnesota-based
business units increased in 1995 and 1996 due to price increases, continued
efficiency improvements and a generally favorable product mix. The St. Paul
business units' margin improvement in 1995 was offset by a full year of
improving but lower margin shipments from the San Diego Division, resulting in a
consolidated gross margin of 57.1% for 1995 compared with 62.7% of net sales for
1994. Gross profit margins decreased to 55.1% in 1996, primarily due to the
inclusion of the lower margin sales of the Lawrence Division, which was acquired
in December 1995. Although the gross profit margins for the San Diego and
Lawrence divisions improved during 1996, the company believes they will continue
to dilute the company's overall gross profit margin for the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses increased 6% to $12.2 million in 1996 compared with $11.5 million in
1995 and $6.9 million in 1994. The increase is primarily attributable to higher
expenses to support the San Diego and Lawrence divisions acquired in 1994 and
1995 respectively. These increases were offset somewhat by lower commissions
expense in 1996 resulting from increased sales to noncommissionable accounts.
Also, management compensation was lower in 1996 as a result of salary and
incentive reductions in the second half of the year based on the company's
operating results. As a percentage of net sales, selling, general and
administrative expenses decreased to 20.8%, 24.2%, and 26.5% in 1996, 1995, and
1994 respectively primarily because fixed expenses increased at a slower rate
than net sales.
RESEARCH AND DEVELOPMENT: Research and development expenses increased 53% to
$7.6 million in 1996 compared with $5.0 million in 1995 and $3.2 million in
1994. The increase in 1995 is primarily attributable to the inclusion of the San
Diego Division acquired in late 1994 and the increase in 1996 is primarily
attributable to the inclusion of the Lawrence Division acquired in December
1995. As a percentage of net sales, research and development expenses amounted
to 13.1%, 10.4%, and 12.4% in 1996, 1995, and 1994 respectively. Over time, the
company expects that research and development spending will generally average
12% of net sales.
ACQUISITION RELATED CHARGES: Effective December 29, 1995, the company acquired
substantially all of the assets and assumed certain liabilities of EJ Systems,
Inc. ("EJ"). On November 28, 1994 the company acquired substantially all of the
assets and assumed certain liabilities of SymTek Systems, Inc. ("SymTek"). These
acquisitions were accounted for using the purchase method and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of each acquisition.
PAGE 13
[PHOTO]
The Aetrium(R) Plunge-to-Board Contactor shown
is a printing graphic image to enhance the
effect of the 1996 Annual Report and has nothing
to do with the copy.
In each acquisition, a portion of the purchase price was allocated to research
and development activities that were in-process at the time of the acquisition
and had not yet reached technological feasibility. The amounts allocated to
in-process research and development amounted to $6.3 million for the EJ
acquisition and $4.9 million for the SymTek acquisition, and were recorded as an
operating expense in 1995 and 1994 respectively. These amounts are reflected in
the accompanying consolidated statements of income under the caption
"acquisition related charge." See Note 6 to the Consolidated Financial
Statements.
OTHER INCOME, NET: Other income, net, increased substantially in 1996 to $1.1
million compared with $.4 million in 1995 and 1994. The increase is attributable
to increased interest income earned on higher invested cash balances resulting
from the proceeds of a stock offering completed in late 1995.
INCOME TAX EXPENSE: Income tax expense was provided for at an effective rate of
31.5% in 1996 and 30% in 1995 and 1994. The higher rate in 1996 is due primarily
to the expiration of the federal research credit during portions of 1995 and
1996 and a reduced foreign sales corporation benefit in 1996 due to lower
offshore sales. The company's effective tax rate compares favorably with federal
and state statutory rates primarily due to benefits associated with the
company's foreign sales corporation and research tax credits as well as the
implementation of various tax planning strategies, including the investment of
excess funds in tax-exempt securities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES: Cash and short term
investments increased by approximately $.5 million in 1996 to $35.8 million.
Cash generated from 1996 operations was $10.1 million. Approximately $ 7.3
million was used to pay the indebtedness related to the EJ acquisition and $1.4
million was used for capital expenditures. As of December 31, 1996, there was no
long term debt.
Accounts receivable decreased 23% to $8.0 million at December 31, 1996 compared
to $10.4 million at December 31, 1995 primarily because 1996 fourth quarter net
sales were 27% lower than fourth quarter 1995 net sales due to a general
slowdown in the semiconductor industry in the second half of 1996.
Inventories increased from $8.7 million at December 31, 1995 to a peak level of
$11.6 million at June 30, 1996 to support higher sales levels in the first half
of 1996 and declined to $10.3 million at December 31, 1996 as sales levels
decreased in the second half of the year.
The company has a $5.0 million line of credit agreement with Harris Trust and
Savings Bank of Chicago, Illinois. Borrowings under this agreement are secured
by receivables, inventory and general intangibles. Borrowing is limited to a
percentage of eligible receivables and inventory. There were no line of credit
advances outstanding as of December 31, 1996 or 1995.
PAGE 14
[PHOTO]
The Aetrium(R) PLCC Contactor shown is a
printing graphic image to enhance the effect of
the 1996 Annual Report and has nothing to do
with the copy. This is a repeated graphic image
from page 13.
The company believes its cash and short term investments of $35.8 million at
December 31, 1996, funds generated from operations, and borrowings available
under its credit facility will be sufficient to meet capital expenditure and
working capital needs for at least 24 months. The company may acquire other
companies, product lines or technologies that are complementary to the company's
business and the company's working capital needs may change as a result of such
acquisitions.
BUSINESS RISKS AND UNCERTAINTIES: A number of risks and uncertainties exist
which could impact the company's future operating results. These uncertainties
include, but are not limited to, general economic conditions, competition,
changes in rates of capital spending by semiconductor manufacturers, the
company's success in developing new products and technologies, market acceptance
of new products, and other factors, including those set forth in the company's
SEC filings, including its current report on Form 10-K for the year ended
December 31,1996.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Aetrium Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aetrium Incorporated and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 31, 1997
PAGE 15
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
NET SALES $ 58,387,108 $ 47,630,639 $ 26,091,104
Cost of goods sold 26,218,862 20,450,299 9,734,733
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 32,168,246 27,180,340 16,356,371
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 12,161,441 11,509,977 6,931,094
Research and development 7,630,572 4,972,762 3,238,716
Acquisition related charge -- 6,338,590 4,948,807
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 19,792,013 22,821,329 15,118,617
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 12,376,233 4,359,011 1,237,754
Other income, net 1,116,197 434,734 376,805
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,492,430 4,793,745 1,614,559
Provision for income taxes (4,250,000) (1,438,000) (484,000)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,242,430 $ 3,355,745 $ 1,130,559
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.08 $ .46 $ .16
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 8,591,000 7,353,000 6,913,000
===================================================================================================================
See accompanying notes to the consolidated financial statements. AETRIUM INC. 1996
PAGE 16
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 34,756,218 $ 35,291,200
Short term investments 1,028,201 --
Accounts receivable, net of allowance for doubtful
accounts of $799,400 and $287,200, respectively 8,032,064 10,442,171
Inventories 10,332,048 8,660,803
Deferred taxes 1,009,545 904,212
Other current assets 354,266 439,490
- -------------------------------------------------------------------------------------------------------------------
Total current assets 55,512,342 55,737,876
- -------------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and fixtures 851,559 516,671
Equipment 3,683,434 2,945,651
- -------------------------------------------------------------------------------------------------------------------
4,534,993 3,462,322
Less accumulated depreciation and amortization (2,275,700) (1,864,563)
- -------------------------------------------------------------------------------------------------------------------
Property and equipment, net 2,259,293 1,597,759
- -------------------------------------------------------------------------------------------------------------------
Noncurrent deferred taxes 2,518,769 2,704,102
Intangible and other assets, net 1,427,577 1,560,004
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 61,717,981 $ 61,599,741
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Acquisition related obligation $ -- $ 7,507,323
Current portion of long-term debt -- 40,400
Trade accounts payable 1,040,760 1,732,281
Accrued compensation and commissions 1,515,069 1,825,886
Other accrued expenses 1,181,896 1,285,509
Income taxes payable -- 652,375
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,737,725 13,043,774
- -------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion -- 134,667
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; 16,000,000 shares
authorized; 8,449,420 and 8,302,810 shares issued and
outstanding, respectively 8,449 8,303
Additional paid-in capital 43,279,344 42,962,964
Retained earnings 14,692,463 5,450,033
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 57,980,256 48,421,300
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 61,717,981 $ 61,599,741
===================================================================================================================
See accompanying notes to the consolidated financial statements. AETRIUM INC. 1996
PAGE 17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Stock Total
------------------ Additional Subscription Retained Shareholders'
Shares Amount Paid-in Capital Receivable Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1993 6,677,509 $ 6,678 $ 19,237,175 $ (130,000) $ 963,729 $ 20,077,582
Common stock received
in payment of note
and stock subscription
receivable (27,279) (27) (175,013) 130,000 -- (45,040)
Exercise of stock options 235,307 235 326,057 -- -- 326,292
Exercise of stock warrants 12,499 12 33,320 -- -- 33,332
Repurchase of common
stock in connection
with exercise of stock
rights (92,926) (93) (672,625) -- -- (672,718)
Tax benefit related to
exercise of stock
options -- -- 472,632 -- -- 472,632
Net income -- -- -- -- 1,130,559 1,130,559
- -------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1994 6,805,110 6,805 19,221,546 -- 2,094,288 21,322,639
Exercise of stock options 290,726 291 1,364,376 -- -- 1,364,667
Exercise of stock warrants 135,000 135 944,865 -- -- 945,000
Repurchase of common
stock in connection
with exercise of stock
rights (193,004) (193) (3,200,153) -- -- (3,200,346)
Tax benefit related to
exercise of stock options -- -- 997,433 -- -- 997,433
Purchase of
fractional shares (22) -- (392) -- -- (392)
Common stock issued
in stock offering,
including exercise of
over-allotment option,
net of expenses 1,265,000 1,265 23,635,289 -- -- 23,636,554
Net income -- -- -- -- 3,355,745 3,355,745
- -------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1995 8,302,810 8,303 42,962,964 -- 5,450,033 48,421,300
Exercise of stock options 289,071 289 1,703,584 -- -- 1,703,873
Repurchase of common
stock in connection
with exercise of stock
options (142,461) (143) (2,398,173) -- -- (2,398,316)
Tax benefit related to
exercise of stock options -- -- 1,010,969 -- -- 1,010,969
Net income -- -- -- -- 9,242,430 9,242,430
- -------------------------------------------------------------------------------------------------------------------
BALANCE DEC. 31, 1996 8,449,420 $ 8,449 $ 43,279,344 $ -- $ 14,692,463 $ 57,980,256
===================================================================================================================
See accompanying notes to the consolidated financial statements. AETRIUM INC. 1996
PAGE 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,242,430 $ 3,355,745 $ 1,130,559
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 903,992 727,741 397,291
Acquisition related charge -- 6,338,590 4,948,807
Deferred taxes 80,000 (1,804,000) (931,000)
Changes in assets and liabilities, net of affects of
acquired businesses:
Accounts receivable, net 2,410,107 (3,457,934) (479,737)
Inventories (1,671,245) (3,199,674) 654,585
Other current assets 85,224 (183,886) (31,436)
Intangible and other assets 2,484 184,288 864
Trade accounts payable (691,521) 808,824 (341,305)
Accrued compensation and commissions (310,817) 332,773 210,404
Other accrued expenses (323,613) (634,405) 131,606
Income taxes payable 358,594 1,549,809 385,987
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,085,635 4,017,871 6,076,625
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired -- -- (7,762,774)
Payment of acquisition related indebtedness (7,287,323) -- --
Purchase of property and equipment (1,435,583) (660,999) (297,965)
Purchase of short term investments (1,028,201) -- --
Other -- -- (2,350)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,751,107) (660,999) (8,063,089)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 355,724 23,819,675 153,545
Repurchase of common stock related to
exercise of stock options (1,050,167) (1,074,192) (466,638)
Principal payments on debt (175,067) -- (544,380)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (869,510) 22,745,483 (857,473)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (534,982) 26,102,355 (2,843,937)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 35,291,200 9,188,845 12,032,782
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 34,756,218 $ 35,291,200 $ 9,188,845
===================================================================================================================
See accompanying notes to the consolidated financial statements. AETRIUM INC. 1996
PAGE 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS DESCRIPTION
The company specializes in the design, development, manufacturing and marketing
of a variety of electromechanical equipment used by the semiconductor industry
to handle and test integrated circuits.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with the current year presentation.
CASH EQUIVALENTS AND SHORT TERM INVESTMENTS: Short term investments include
highly liquid investments purchased with an original maturity greater than three
months and less than one year and are stated at cost which approximates market
value. Short term investments which have a maturity of three months or less at
the time of purchase are considered cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT : Property and equipment are stated at cost. Depreciation
and amortization are computed for financial statement and tax purposes using
accelerated methods over the shorter of the estimated useful lives or the
applicable lease terms. Maintenance and repairs are charged to expense as
incurred.
INTANGIBLES: Goodwill, representing the excess of purchase price over the fair
value of net assets of acquired businesses, is amortized on a straight-line
basis over 15 years. The company assesses the potential impairment of its
intangible assets based on anticipated undiscounted cash flows from operations.
At December 31, 1996 and 1995, no impairment was indicated.
Costs associated with the purchase of product and patent rights are capitalized
and amortized on a straight-line basis over their respective useful lives or 15
years, whichever is less.
WARRANTY COSTS: Estimated product warranty costs are accrued at the time of
shipment.
REVENUE RECOGNITION: Revenue is recognized upon the shipment of products.
RESEARCH AND DEVELOPMENT: Expenditures for research and development, including
software development, are expensed as incurred.
INCOME TAXES: Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("FAS") No. 109, "Accounting for Income Taxes".
Deferred tax assets are recognized for deductible temporary differences and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
NET INCOME PER COMMON SHARE: Net income per common share is computed by dividing
net income by the weighted average number of shares of common and common
equivalent shares outstanding during each year. Common stock equivalents include
stock options and warrants using the treasury stock method.
AETRIUM INC. 1996
PAGE 20
NOTE 3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows:
Year Ended Dec. 31, 1996 1995 1994
- -------------------------------------------------------
Interest paid $ 13,871 $ 10,044 $ 44,229
Income taxes paid $4,063,286 $ 1,619,976 $1,101,228
- -------------------------------------------------------
During the years ended December 31, 1996, 1995 and 1994 employees surrendered
79,310 ($1,348,149 fair market value), 73,796 ($1,181,154 fair market value) and
28,053 ($206,080 fair market value) shares of Common Stock, respectively, as
payment for the exercise prices of stock options.
NOTE 4 INVENTORIES
A summary of the composition of inventories is as follows:
December 31, 1996 1995
- -----------------------------------------------------------
Purchased parts and
completed subassemblies $ 7,330,388 $ 4,050,934
Work in process 2,105,037 3,180,906
Finished goods 896,623 1,428,963
===========================================================
Total inventories $ 10,332,048 $ 8,660,803
- -----------------------------------------------------------
NOTE 5 INTANGIBLE AND OTHER ASSETS
Intangible and other assets is comprised of the following:
December 31, 1996 1995
- -------------------------------------------------------------
Goodwill $ 1,269,937 $ 1,269,937
Product and patent rights 917,035 917,035
Other 60,154 46,782
- -------------------------------------------------------------
2,247,126 2,233,754
Accumulated amortization (819,549) (673,750)
=============================================================
Total intangible and
other assets, net $ 1,427,577 $ 1,560,004
- -------------------------------------------------------------
Amortization expense related to intangibles amounted to $145,799, $119,131, and
$119,090 for 1996, 1995 and 1994 respectively.
NOTE 6 ACQUISITIONS
EJ SYSTEMS: Effective December 29, 1995, the company acquired substantially all
of the assets (including in-process research and development) and assumed
certain liabilities of EJ Systems, Inc. ("EJ"), a manufacturer of environmental
test products. The purchase price totaled $7,507,323 including $7,287,323 of
cash and $220,000 of acquisition related costs. The acquisition was accounted
for as a purchase and, accordingly, the net assets acquired were recorded at
their fair values at December 29, 1995, the effective
AETRIUM INC. 1996
PAGE 21
NOTE 6 ACQUISITIONS (CONT.)
date of the acquisition. The purchase price was allocated as follows:
- -------------------------------------------------------
Current assets $ 1,265,515
Furniture and equipment 227,284
Intangibles, patents 400,000
In-process research and development 6,338,590
Notes payable (175,067)
Current liabilities (548,999)
=======================================================
Total purchase price $ 7,507,323
- -------------------------------------------------------
The $6,338,590 related to in-process research and development, as determined by
a third party appraisal, was charged against income in 1995 as the underlying
research and development projects had not yet reached technological feasibility.
In connection with the purchase of the EJ business, the company entered into a
product development contract with the previous owner of the business, which
provides for potential future payments up to a cumulative $2 million based upon
the successful completion of certain product developments. As of December 31,
1996, no payments had been made under the product development contract.
SYMTEK SYSTEMS: On November 28, 1994, the company acquired substantially all of
the assets (including in-process research and development) and assumed certain
liabilities of SymTek Systems, Inc. ("SymTek"), a manufacturer of automated
integrated circuit test handlers. The purchase price totaled $7,841,529
including $6,828,957 of cash and $1,012,572 of acquisition related costs. The
acquisition was accounted for as a purchase and, accordingly, the net assets
acquired were recorded at their fair values at the effective date of the
acquisition. The purchase price was allocated as follows:
- -------------------------------------------------------
Current assets $ 4,130,016
Furniture and equipment 462,020
In-process research and development 4,948,807
Current liabilities (1,699,314)
- -------------------------------------------------------
Total purchase price $ 7,841,529
- -------------------------------------------------------
The $4,948,807 related to in-process research and development, as determined by
a third party appraisal, was charged against income in 1994 as the underlying
research and development projects had not yet reached technological feasibility.
PRO FORMA INFORMATION: The company's consolidated financial statements include
the results of EJ operations since December 29, 1995 and the results of SymTek
operations since November 28, 1994. The following table presents the
consolidated results of operations of the company for 1995 and 1994 on an
unaudited pro forma basis as if the acquisitions took place at the beginning of
each year (in thousands, except per share data):
Unaudited pro forma 1995 1994
- --------------------------------------------------------------
Net sales $ 52,430 $ 46,795
Net income 7,159 1,136
Pro forma net income per share $ .97 $ .16
- --------------------------------------------------------------
Reported net income per share
before acquisition related charge $ 1.06 $ .66
- --------------------------------------------------------------
The acquisition related charges of $6,338,590 for EJ in 1995 and $4,948,807 for
SymTek in 1994 are not reflected in the pro forma results presented above. The
unaudited pro forma results of operations are for comparative purposes only and
do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of the periods presented or the results
which may occur in the future.
AETRIUM INC. 1996
PAGE 22
NOTE 7 LONG-TERM DEBT AND CREDIT AGREEMENT
As of December 31, 1996, the company had no outstanding long-term debt. As of
December 31, 1995, long-term debt consisted of a bank loan obligation assumed in
the EJ acquisition amounting to $175,067. This loan was paid in full in January,
1996.
The company has a line of credit with a bank which provides for borrowings up to
the lesser of $5,000,000, or 80% of eligible accounts receivables and 50% of
eligible inventory. The line of credit is secured by receivables, inventory, and
general intangibles. There were no line of credit advances outstanding as of
December 31, 1996 and 1995.
NOTE 8 LEASE OBLIGATIONS
The company leases certain equipment and facilities under various operating
leases. Its headquarters is leased from a partnership owned by certain
shareholders of the company. The lease agreement expires in February 2006. None
of the shareholders in the partnership are either directors or officers of the
company. Rent expense under all operating leases was as follows:
Year Ended Dec. 31, 1996 1995 1994
- -----------------------------------------------------------------
Paid to shareholders $ 231,575 $ 185,284 $ 144,891
Paid to others 457,501 353,286 88,674
=================================================================
Total rent expense $ 689,076 $ 538,570 $ 233,565
- -----------------------------------------------------------------
Future minimum annual lease payments under operating leases are as follows:
- -------------------------------------------------------
1997 $ 919,000
1998 933,000
1999 793,000
2000 258,000
2001 240,000
Thereafter 999,000
=======================================================
Total minimum lease payments $ 4,142,000
- -------------------------------------------------------
NOTE 9 COMMON STOCK
On July 24, 1995, the company's board of directors approved a 3-for-2 stock
split. Accordingly, all historical financial data and per share amounts included
in the financial statements and footnotes have been restated to reflect the
stock split. In November 1995, the company issued 1,265,000 shares of Common
Stock in a stock offering. Net proceeds to the company were approximately $23.6
million after deducting the underwriter discounts and expenses.
NOTE 10 STOCK OPTIONS AND WARRANTS
In 1993, the company issued to the underwriters of its initial public offering
warrants to purchase 135,000 shares of Common Stock at $7.00 per share. During
1995, the underwriters exercised their warrants in cashless transactions whereby
46,735 shares with a fair market value of $945,000 were withheld as payment for
the exercise prices, resulting in a net issuance of 88,265 shares of Common
Stock.
A nonqualified stock option plan adopted by the company in 1987 (the "1987
Plan") terminated in 1992. As of December 31, 1996, outstanding options for the
purchase of 5,812 shares of Common Stock granted under the 1987 Plan continued
to be exercisable in accordance with their original terms.
In 1993, the company's shareholders approved the adoption of the 1993 Stock
Incentive Plan (the "Plan").
AETRIUM INC. 1996
PAGE 23
NOTE 10 STOCK OPTIONS AND WARRANTS (CONT.)
Employees, officers, directors, consultants and independent contractors
providing services to the company are eligible to receive awards under the Plan.
The number of shares available for issuance under the Plan is equal to 17.5% of
the aggregate number of shares of Common Stock outstanding less the total number
of shares of Common Stock issuable upon the exercise or conversion of any stock
options, warrants, or other stock rights. The Plan is administered by the
Compensation Committee of the Board of Directors and provides for the granting
of: (a) stock options; (b) stock appreciation rights; (c) restricted stock; (d)
performance awards; and (e) stock awards valued in whole or in part by reference
to or otherwise based upon the company's stock. Options granted under the Plan
may be incentive stock options or nonqualified stock options. The Plan provides
that newly elected outside directors will be granted a nonqualified stock option
to purchase 30,000 shares of Common Stock at a price equal to the fair market
value at the time of the grant. The Plan will terminate on June 16, 2003.
As required, the company adopted Statement of Financial Accounting Standards
("FAS") No. 123, "Accounting for Stock-Based Compensation" in 1996.
As permitted by FAS No. 123, the company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation expense related thereto. If the company had elected
to recognize compensation expense based on the fair value of the options granted
at grant date as prescribed by FAS No. 123, net income and net income per share
would have been reduced to the pro forma amounts indicated in the following
table ($ in thousands, except per share amounts):
1996 1995
- -------------------------------------------------------
Net income - as reported $ 9,242 $ 3,356
Net income - pro forma $ 8,662 $ 3,315
Net income per share -
as reported $ 1.08 $ .46
Net income per share -
pro forma $ 1.01 $ .45
- -------------------------------------------------------
The fair value of each option grant in 1996 and 1995 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
- -------------------------------------------------------
Expected dividend level 0%
Expected stock price volatility 44%
Risk-free interest rate 6.0%
Expected life of options 3.5 years
- -------------------------------------------------------
The following table summarizes activity under the company's stock option plans:
Outstanding Options
------------------------------------------------------------------
Weighted Average
Number of Shares Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 554,907 $ 1.39 to 6.58 $ 2.85
Options granted 637,500 6.50 to 7.83 6.79
Options exercised (235,307) 1.39 1.39
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 957,100 1.39 to 7.83 5.83
Options granted 525,725 10.25 to 16.50 11.27
Options exercised (290,726) 1.39 to 6.67 4.69
Options canceled (46,407) 1.39 to 6.50 6.34
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,145,692 1.39 to 16.50 8.59
Options granted 172,500 10.25 to 18.81 12.46
Options exercised (289,071) 1.39 to 11.50 5.89
Options canceled (29,939) 11.50 to 16.50 15.51
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 999,182 $ 1.39 to 18.81 $ 9.59
===================================================================================================================
Options exercisable as of December 31, 1996 335,781 $ 1.39 to 18.81 $ 8.74
AETRIUM INC. 1996
PAGE 24
The following table summarizes information related to stock options outstanding
at December 31, 1996, all of which are nonqualified options which become
exercisable over a four to five year period and expire five years after the
grant date:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Number Weighted Number Weighted
Range of Outstanding Average Remaining Weighted Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$ 1.39 5,812 .6 years $ 1.39 5,812 $ 1.39
6.58 - 7.83 326,646 2.1 years 6.82 170,224 6.81
10.25 - 18.81 666,724 4.1 years 11.02 159,745 11.05
- -------------------------------------------------------------------------------------------------------------------
$ 1.39 - 18.81 999,182 3.4 years $ 9.59 335,781 $ 8.74
During the years ended December 31, 1996, 1995, and 1994 in connection with
certain stock option exercises, employees surrendered 142,461 ($2,398,316 fair
market value), 146,269 ($2,255,346 fair market value) and 92,926 ($672,718 fair
market value) shares of Common Stock as payment for the exercise prices of such
options and related withholding tax obligations.
The company recorded a tax benefit of $1,010,969, $997,433 and $472,632 for the
years ending December 31, 1996, 1995, and 1994, respectively, related to the
exercise of nonqualified stock options, which amounts have been credited to
Additional Paid-in Capital.
NOTE 11 EMPLOYEE SAVINGS 401(k) AND STOCK PURCHASE PLANS
The company has a 401(k) employee savings plan which covers all employees who
are at least 21 years of age and have at least three months of service. Company
contributions to the plan were $271,190, $240,376 and $121,053 in 1996, 1995 and
1994 respectively.
During 1994, the company established a non-qualified employee stock purchase
plan. Full-time eligible employees may purchase shares of Common Stock by
contributing to the plan through payroll deductions. Employee contributions to
the plan are limited to 10% of each employee's base compensation. The plan
purchases shares on the open market at fair market value. At its discretion, the
company may choose to contribute to the plan. The company contributed $14,966
and $3,637 to the plan in 1996 and 1995 respectively.
NOTE 12 INCOME TAXES
The provision for income taxes is made up of the following components:
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Current tax provision:
Federal $ 3,585,000 $ 2,821,000 $ 1,263,000
State 585,000 421,000 152,000
- -------------------------------------------------------------------------------------------------------------------
Total current provision 4,170,000 3,242,000 1,415,000
- -------------------------------------------------------------------------------------------------------------------
Deferred tax provision:
Federal 69,000 (1,570,000) (871,000)
State 11,000 (234,000) (60,000)
- -------------------------------------------------------------------------------------------------------------------
Total deferred provision 80,000 (1,804,000) (931,000)
- -------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 4,250,000 $ 1,438,000 $ 484,000
===================================================================================================================
AETRIUM INC. 1996
PAGE 25
NOTE 12 INCOME TAXES (CONT.)
An analysis of the effective tax rate on earnings and a reconciliation from the
expected statutory rate are as follows:
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 13,492,430 $ 4,793,745 $ 1,614,559
- -------------------------------------------------------------------------------------------------------------------
Statutory federal tax rate 35% 34% 34%
- -------------------------------------------------------------------------------------------------------------------
Tax computed at federal statutory rate $ 4,722,351 $ 1,629,873 $ 548,950
State taxes, net of federal benefit 387,400 123,420 83,708
Increase (decrease) in tax from:
Goodwill amortization 19,938 19,368 19,368
Foreign sales corporation benefit (315,000) (244,800) (184,620)
Tax exempt interest income (388,909) (154,484) (115,586)
Tax credits (198,750) (234,300) (130,680)
Other 22,970 298,923 262,860
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 4,250,000 $ 1,438,000 $ 484,000
===================================================================================================================
Deferred tax assets (liabilities) are comprised of the following:
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Accounts receivable,principally due to allowances for returns and doubtful accounts $ 287,784 $ 94,168
Inventories, principally due to reserves for obsolescence and additional costs
inventoried for tax purposes pursuant to the Tax Reform Act of 1986 318,552 272,338
Employee compensation and benefits accrued for financial reporting purposes 69,093 77,290
Purchased research and development 2,928,326 3,224,178
Tax credit carryforwards 104,867 153,048
Other (180,308) (212,708)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 3,528,314 $ 3,608,314
===================================================================================================================
- --------------------------------------------------------------------------------
NOTE 13: BUSINESS SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION, AND
CONCENTRATION OF CREDIT RISK
The company operates in one industry segment supplying electromechanical
equipment to the semiconductor industry.
Foreign sales from the United States were as follows:
Year Ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------
Southeast Asia $12,552,000 $18,021,000 $ 9,472,000
Europe 3,597,000 4,364,000 1,954,000
Other 8,000 7,000 105,000
- --------------------------------------------------------------
$16,157,000 $22,392,000 $11,531,000
==============================================================
Sales to a distributor customer represented 10.0%, 19.5% and 19.7% of total net
sales in 1996, 1995 and 1994 respectively. Sales to a second customer
represented 16.0% of total net sales in 1996. Sales to a third customer
represented 16.3% of total net sales in 1995. Sales to a fourth customer
represented 11.6% and 10.4% of total net sales in 1995 and 1994 respectively.
Sales to a fifth customer represented 10.1% of total net sales in 1994.
The company sells its products principally to manufacturers of integrated
circuits and semiconductor equipment. Its accounts receivable balance is
concentrated with customers principally in one industry; however, the company
regularly monitors the creditworthiness of its customers and credit losses have
historically been minimal.
AETRIUM INC. 1996
PAGE 26
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SUMMARY
IN THOUSANDS, EXCEPT PER SHARE DATA
Year ended December 31,
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Income statement data:
Net sales $ 58,387 $ 47,631 $ 26,091 $ 20,900 $ 13,597
Income from operations 12,376 4,359 1,238 4,810 1,251
Net income 9,242 3,356 1,131 4,584* 1,145
Net income per share 1.08 .46 .16 .85* .23
- -------------------------------------------------------------------------------------------------------------------
* INCLUDES $1,315 ($.25 PER SHARE) NET GAIN FROM UNUSUAL ITEMS.
December 31,
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets $ 61,718 $ 61,600 $ 25,210 $ 22,896 $ 9,622
Long term debt, less current portion -- 135 -- 410 183
Convertible preferred stock -- -- -- -- 10,245
- -------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------
1996 Net sales $ 17,049 $ 17,271 $ 13,048 $ 11,019
Gross profit 9,563 9,817 6,991 5,797
Income from operations 4,145 4,451 2,320 1,460
Net income 3,001 3,203 1,781 1,257
Net income per share .35 .37 .21 .15
- -------------------------------------------------------------------------------------------------------------------
1995 Net sales $ 8,341 $ 10,665 $ 13,542 $ 15,083
Gross profit 4,765 6,206 7,470 8,739
Income from operations before
unusual item 1,511 2,075 3,086 4,026(1)
Net income before unusual item 1,112 1,508 2,218 2,954(1)
Net income per share before
unusual item .16 .21 .30 .37(1)
Net income (loss) per share .16 .21 .30 (.19)
- -------------------------------------------------------------------------------------------------------------------
(1) BEFORE AN ACQUISITION RELATED CHARGE.
PRICE RANGE OF THE COMPANY'S COMMON STOCK
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------
1996 HIGH $ 20.75 $ 22.00 $ 18.00 $ 14.50
LOW $ 13.25 $ 14.75 $ 8.38 $ 10.00
- -------------------------------------------------------------------------
1995 HIGH $ 10.33 $ 13.08 $ 25.25 $ 22.00
LOW $ 6.67 $ 9.00 $ 12.00 $ 15.75
- -------------------------------------------------------------------------
As of December 31, 1996 there were approximately 200 shareholders of record. The
company estimates that an additional 6,100 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
DIVIDENDS
The Company has never paid cash dividends on Common Stock. The company currently
intends to retain any earnings for use in its operations and does not anticipate
paying cash dividends in the foreseeable future.
AETRIUM INC. 1996
PAGE 27