UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2002

 

Commission File No. 000-22166

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months ( or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý   No   o

 

 

 

AETRIUM INCORPORATED

 

INDEX

 

PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001
		Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2002 and 2001
		Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2002 and 2001
		Notes to unaudited consolidated financial statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

 

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PART 1.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AETRIUM INCORPORATED

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

ASSETS

 

		September 30, 2002			December 31, 2001
		(Unaudited)
Current Assets:
Cash and cash equivalents		$	4,725		$	7,181
Accounts receivable, net		2,574			1,505
Refundable income taxes		440			0
Inventories		7,641			8,956
Other current assets		218			131
Total current assets		15,598			17,773
Property and equipment:
Furniture and fixtures		598			597
Equipment		3,129			3,091
		3,727			3,688
Less accumulated depreciation and amortization		(3,153		)	(2,842		)
Property and equipment, net		574			846
Goodwill		1,393			7,140
Identifiable intangible assets, net		2,250			3,570
Other assets		41			57
Total assets		$	19,856		$	29,386

 

See accompanying notes to the consolidated financial statements.

 

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LIABILITIES AND SHAREHOLDERS’ EQUITY

 

		September 30, 2002			December 31, 2001
		(Unaudited)
Current liabilities:
Trade accounts payable		$	898		$	676
Accrued compensation		345			493
Other accrued liabilities		2,038			3,701
Total current liabilities		3,281			4,870
Shareholders’ equity:
Common stock, $.001 par value; 30,000,000 shares authorized; 9,477,044 and 9,474,566 shares issued and outstanding, respectively		10			10
Additional paid-in capital		60,250			60,246
Accumulated deficit		(43,685		)	(35,740		)
Total shareholders’ equity		16,575			24,516
Total liabilities and shareholders’ equity		$	19,856		$	29,386

 

See accompanying notes to the consolidated financial statements.

 

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AETRIUM INCORPORATED

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

		Three months ended September 30,						Nine months ended September 30,
		2002			2001			2002			2001
Net sales		$	3,219		$	3,876		$	9,513		$	16,250
Cost of goods sold		1,492			2,106			4,336			8,299
Gross profit		1,727			1,770			5,177			7,951
Operating expenses:
Selling, general, and administrative		1,844			2,332			5,464			9,108
Research and development		557			774			1,687			4,066
Unusual charges		0			0			0			1,525
Total operating expenses		2,401			3,106			7,151			14,699
Loss from operations		(674		)	(1,336		)	(1,974		)	(6,748		)
Other income, net		19			49			75			211
Loss before income taxes and cumulative effect of a change in accounting principle		(655		)	(1,287		)	(1,899		)	(6,537		)
Income tax benefit		440			226			440			226
Loss before cumulative effect of a change in accounting principle		(215		)	(1,061		)	(1,459		)	(6,311		)
Cumulative effect of a change in accounting principle - see Note 4		0			0			(6,486		)	0
Net loss		$	(215	)	$	(1,061	)	$	(7,945	)	$	(6,311	)
Loss per common share (basic and diluted):
Loss before cumulative effect of a change in accounting principle		$	(.02	)	$	(.11	)	$	(.15	)	$	(.67	)
Cumulative effect of a change in accounting principle - see Note 4		0			0			(.69		)	0
Net loss		$	(.02	)	$	(.11	)	$	(.84	)	$	(.67	)
Weighted average common shares outstanding (basic and diluted)		9,477			9,475			9,476			9,475

 

See accompanying notes to the consolidated financial statements.

 

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AETRIUM INCORPORATED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		Nine months ended September 30,
		2002			2001
Cash flows from operating activities:
Net loss		$	(7,945	)	$	(6,311	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		892			1,666
Provision for excess and obsolete inventories		100			956
Unusual charges		0			1,265
Cumulative effect of a change in accounting principle		6,486			0
Changes in assets and liabilities:
Accounts receivable		(1,069		)	5,970
Refundable income taxes		(440		)	346
Inventories		1,215			(910		)
Other current assets		(87		)	76
Other assets		16			30
Trade accounts payable		222			(3,255		)
Accrued compensation		(148		)	(946		)
Other accrued liabilities		(1,663		)	(1,286		)
Net cash used in operating activities		(2,421		)	(2,399		)
Cash flows from investing activities:
Purchase of property and equipment		(39		)	(66		)
Proceeds from sale of equipment		0			52
Net cash used in investing activities		(39		)	(14		)
Cash flows from financing activities:
Net proceeds from issuance of common stock		4			0
Net cash provided by financing activities		4			0
Net decrease in cash and cash equivalents		(2,456		)	(2,413		)
Cash and cash equivalents at beginning of period		7,181			9,132
Cash and cash equivalents at end of period		$	4,725		$	6,719

 

See accompanying notes to the consolidated financial statements.

 

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AETRIUM INCORPORATED

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.             BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal, recurring adjustments except for the change in accounting principle described in Note 4) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the operating results to be expected for the full year or any future period.

 

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

 

Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2001.

 

2.             NET INCOME (LOSS) PER COMMON SHARE

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during each period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares and potentially dilutive shares outstanding during each period. Potentially dilutive shares include stock options using the treasury stock method. Stock options are not included in the diluted loss per share calculations in the three and nine-month periods ended September 30, 2002 and 2001 because they are antidilutive.  As of September 30, 2002 there were 1,551,800 outstanding stock options which could potentially impact diluted earnings per share.

 

3.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit of Disposal Activities,” which replaces Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

 

 

4.             GOODWILL AND OTHER INTANGIBLE ASSETS — CHANGE IN ACCOUNTING PRINCIPLE

 

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations, requiring that all business combinations initiated after June 30, 2001 be accounted for using the purchase method.  SFAS 142 provides that goodwill is no longer amortized, but rather is reviewed for impairment at least annually and more frequently in certain circumstances using a two-step process. The first step is to evaluate the carrying value of goodwill for potential impairment and, in transition, this step must be completed as of the beginning

 

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of the fiscal year in which SFAS 142 is adopted. If the first step indicates potential impairment, the second step of the process is to measure the amount of the impairment loss, if any.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supercedes SFAS 121. SFAS 144 does, however, retain the fundamental provisions of SFAS 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale.

 

Aetrium adopted SFAS 141, SFAS 142, AND SFAS 144 effective January 1, 2002. The adoption of SFAS 141 and SFAS 144 did not affect our financial position or results of operations.  We completed step one of the goodwill impairment test required by SFAS 142 by comparing the fair value of our single reporting unit (i.e. Aetrium) as of January 1, 2002 with the net carrying value of our assets, including goodwill.  The fair value of Aetrium was determined based on quoted market prices of our common stock, as adjusted for a control premium. Since the carrying value of our net assets exceeded their fair value, management concluded that there was a potential impairment.  As required by SFAS 142 because there was an indication of a potential impairment, we completed step two of the impairment test in order to measure the amount of any impairment loss. In performing the second step of the impairment test, we compared the aggregate fair values of our non-goodwill assets and liabilities with the fair value of the reporting unit (i.e. Aetrium) in order to determine the implied fair value of goodwill.  Step two of the impairment test indicated that the carrying value of our goodwill exceeded its implied fair value by $6.5 million. In accordance with SFAS 142, this impairment was recorded in our statement of operations as a change in accounting principle effective January 1, 2002.

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 are as follows (in thousands):

 

Goodwill balance at December 31, 2001		$	7,140
Intangible assets reclassified to goodwill at January 1, 2002		739
Transition impairment loss - recorded in quarter ended March 31, 2002		(6,486		)
Goodwill balance at September 30, 2002		$	1,393

 

Identifiable intangible assets are comprised of the following (in thousands):

 

		September 30, 2002									December 31, 2001
		Gross			Accumulated amortization			Net			Gross			Accumulated amortization			Net
Developed technology		$	2,600		$	(1,710	)	$	890		$	2,600		$	(1,442	)	$	1,158
Core technology		3,167			(1,861		)	1,306			3,167			(1,556		)	1,611
Intangible assets reclassified to goodwill		0			0			0			1,223			(484		)	739
Other		99			(45		)	54			99			(37		)	62
Total		$	5,866		$	(3,616	)	$	2,250		$	7,089		$	(3,519	)	$	3,570

 

 

 

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Amortization expense related to intangible assets amounted to $0.6 million for the nine months ended September 30, 2002.  Estimated amortization expense for the balance of 2002 and the five succeeding years is as follows (in thousands):

 

2002 (three months)		$	194
2003		774
2004		761
2005		426
2006		92
2007		3

 

If SFAS 142 had been in effect in fiscal 2001, results of operations for the three and nine months ended September 30, 2001 would have been as follows (in thousands, except per share amounts):

 

		Three Months Ended September 30, 2001			Nine months Ended September 30, 2001
Net loss:
Reported net loss		$	(1,061	)	$	(6,311	)
Add back: goodwill amortization		206			617
Adjusted net loss		$	(855	)	$	(5,694	)
Net loss per basic and diluted share:
Reported net loss		$	(0.11	)	$	(0.67	)
Add back: goodwill amortization		.02			.07
Adjusted net loss		$	(0.09	)	$	(0.60	)

 

5.             COMPREHENSIVE INCOME (LOSS)

 

Aetrium’s comprehensive loss is equal to its net loss for all periods presented.

 

6.             INVENTORIES

 

Inventories are comprised of the following:

 

		September 30, 2002			December 31, 2001
		(in thousands)
Purchased parts and completed subassemblies		$	3,148		$	4,095
Work-in-process		2,703			2,480
Finished goods, including demonstration equipment		829			1,455
Equipment shipped subject to revenue deferral		961			926
Total		$	7,641		$	8,956

 

7.             OTHER ACCRUED LIABILITIES

 

Other accrued liabilities are comprised of the following:

 

		September 30, 2002				December 31, 2001
		(in thousands)
Accrued commissions		$		106		$	189
Accrued warranty		424				455
Customer deposits and deferred revenue		617				1,527
Accrued restructuring costs		452				1,108
Other		439				422
Total		$	2,038			$	3,701

 

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8.             UNUSUAL CHARGES AND RESTRUCTURING ACTIVITIES

 

Aetrium has been significantly impacted by the downturn in the semiconductor equipment industry that began in late 2000, continued through 2001 and into 2002.  During 2001, we recorded unusual charges in connection with a number of restructuring actions implemented to improve operating efficiencies and reduce costs.  We completed the transfer of our operations in Poway, California to North St. Paul, Minnesota.  We restructured our operations in Minnesota, including the consolidation of operations from two buildings into one. We significantly reduced our personnel expenses by implementing workforce reductions in March, April, June and December of 2001. These restructuring activities resulted in unusual charges being recorded in the first, second and fourth quarters of 2001.

 

In the quarter ended March 31, 2001, we recorded unusual charges as follows (in thousands):

 

 

We recorded restructuring charges totaling $0.3 million, including $0.2 million for severance and related costs associated with the termination of 31 employees in manufacturing, sales, engineering, and administration. In addition, we recorded a facility exit charge of $0.1 million to increase our accrual related to a leased facility in Grand Prairie, Texas that we had vacated in early 2000.  The accrual increase was required to cover estimated non-cancelable lease payments and other costs we expected to incur until a new tenant was located.

 

In March 2001, we completed the closure of our Poway, California operation.  Relocation expenses of $0.2 million incurred during the quarter consisted primarily of final costs related to the transfer of product development activities from Poway to our North St. Paul, Minnesota operation.

 

In the quarter ended June 30, 2001, we recorded unusual charges as follows (in thousands):

 

 

In the quarter ended June 30, 2001, we terminated 43 employees in manufacturing, sales, engineering, and administration.  We recorded severance and related costs of $0.3 million related to the terminations.

 

In May 2001, we consolidated our North St. Paul, Minnesota operations from two buildings into one.  Our 30,000 square foot building, which is under lease through February 2006, was vacated prior to June 30, 2001.  We recorded a facility exit charge of $0.4 million for estimated non-cancelable lease payments and other costs we expected to incur during the estimated time needed to locate a subtenant. Also, in connection with vacating this facility, we recorded a charge of $0.2 million related to abandoned leaseholds and losses on the sale of certain equipment during the quarter.

 

In May 2002, we negotiated the termination of the lease on the facility in Grand Prairie, Texas.  The termination agreement provided for cash payments of $39,000 upon execution of the agreement and $30,000 on each of August 1, 2002 and October 1, 2002.

 

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Following is a summary of continuing lease obligations related to facilities that we have vacated as of September 30, 2002:

 

•                  A lease on the 30,000 square foot facility in North St. Paul that we vacated in June 2001 expires in February 2006, with an annual rent of approximately $198,000. Approximately half of this space is subleased to third parties, and we are actively seeking to sublease the remaining unused space.

 

•                  A lease on a 10,000 square foot facility located in Poway, California that we vacated in March 2001 expires in September 2003, with an annual rent of approximately $113,000.  This facility has been subleased to a third party for the remainder of the lease term, but we remain liable under the lease on a contingent basis.

 

•                  A lease on a 45,000 square foot facility in Poway, California that we vacated in 2000 was assigned to a third party and we are contingently liable for the lease if the assignee defaults.  This lease expires in January 2010, and has an annual rent of approximately $429,000.

 

Following is a table that summarizes severance and facility exit restructuring charges and the associated accrual activity for the nine months ended September 30, 2002 (in thousands):

 

		Severance and Benefits			Facility Exit Costs			Total
Accrual Balance, December 31, 2001		$	404		$	704		$	1,108
Cash Payments		(225		)	(118		)	(343		)
Accrual Balance, March 31, 2002		179			586			765
Cash Payments		(83		)	(104		)	(187		)
Accrual Balance, June 30, 2002		96			482			578
Cash Payments		(55		)	(71		)	(126		)
Accrual Balance, September 30, 2002		$	41		$	411		$	452

 

We estimate that the accrued severance and facility exit costs at September 30, 2002 will be paid or utilized as follows: approximately $100,000 in the quarter ended December 31, 2002; approximately $25,000 per quarter thereafter.

 

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AETRIUM INCORPORATED

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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. 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 have the greatest impact on and require the most significant judgments and estimates used in the preparation of our consolidated financial statements are those related to revenue recognition, bad debts, inventories, goodwill, intangible assets, warranty obligations, and income tax accounting.

 

Our policy is to recognize revenue on product sales upon shipment if contractual obligations have been substantially met 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 upgrade sales. Some equipment or equipment upgrade sales contracts, however, may include post-shipment obligations and/or contractual terms that can only be satisfied after shipment, such as installation and meeting customer-specified acceptance requirements at the customer’s site.  In these cases, revenue is not recognized until such obligations have been completed and there is objective evidence that the applicable contract terms have been met.   Due to the high selling price of certain types of equipment, the timing of revenue recognition of a relatively small number of transactions may have a significant impact on our quarterly results.

 

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

 

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

 

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As explained in Note 4 to our consolidated financial statements, we recorded a transitionary goodwill impairment charge of $6.5 million upon adoption of SFAS 142.  This charge was recorded as a change in accounting principle in the quarter ended March 31, 2002.  In accordance with SFAS 142, we review goodwill for impairment at least annually and more frequently in certain circumstances.  SFAS 142 prescribes a two-step process to test goodwill for impairment.  We perform step one by comparing the fair value of Aetrium with the net carrying value of our assets, including goodwill. If the fair value is less than the carrying value, potential impairment is indicated and we would complete step two to measure the amount of any impairment loss.  Step two involves determining the implied fair value of goodwill by comparing the fair value of Aetrium with the net fair value of our individual assets and

 

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liabilities.  If the carrying amount of our goodwill exceeds its implied fair value, we would recognize an impairment loss equal to that excess.  In accordance with SFAS 144, we review our non-goodwill intangibles and other long-lived assets for impairment whenever an event or change in circumstances indicates that the carrying value of an asset may not be recoverable.  If such an event or change in circumstances occurs and potential impairment is indicated because the carrying values exceed the estimated future undiscounted cash flows, we would measure the impairment loss as the amount by which the carrying value of the asset exceeds its fair value. The quoted market price of our stock is a significant factor in determining the fair value of Aetrium.  In the future, if it is determined that the fair value of Aetrium has declined or if changes in business conditions or other factors adversely impact the recoverability of goodwill and/or other long-lived assets, we may incur additional charges for impairment losses.

 

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.

 

Our deferred tax assets are reduced by a valuation allowance when we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized.  At September 30, 2002, we maintained a valuation allowance to fully reserve against our deferred tax assets.   If we generate taxable income consistently in future periods, our assessment of our ability to realize these deferred tax assets may change and we may reduce this valuation allowance, which would be reported as an income tax benefit.

 

Results of Operations

 

Net Sales.  Net sales for the nine months ended September 30, 2002 were $9.5 million, a 42% decrease from the same period in 2001.  Net sales for the quarter ended September 30, 2002 were $3.2 million, compared with $3.9 million for the same period in 2001. Equipment sales in 2002 decreased across all product lines as a result of the prolonged downturn in the semiconductor equipment industry that began in late 2000, continued through 2001 and into 2002.

 

Gross Profit. Gross profit was 54.4% of net sales for the nine months ended September 30, 2002 compared with 48.9% of net sales for the comparable period in 2001. Gross profit was 53.7% of net sales for the quarter ended September 30, 2002 compared with 45.7% of net sales for the comparable period in 2001 and 54.9% for the quarter ended June 30, 2002. Gross margins improved in the three and nine month periods ended September 30, 2002 compared to the same periods in 2001 primarily due to lower costs resulting from restructuring activities and lower provisions for excess and obsolete inventories. Gross margins decreased slightly in the quarter ended September 30, 2002 compared to the immediately preceding quarter primarily due to the mix of products sold.

 

Selling, General and Administrative.  Selling, general and administrative expenses for the nine months ended September 30, 2002 were $5.5 million compared to $9.1 million for the same period in 2001, a 40% decrease. Selling, general and administrative expenses for the quarter ended September 30, 2002 were $1.8 million compared with $2.3 million for the comparable period in 2001, a 22% decrease. Commissions expense decreased in 2002 due to significantly lower sales volume and savings realized from the termination of our U.S. independent sales representatives in early 2002. Goodwill amortization expense amounted to $0.2 million and $0.6 million for the three and nine-month periods ended September 30, 2001, respectively. This compares with no goodwill amortization expense in 2002 due to the implementation of SFAS No. 142 as explained in Note 4 to the consolidated financial statements.  In addition, selling, general and administrative expenses in 2002 were significantly lower due to restructuring activities implemented during 2001, including workforce reductions, the closing of our Poway, California facility, the consolidation of our North St. Paul, Minnesota operations into a single facility, and the reorganization of our North St. Paul, Minnesota operations.

 

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Research and Development.  Research and development expenses were $1.7 million for the nine months ended September 30, 2002 compared with $4.1 million for the comparable period in 2001, a 59% decrease. Research and development expenses amounted to $0.6 million for the quarter ended September 30, 2002 compared to $0.8 million for the comparable period in 2001.  The decrease in 2002 is primarily attributable to a reduction in engineering personnel, including workforce reductions related to the closing of our Poway, California facility in the first quarter of 2001, as well as workforce reductions we implemented during 2001 at our Dallas, Texas and North St. Paul, Minnesota facilities.

 

Unusual Charges and Restructuring Activities.  During 2001, in response to a significant downturn in the semiconductor equipment industry that began in late 2000, we implemented a number of restructuring actions to improve operating efficiencies and reduce costs.  We completed the transfer of our operations in Poway, California to North St. Paul, Minnesota.  We restructured our operations in Minnesota, including the consolidation of operations from two buildings into one. We significantly reduced our personnel expenses by implementing workforce reductions in March, April, June and December of 2001. These restructuring activities resulted in unusual charges being recorded in the first, second and fourth quarters of 2001.

 

In the quarter ended March 31, 2001, we recorded unusual charges as follows (in thousands):

 

 

We recorded restructuring charges totaling $0.3 million, including $0.2 million for severance and related costs associated with the termination of 31 employees in manufacturing, sales, engineering, and administration. In addition, we recorded a facility exit charge of $0.1 million to increase our accrual related to a leased facility in Grand Prairie, Texas that we had vacated in early 2000.  The accrual increase was required to cover estimated non-cancelable lease payments and other costs we expected to incur until a new tenant was located.

 

In March 2001, we completed the closure of our Poway, California operation.  Relocation expenses of $0.2 million incurred during the quarter consisted primarily of final costs related to the transfer of product development activities from Poway to our North St. Paul, Minnesota operation.

 

In the quarter ended June 30, 2001, we recorded unusual charges as follows (in thousands):

 

 

In the quarter ended June 30, 2001, we terminated 43 employees in manufacturing, sales, engineering, and administration.  We recorded severance and related costs of $0.3 million related to the terminations.

 

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In May 2001, we consolidated our North St. Paul, Minnesota operations from two buildings into one.  Our 30,000 square foot building, which is under lease through February 2006, was vacated prior to June 30, 2001.  We recorded a facility exit charge of $0.4 million for estimated non-cancelable lease payments and other costs we expected to incur during the estimated time needed to locate a subtenant. Also, in connection with vacating this facility, we recorded a charge of $0.2 million related to abandoned leaseholds and losses on the sale of certain equipment during the quarter.

 

In May 2002, we negotiated the termination of the lease on the facility in Grand Prairie, Texas.  The termination agreement provided for cash payments of $39,000 upon execution of the agreement and $30,000 on each of August 1, 2002 and October 1, 2002.

 

Following is a summary of continuing lease obligations related to facilities that we have vacated as of September 30, 2002:

 

•                  A lease on the 30,000 square foot facility in North St. Paul that we vacated in June 2001 expires in February 2006, with an annual rent of approximately $198,000. Approximately half of this space is subleased to third parties, and we are actively seeking to sublease the remaining unused space.

 

•                  A lease on a 10,000 square foot facility located in Poway, California that we vacated in March 2001 expires in September 2003, with an annual rent of approximately $113,000.  This facility has been subleased to a third party for the remainder of the lease term, but we remain liable under the lease on a contingent basis.

 

•                  A lease on a 45,000 square foot facility in Poway, California that we vacated in 2000 was assigned to a third party and we are contingently liable for the lease if the assignee defaults.  This lease expires in January 2010, and has an annual rent of approximately $429,000.

 

Following is a table that summarizes severance and facility exit restructuring charges and the associated accrual activity for the nine months ended September 30, 2002 (in thousands):

 

		Severance and Benefits			Facility Exit Costs			Total
Accrual Balance, December 31, 2001		$	404		$	704		$	1,108
Cash Payments		(225		)	(118		)	(343		)
Accrual Balance, March 31, 2002		179			586			765
Cash Payments		(83		)	(104		)	(187		)
Accrual Balance, June 30, 2002		96			482			578
Cash Payments		(55		)	(71		)	(126		)
Accrual Balance, September 30, 2002		$	41		$	411		$	452

 

We estimate that the accrued severance and facility exit costs at September 30, 2002 will be paid or utilized as follows: approximately $100,000 in the quarter ended December 31, 2002; approximately $25,000 per quarter thereafter.

 

Other Income, net.  Other income, net, which consists primarily of interest income from the investment of excess funds, amounted to $75,000 for the nine months ended September 30, 2002 compared to $211,000 for the same period in 2001. Other income, net amounted to $19,000 for the quarter ended September 30, 2002 compared with

 

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$49,000 for the same period in 2001. The decrease is attributable to lower average cash balances and generally lower interest rates in 2002 compared with the prior year.

 

Income Taxes.  We maintain a valuation allowance against our deferred tax assets and do not intend to record any income tax expense or benefit until the company is consistently profitable on a quarterly basis. Therefore, we did not record an income tax benefit related to current operations for the three and nine-month periods ended September 30, 2002 and 2001. However, in the quarter ended September 30, 2002, we did record an income tax benefit of $0.4 million for a refund claim we filed which is related to taxes paid and expensed prior to 2002.  The refund claim resulted from Federal income tax law changes incorporated in the Job Creation and Worker Assistance Act enacted in 2002.  Also, in the quarter ended September 30, 2001, we recorded an income tax benefit of $0.2 million related directly to income taxes paid and expensed prior to 2001 that were refunded to the company during that quarter.

 

Financial Condition, Liquidity and Capital Resources

 

Cash and cash equivalents decreased by approximately $2.5 million in the nine months ended September 30, 2002.  Cash used in operating activities included a net loss of $1.9 million (excluding a $6.5 million non-cash charge for a change in accounting principle), a $1.1 million increase in accounts receivable and a $1.8 million decrease in accrued liabilities, partially offset by a decrease in inventories of $1.2 million.  Non-cash depreciation and amortization expense amounted to $0.9 million for the nine months ended September 30, 2002. Accounts receivable increased in part because approximately $0.5 million in collections that we anticipated receiving prior to September 30, 2002 was received shortly after the end of the quarter. Inventories have declined in each quarter since June 30, 2001 as a result of inventory reduction initiatives implemented in 2001 and continued in 2002.  The decrease in accrued liabilities resulted primarily from payments of accrued severance and other restructuring costs and a decrease in customer deposits and deferred revenues.

 

We believe our cash and short-term investments of $4.7 million at September 30, 2002 will be sufficient to meet capital expenditure and working capital needs for at least the next twelve months.  Historically we have supported our capital expenditure and working capital needs with cash generated from operations, and in future periods we expect to continue to do the same. However, a continuation of the current semiconductor industry downturn and/or future industry cycles could affect the demand for and price of our products, which could 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.

 

Future minimum annual lease payments under operating leases as of September 30, 2002 are as follows (in thousands):

 

 

The above minimum lease payments have not been reduced by minimum sublease rentals of $0.4 million due in the future under noncancellable subleases.

 

The above minimum lease payments do not include a facility lease that has been assigned to a third party and on which we remain contingently liable on a property located in Poway, California.  The lease expires in January 2010 and minimum remaining payments amount to $3.8 million as of September 30, 2002.

 

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Business Risks and Uncertainties

 

A number of risks and uncertainties exist which could impact our future operating results. Aetrium operates in the semiconductor capital equipment industry, which is often described as a cyclical growth industry characterized by a long-term growth trend occasionally interrupted by periods of excess capacity in which the demand for new equipment is significantly diminished.  As a result of these business cycles, we have in the past, and will likely in the future, experience significant fluctuations in demand for the equipment we manufacture and sell. The semiconductor equipment industry has been in a prolonged downturn since late 2000.  In response to this downturn, we have implemented various expense reduction measures, including workforce reductions, facility shutdowns, and employee wage reductions.  Such actions could have long-term adverse effects on our business and competitiveness.  Although there are indications of the beginning of a recovery in the semiconductor industry, the outlook for the global economy and the future demand for semiconductors and semiconductor equipment are uncertain.  If general economic and/or semiconductor industry business conditions remain weak, we could experience an extended period of low revenue levels which could require additional expense reduction measures and which could also have a negative impact on the realizeability of certain assets, including inventories and long-lived intangible assets. We will continue to monitor business conditions and make additional adjustments to operations and/or asset values, if necessary.

 

Other risks and uncertainties include, but are not limited to competition, reliance on significant customers, our success in developing new products and technologies, market acceptance of new products, risks and unanticipated costs associated with integrating or restructuring acquired or existing operations, and other factors, including those set forth in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2001.

 

We undertake no obligation to update the above information, including the forward-looking statements, in this quarterly report on Form 10-Q.

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio.  We place our investments with high credit quality issuers and limit the amount of credit exposure to any one issuer.  We have no investments denominated in foreign currencies and therefore we are not subject to foreign exchange risk.  We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor.  As of September 30, 2002, our portfolio consisted primarily of high quality taxable instruments, including corporate notes and bonds, money market funds, and bank repurchase agreements.

 

Item 4.    Controls and Procedures

 

Our President and Chief Executive Officer, our Chief Administrative Officer and our Treasurer conducted an evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) as of September 30, 2002. Based on their evaluation, they concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to September 30, 2002.

 

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AETRIUM INCORPORATED

 

PART II.  OTHER INFORMATION

 

Item 1.	Legal Proceedings
	None.
Item 2.	Changes in Securities
	None.
Item 3.	Defaults on Senior Securities
	None.
Item 4.	Submissions of Matters to a Vote of Security Holders
	None.
Item 5.	Other Information
	None.
Item 6.	Exhibits and Reports on Form 8-K
	(a)  Exhibits
		99.1	Certifications pursuant to 18 U.S.C. Section 1350 under Section 906 of the Sarbanes-Oxley Act of 2002
	(b)  Reports on Form 8-K
	None

 

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AETRIUM INCORPORATED

 

 

SIGNATURES

 

 

 

 

Pursuant to the requirements 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
		(Registrant)
Date: November 11, 2002	By:	/s/ Joseph C. Levesque
		Joseph C. Levesque
		Chairman of the Board, President, and Chief Executive Officer
Date: November 11, 2002	By:	/s/ Paul H. Askegaard
		Paul H. Askegaard
		Treasurer
		(principal financial and accounting officer)

 

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CERTIFICATIONS

 

Certification by Chief Executive Officer

 

I, Joseph C. Levesque, Chairman of the Board, President and Chief Executive Officer of Aetrium Incorporated, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Aetrium Incorporated.

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 11, 2002		/s/ Joseph C. Levesque
		Joseph C. Levesque
		Chairman of the Board, President and Chief Executive Officer

 

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Certification by Chief Administrative Officer

 

I, Douglas L. Hemer, Chief Administrative Officer of Aetrium Incorporated, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Aetrium Incorporated.

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 11, 2002		/s/ Douglas L. Hemer
		Douglas L. Hemer
		Chief Administrative Officer

 

21

 

Certification by Treasurer

 

I, Paul H. Askegaard, Treasurer of Aetrium Incorporated, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Aetrium Incorporated.

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 11, 2002		/s/ Paul H. Askegaard
		Paul H. Askegaard
		Treasurer (principal financial and accounting officer)

 

The written statements of our Chief Executive Officer, Chief Administrative Officer and Treasurer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this report by correspondence to the Securities and Exchange Commission.

 

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