###### ** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**ý****          ****Quarterly report under Section 13or 15(d) of the Securities Exchange Act of 1934.**

 

**For thequarterly period ended January 31, 2005**

 

**OR**

 

**o****          ****Transition report under Section13 or 15(d) of the Exchange Act.**

 

**For the transition period from               to              .**

 

## **Commission file number 001-13543**

 

**Angeion Corporation**

(Exact name of small business issuer as specified in its charter)

 

| **Minnesota**                                                   | ** ** | **41-1579150**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **350 Oak Grove Parkway, Saint Paul, Minnesota 55127-8599**     |
| (Address of principal executive offices)                        |
|                                                            |       |                                  |
| **(651) 484-4874**                                              |
| (Issuer’s telephone number, including area  code)          |

 

Check whether the registrant filed alldocuments and reports required to be filed by Section 12, 13 or 15(d) of theExchange Act of 1934 after distribution of securities under a plan confirmed bya court:

Yes   ý   No   o

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (orfor such shorter period that the issuer was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes   ý   No   o

 

The Company had 3,606,038 shares of common stock, $0.10 par value,outstanding as of February 23, 2005.

 

 

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**PARTI - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**ANGEION CORPORATION ANDSUBSIDIARIES**

 

**Consolidated BalanceSheets**

**January 31, 2005 andOctober 31, 2004**

(unaudited, in thousands except shareand per share data)

 
| ** **                                                                                                                                   | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Assets**                                                                                                                                   |       |                  |       |                  |       |
| **Current  assets:**                                                                                                                         |       |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                    |       | $                     | 2,269      |                  | $          | 2,390 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $342 and $376, respectively                                                  |       | 3,448                 |       | 4,157                 |       |
| Inventories                                                                                                                                  |       | 2,991                 |       | 2,947                 |       |
| Current assets of discontinued operations                                                                                                    |       | 700                   |       | 700                   |       |
| Prepaid expenses and other current assets                                                                                                    |       | 204                   |       | 294                   |       |
| Total current assets                                                                                                                         |       | 9,612                 |       | 10,488                |       |
|                                                                                                                                         |       |                  |       |                  |       |
| Property and equipment, net                                                                                                                  |       | 1,162                 |       | 1,233                 |       |
| Intangible assets, net                                                                                                                       |       | 6,106                 |       | 6,309                 |       |
|                                                                                                                                         |       | $                     | 16,880     |                  | $          | 18,030 |   |
|                                                                                                                                         |       |                  |       |                  |       |
| **Liabilities  and Shareholders' Equity**                                                                                                    |       |                  |       |                  |       |
| **Current  liabilities:**                                                                                                                    |       |                  |       |                  |       |
| Accounts payable                                                                                                                             |       | $                     | 1,111      |                  | $          | 1,526 |   |
| Employee compensation                                                                                                                        |       | 938                   |       | 932                   |       |
| Deferred income                                                                                                                              |       | 1,006                 |       | 1,099                 |       |
| Warranty reserve                                                                                                                             |       | 157                   |       | 155                   |       |
| Current liabilities of discontinued  operations                                                                                              |       | 1,070                 |       | 1,092                 |       |
| Other current liabilities and accrued  expenses                                                                                              |       | 470                   |       | 394                   |       |
| Total current liabilities                                                                                                                    |       | 4,752                 |       | 5,198                 |       |
|                                                                                                                                         |       |                  |       |                  |       |
| **Shareholders'  equity:**                                                                                                                   |       |                  |       |                  |       |
| Common stock, $0.10 par value, authorized  25,000,000 shares, issued and outstanding, 3,606,038 shares in 2005 and  3,601,517 shares in 2004 |       | 361                   |       | 360                   |       |
| Additional paid-in capital                                                                                                                   |       | 17,562                |       | 17,556                |       |
| Accumulated deficit                                                                                                                          |       | (5,795                | )          | (5,084                | )          |
| Total shareholders' equity                                                                                                                   |       | 12,128                |       | 12,832                |       |
|                                                                                                                                         |       | $                     | 16,880     |                  | $          | 18,030 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

(unaudited, in thousands except per shareamounts)

 
| ** **                                                          | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **Revenues**                                                        | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Equipment and supply sales                                          |       | $                                   | 4,285      |   | $ | 3,849 |   |
| Service revenue                                                     |       | 745                                 |       | 706 |   |
|                                                                |       | 5,030                               |       | 4,555 |   |
| **Cost of  goods sold**                                             |       |                                |       |   |   |
| Cost of equipment and supplies                                      |       | 2,596                               |       | 2,363 |   |
| Cost of service revenue                                             |       | 101                                 |       | 134 |   |
|                                                                |       | 2,697                               |       | 2,497 |   |
|                                                                |       |                                |       |   |   |
| **Gross  margin**                                                   |       | 2,333                               |       | 2,058 |   |
|                                                                |       |                                |       |   |   |
| **Operating  expenses:**                                            |       |                                |       |   |   |
| Selling and marketing                                               |       | 1,707                               |       | 1,525 |   |
| General and administrative                                          |       | 664                                 |       | 632 |   |
| Research and development                                            |       | 478                                 |       | 398 |   |
| Amortization of intangibles                                         |       | 203                                 |       | 238 |   |
|                                                                |       | 3,052                               |       | 2,793 |   |
|                                                                |       |                                |       |   |   |
| **Operating  loss**                                                 |       | (719                                | )          | (735 | ) |
|                                                                |       |                                |       |   |   |
| Interest income                                                     |       | 8                                   |       | 5 |   |
|                                                                |       |                                |       |   |   |
| **Loss  before taxes**                                              |       | (711                                | )          | (730 | ) |
|                                                                |       |                                |       |   |   |
| Tax benefit                                                         |       | —                              |       | — |   |
|                                                                |       |                                |       |   |   |
| **Net loss**                                                        |       | $                                   | (711       | ) | $ | (730 | ) |
|                                                                |       |                                |       |   |   |
| **Net loss  per share - basic and diluted**                         |       | $                                   | (0.20      | ) | $ | (0.20 | ) |
|                                                                |       |                                |       |   |   |
| **Weighted  average common shares outstanding - basic and diluted** |       | 3,603                               |       | 3,596 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                         | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **Cash  Flows From Operating Activities:**                                         |       |                                |       |   |   |
| Net loss                                                                           |       | $                                   | (711       | ) | $ | (730 | ) |
| Adjustments to reconcile net loss to net  cash flows used in operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                      |       | 323                                 |       | 385 |   |
| Changes in operating assets and  liabilities:                                      |       |                                |       |   |   |
| Accounts receivable                                                                |       | 709                                 |       | (102 | ) |
| Inventories                                                                        |       | (44                                 | )          | (389 | ) |
| Prepaid expenses and other current assets                                          |       | 90                                  |       | 31 |   |
| Accounts payable                                                                   |       | (415                                | )          | 226 |   |
| Employee compensation                                                              |       | 6                                   |       | (209 | ) |
| Deferred income                                                                    |       | (93                                 | )          | 161 |   |
| Warranty reserve                                                                   |       | 2                                   |       | 5 |   |
| Other current liabilities and accrued  expenses                                    |       | 76                                  |       | 62 |   |
| Net cash used in continuing operations                                             |       | (57                                 | )          | (560 | ) |
| Net cash used in discontinued operations                                           |       | (22                                 | )          | — |   |
| Net cash used in operating activities                                              |       | (79                                 | )          | (560 | ) |
|                                                                               |       |                                |       |   |   |
| **Cash  Flows From Investing Activities:**                                         |       |                                |       |   |   |
| Purchase of property and equipment                                                 |       | (49                                 | )          | (73 | ) |
| Net cash used in investing activities                                              |       | (49                                 | )          | (73 | ) |
|                                                                               |       |                                |       |   |   |
| **Cash  Flows From Financing Activities:**                                         |       |                                |       |   |   |
| Proceeds from issuance of common stock                                             |       | 7                                   |       | 4 |   |
| Net cash provided by financing activities                                          |       | 7                                   |       | 4 |   |
|                                                                               |       |                                |       |   |   |
| **Net  decrease in cash and cash equivalents**                                     |       | (121                                | )          | (629 | ) |
|                                                                               |       |                                |       |   |   |
| **Cash and  cash equivalents at beginning of period**                              |       | 2,390                               |       | 3,588 |   |
|                                                                               |       |                                |       |   |   |
| **Cash and  cash equivalents at end of period**                                    | ** ** | **$**                               | **2,269**  | ** ** | **$** | **2,959** | ** ** |

 

See accompanying notes to consolidated financial statements.

 

4

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

January 31, 2005

(Unaudited)

 

**1.****             Basis of Presentation**

 

The consolidated balance sheet as of January 31, 2005, the consolidatedstatements of operations and cash flows for the three months ended January 31,2005 and 2004, and the related information presented in these notes have beenprepared by management in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form10-QSB and Rule 10-01 of Regulation S-X, without audit.  Accordingly, they do not include all of theinformation and notes required by U.S. generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation of results have been included. The consolidated balance sheet at October 31, 2004 was derived from theaudited consolidated financial statements as of that date.  Operating results for the three months endedJanuary 31, 2005 are not necessarily indicative of the results that may beexpected for the year ending October 31, 2005. For further information, refer to the consolidated financial statementsand notes thereto included in Angeion Corporation’s Annual Report on Form10-KSB for the year ended October 31, 2004.

 

Comprehensive income is a measure of all non-owner changes inshareholders’ equity and includes such items as net income, certain foreign currencytranslation items, minimum pension liability adjustments and changes in thevalue of available-for-sale securities. For the three months ended January 31, 2005 and 2004, comprehensive lossfor Angeion Corporation was equivalent to net loss as reported.

 

**2.****             NewAccounting Pronouncements**

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 151 (“SFAS No.151”), “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” whichclarifies the types of costs that should be expensed rather than capitalized asinventory.  This statement also clarifiesthe circumstances under which fixed overhead costs associated with operatingfacilities involved in inventory processing should be capitalized.  The provisions of SFAS No. 151 are effectivefor fiscal years beginning after June 15, 2005 and the Company will adopt thisstandard in its fiscal 2006.  The Companyhas not determined the impact, if any, that this statement will have on its consolidatedfinancial position or results of operations.

 

The FASB issued SFAS No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-BasedPayment,” in December 2004.  SFAS No.123R is a revision of FASB Statement 123, “Accounting for Stock-BasedCompensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and its related implementation guidance.  The Statement focuses primarily on accountingfor transactions in which an entity obtains employee services throughshare-based payment transactions.  SFASNo. 123R requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service in exchange for theaward.  Since the Company is a smallbusiness registrant, this statement is effective as of the beginning of thefirst interim or annual reporting period that begins after December 15, 2005and the Company will adopt the standard in the second quarter of fiscal2006.  The Company has determined that,unless new options are granted, stock-based compensation expense will be $5,000for each of the second, third and fourth quarters of fiscal 2006.

 

5

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**3.****             StockBased Compensation**

 

The Company applies the intrinsic-value method as prescribed underAccounting Principles Board Opinion (APB) No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations toaccount for the issuance of stock incentives to employees and directors.  Accordingly, no compensation expense relatedto employees’ and directors’ stock incentives has been recognized in theconsolidated financial statements.  Inaccordance with the provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, the Company is required to present proforma information reflecting compensation cost for such issuances.  Had the Company determined compensation costsbased on the fair value at the date of grant for options granted, the Company’snet loss would have been increased to the pro forma amounts indicated in thefollowing table.

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(In thousands, except for per  share amounts)**                                                                                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Net loss:                                                                                                                                     |       |                               |       |   |   |
| As reported                                                                                                                                   |       | $                                  | (711       | ) | $ | (730 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects                                     |       | —                             |       | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (21                                | )          | (57 | ) |
| Pro forma                                                                                                                                     |       | $                                  | (732       | ) | $ | (787 | ) |
| Net loss per share – basic and diluted                                                                                                   |       |                               |       |   |   |
| As reported                                                                                                                                   |       | $                                  | (0.20      | ) | $ | (0.20 | ) |
| Pro forma                                                                                                                                     |       | $                                  | (0.20      | ) | $ | (0.22 | ) |

 

**4.****             Inventories**

 
| **(In thousands)** | ** ** | **January 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------|------------|
| Raw materials      |       | $                     | 1,049      |                  | $          | 872 |   |
| Work-in-progress   |       | 195                   |       | 167                   |       |
| Finished goods     |       | 1,747                 |       | 1,908                 |       |
|               |       | $                     | 2,991      |                  | $          | 2,947 |   |

 

**5.****             IntangibleAssets**

 

The Company adopted fresh start reporting as defined in SOP 90-7 uponits emergence from bankruptcy on October 31, 2002.  SOP 90-7 required the Company’s assets to berecorded at their respective fair values as of October 31, 2002.  The Company, with the assistance of anindependent third-party appraiser, determined the fair values of the Company’sintangible assets.  Accordingly, allintangible assets are valued at fair value as of the date of fresh-startreporting, October 31, 2002, or cost in the case of subsequently acquiredassets.  Intangible assets consisted ofthe following as of January 31, 2005:

 

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| **(In thousands)**             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangible  Assets, net** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
|                           |       |                        |       |                          |       |                        |       |
| Amortized developed technology |       | $                           | 7,107      |                          | $          | 2,001                       |       | $ | 5,106 |   |
| Unamortized trade name         |       | 1,000                       |       | —                        |       | 1,000                       |       |
|                           |       | $                           | 8,107      |                          | $          | 2,001                       |       | $ | 6,106 |   |

 

Amortization expense was $203,000 and $238,000 for the three monthsended January 31, 2005 and 2004, respectively. Developed technology is being amortized using the straight-line methodover the estimated useful lives of the assets that range from three to tenyears.  Estimated amortization expensefor the remainder of fiscal year 2005 and for each of the succeeding yearsbased on the intangible assets as of January 31, 2005 is as follows:

 
| **(In thousands)**                  | ** ** | **Amortization** | ** ** |
|-------------------------------------|------------|------------------|------------|
| Nine months ending October 31, 2005 |       | $                | 609        |   |
| 2006                                |       | 812              |       |
| 2007                                |       | 779              |       |
| 2008                                |       | 778              |       |
| 2009                                |       | 778              |       |
| Thereafter                          |       | 1,350            |       |
|                                |       | $                | 5,106      |   |

 

**6.****             WarrantyReserve**

 

Sales of the Company’s equipment are subject to a warranty.  Equipment warranties typically extend for aperiod of twelve months from the date of installation.  Standard warranty terms are included incustomer contracts.  Under the terms ofthese warranties, the Company is obligated to repair or replace any componentsor assemblies that it deems defective in workmanship or materials.  The Company reserves the right to rejectwarranty claims where it determines that failure is due to normal wear,customer modifications, improper maintenance or misuse.  The Company adjusts the warranty reservebased on the number and type of equipment that is subject to warranty, adjustedfor the remaining months of warranty coverage. The warranty reserve adjustment reflects the Company’s historicalwarranty experience based on type of equipment. Warranty provisions are evaluated and adjusted periodically.  Warranty provisions for the three monthsended January 31, 2005 and 2004 were as follows:

 
| ** **                   | ** ** | **Three Months Ended January 31,** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| **(In thousands)**           | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Balance, beginning of period |       | $                                  | 155        |   | $ | 133 |   |
| Warranty provisions          |       | 66                                 |       | 61 |   |
| Warranty claims              |       | (64                                | )          | (56 | ) |
| Balance, end of period       |       | $                                  | 157        |   | $ | 138 |   |

 

**7.****             Net Loss Per Share**

 

Basic loss per share is computed by dividing net loss by the weightedaverage shares outstanding during the reporting period.  Diluted loss per share is computed similar tobasic loss per share except that the weighted average shares outstanding areincreased to include additional shares from the assumed exercise of stockoptions and warrants, if dilutive.  Thenumber of additional shares is calculated by assuming that outstanding stockoptions or warrants were exercised and that the proceeds from the

 

7

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exercise were used to acquire shares of common stock at the averagemarket price during the reporting period. As a result of the net losses, there were no dilutive common sharesoutstanding for the three months ended January 31, 2005 and 2004.  The Company had warrants outstanding atJanuary 31, 2005 and 2004 to purchase 179,481 and 179,537 shares, respectively,of its common stock that were considered antidilutive and therefore notconsidered to have been exercised.  TheCompany also had options outstanding at January 31, 2005 and 2004 to purchase482,800 and 373,800 shares, respectively, of its common stock that wereconsidered antidilutive and therefore not considered exercised.

 

**8.****             DiscontinuedOperations and Litigation**

 

During the period from October 1990 through March 2000, theCompany was engaged in the development, design, manufacture and sale ofimplantable cardioverter defibrillator (“ICD”) systems.  ICDs are designed to treat abnormally rapidheartbeats or tachycardia in the ventricular (or lower) chambers of theheart.  ICDs are electronic devices thatare implanted within the body and are connected to the heart with defibrillatorleads.  These devices are designed tomonitor the patient’s heartbeat and, in the event of tachycardia, deliver anelectrical shock to return the heartbeat to normal rhythm.

 

During March 2000, the Company announced its decision to discontinuethe development, manufacture and distribution of ICDs.  Accordingly, the ICD business is accountedfor as a discontinued operation and amounts in the financial statements andrelated notes for all periods shown reflect discontinued operations accounting.

 

In June 2002, ELA Medical, a former partnerof Angeion in a joint venture that manufactured and distributed ICDs, advisedAngeion that some of the ICD’s formerly manufactured by Angeion wereexperiencing premature battery depletion and that 14 had been explanted.  In accordance with FDA procedures, Angeioninstituted a field corrective action on certain of the ICDs.

 

In June 2003, ELA Medical soughtreimbursement from Angeion for the cost of explanting and replacing theICDs.  Angeion advised its insurancecarrier of the ELA Medical claim and sought coverage of the claim.

 

On September 13, 2004, the basic insurer, Medmarc Casualty InsuranceCompany, advised Angeion that Medmarc was denying insurance coverage to Angeionfor the claim by ELA Medical, Inc.  Inaddition, on September 13, 2004, Medmarc commenced a declaratory judgmentaction against Angeion and ELA Medical in United States District Court for theDistrict of Minnesota seeking a declaratory judgment that Medmarc’sinterpretation of the policy is correct. In the lawsuit, ELA Medical has entered a cross-claim against Angeionfor the costs and expenses it incurred in connection with the recall in theequivalent amount of $1,665,068.

 

Angeion has denied liability to ELA Medical and has counterclaimedagainst Medmarc and is seeking a declaratory judgment that Medmarc is liable(i) to Angeion for any amount that it is required to pay to ELA Medical, and(ii) for any fees and expenses that Angeion has incurred in connection withdefense of the cross-claim by ELA Medical and the declaratory action byMedmarc.  Angeion vigorously intends topursue its available defenses against ELA Medical and it asserts that Medmarc isrequired to provide Angeion coverage with respect to these matters.

 

The lawsuit is just beginning and is currently only in the discoverystage.  The Company expects that anytrial in this matter will not occur until the spring of 2006.

 

The Company believes that although it mayhave some liability to ELA Medical, for several reasons, it is not liable toELA Medical for the entire amount alleged. The Company further believes that

 

8

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a certain portion of the amount expended byELA Medical may not be covered by insurance. During the fourth quarter of 2004, the Company determined that theamount of its potential liability to ELA Medical ranged from $1,092,000 to$2,198,000 and recorded a liability of $1,092,000 at October 31, 2004.  The Company also determined it is probablethat at least $700,000 of any claims ultimately paid to ELA Medical wererecoverable under existing insurance policies. During the first quarter of 2005, the Company determined that there wereno changes in facts or circumstances that would require adjustment of thecurrent assets of discontinued operations or current liabilities ofdiscontinued operations as of January 31, 2005.

 

The ultimate amount of both the liability dueto ELA Medical and the amount recoverable from insurance carriers is subject tofuture development and additional information. The amounts currently estimated for the claim and associated expenses aswell as the probable insurance recovery are based on data provided by ELAMedical for explantations that occurred through March 31, 2004 and otherinformation related to the cause of the battery depletion.  Since 167 devices remain implanted inpatients at March 31, 2004, the amount of the claim may increase.  While it is not possible to predict theultimate amount of the claim or the associated expenses, the Company believesthat if the amount of the claim increases, the amount recoverable from theinsurance company would also increase. In addition, the Company’s liability insurance coverage for claimsassociated with its ICD products expires on July 11, 2005.

 

The Company may incur additional expenses,which could be substantial, in connection with any purchase of insurancecoverage beyond July 11, 2005.

 

9

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**Item 2.****    Management’sDiscussion and Analysis or Plan of Operation.**

 

# **Forward-Looking Statements and Risk Factors**

 

Statements included in this Quarterly Report on Form 10-QSB that arenot historical or current facts are “forward-looking statements” made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995.  The words “believe,” “expect,” “will,”“can,” “estimate,” “anticipate,” and similar expressions are intended toidentify forward-looking statements. Forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially includingthe following: (i) the Company’s ability to successfully operate its MedicalGraphics business including its ability to develop, improve and update itscardiorespiratory diagnostic products, (ii) the Company’s ability tosuccessfully introduce its New Leaf products including its New Leaf Weight LossProgram, (iii) the Company’s ability to successfully defend itself from productliability claims related to its Medical Graphics and New Leaf products orclaims associated with its prior cardiac stimulation products, (iv) the Company’sability to protect its intellectual property, (v) the Company’s dependence onthird party vendors and any other factors not now anticipated.

 

From time to time, the Company through its management may make oralforward-looking statements.  The Companyundertakes no obligation to update any forward-looking statement.  Additional information with respect to therisks and uncertainties faced by the Company may be found in, and the priordiscussion is qualified in its entirety by, the other risk factors that aredescribed from time to time in Angeion’s Securities and Exchange Commissionreports, including but not limited to the Annual Report on Form 10-KSB forthe year ended October 31, 2004, and subsequently filed reports.

 

In addition to the risk factors and uncertainties set forth above andin our Annual Report on Form 10-KSB, the Company believes that the following factorsare relevant.

 

***Discontinued Operations, Product LiabilityInsurance and Litigation. ***Thetesting, manufacturing, marketing and sale of medical devices involve risk ofliability claims and product recalls. ICD products that the Company sold in the past are highly complex andwere used in medical procedures and in situations where there is a potentialrisk of serious injury, adverse side effects or death.  As a result, the Company currently carriesproduct liability insurance covering its products with policy limits peroccurrence and in the aggregate which the Company has deemed to besufficient.  The Company cannot predict,however, whether this insurance is sufficient, or if not, whether the Companywill be able to obtain sufficient insurance, to cover the risks associated withthe Company’s business or whether such insurance will be available at premiumsthat are commercially reasonable. Although the Company has discontinued its ICD business, a successfulclaim against or settlement by the Company in excess of its insurance coverageor the Company’s inability to maintain insurance in the future could have amaterial adverse effect on the Company’s business, results of operations,liquidity and financial condition.

 

The Company has received a claim for indemnification from ELA Medical,Inc. for expenses incurred by ELA Medical in connection with ICDs formerlymanufactured by the Company.  Althoughthe Company believes its product liability insurance covers the potentialliability associated with the ELA Medical claim, subject to applicableself-retention, there can be no assurance that the Company will not be subjectto other claims in the future.

 

On September 13, 2004, the basic insurer, Medmarc Casualty InsuranceCompany, advised Angeion that Medmarc was denying insurance coverage to Angeionfor the claim by ELA Medical, Inc.  Inaddition, on September 13, 2004, Medmarc commenced a declaratory judgmentaction against Angeion and ELA Medical in United States District Court for theDistrict of Minnesota seeking a declaratory judgment that Medmarc’sinterpretation of the policy is correct. In the lawsuit, ELA Medical has entered

 

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a cross-claim against Angeionfor the costs and expenses it incurred in connection with the recall in theequivalent amount of $1,665,068.

 

During the years ended October 31, 2004 and 2003, the Company recordedlosses in discontinued operations of $901,000 and $235,000, respectively, toreflect an impairment of the ICD patents, its liability for expenses associatedwith the claim by ELA Medical for reimbursement of costs related to ICD’sformerly manufactured by the Company that were experiencing premature batterydepletion and related matters.  Theselosses were net of probable insurance recoveries and included other expensesassociated with the claim.  See Note 8, “DiscontinuedOperations,” in Notes to Consolidated Financial Statements and Part II, Item 1,Legal Proceedings in this Form 10-QSB.

 

***Intangible Assets***.  The Company assesses theimpairment of identifiable intangible assets at least annually or wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable.  The Company initiallyevaluates the recoverability of intangible assets based on fair valuetechniques, mainly undiscounted cash flows. If the Company determines that the carrying value of intangible assetsmay not be recoverable, it measures any impairment based on a projecteddiscounted cash flow method using a discount rate determined by management tobe commensurate with the risk inherent in the current business model or anothervaluation technique.  There can be noassurance that business circumstances will not change or that projected futurecash flows will be sufficient to justify the carrying value of intangibleassets, in which case the Company would be required to recognize an impairmentcharge for a portion or all of the intangible assets.

 

# **Overview**

 

Angeion Corporation is a medical products company with reported revenueof $20.7 million for the year ended October 31, 2004.  Domestic product sales and service revenuesaccounted for 82.8% of revenue for the year ended October 31, 2004 whileinternational product sales accounted for the remaining 17.2%.

 

The Company, through its Medical Graphics Corporation subsidiary,designs non-invasive diagnostic systems under the “MedGraphics” trade name thatassist health care professionals in the prevention, early detection andcost-effective treatment of heart and lung disease.  It also markets a version of some of theseproducts under the New Leaf brand to health and fitness clubs and personaltrainers to assist them in developing exercise programs to help their clientsmeet their personal goals.  Revenuesconsist of equipment and supply sales and service revenues.  Equipment and supply sales reflect sales ofMedical Graphics’ non-invasive cardiorespiratory diagnostic equipment, sales ofNew Leaf health and fitness products, and aftermarket sales of peripherals andsupplies.  Service revenues reflectrevenues from extended service contracts, non-warranty service visits andtraining.

 

Total revenue for the quarter ended January 31, 2005 increased by 10.4%over revenue for the same period in 2004. The Company has posted growth in total revenue during eight out of thelast nine quarters.  We are pleased tonote that our customers’ demand for new cardiorespiratory systems remainsstrong and that our New Leaf products are also significantly contributing tooverall growth.

 

In January and February 2005, the Company entered into agreements withtwo different health and fitness club chains that will now offer our New Leafpersonal assessment system to their customers. This associated increase in the number of sites offering our system willincrease market penetration for our New Leaf health and fitness products.  The Company remains focused on refining itsmarketing efforts for expanding the distribution of New Leaf fitness products.

 

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The Companyalso remains focused on bringing its new cardiorespiratory products tomarket.  These testing systems measurefitness and conditioning levels as well as help physicians diagnose heart andlung diseases.  In 2004, the Companyintroduced the Ultima Series, which included the Ultima CPX and subsequentlytwo other products in the Ultima CCM and Ultima Cardio2.  The Ultima Series of products feature newtechnology to improve performance and reliability.

 

We are scheduled to release two more Ultima Series products, the UltimaPF and Ultima PFX, during the second quarter of 2005.  These two products will update two existingproducts and will also be used to expand the target market.  Another new product, the CPFS/D-USBspirometer, is also scheduled for introduction during the second quarter of2005.  Additional new products areplanned for introduction during the last six months of 2005.

 

The Company is continuing its effort to resolve issues related to theindemnification claim for some of the ICD’s formerly manufactured by theCompany that experienced premature battery depletion.  See Note 8, “Discontinued Operations andLitigation,” Notes to Consolidated Financial Statements in this Form 10-QSB foradditional discussion of that matter.

 

# **Results ofOperations**

 

Angeion Corporation recorded revenue of $5.0 million and a net loss of$711,000 for the three months ended January 31, 2005 compared to revenue of$4.6 million and a net loss of $730,000 for the same period in 2004.

 

**Revenue**

 

Total revenue increased by 10.4% to $5.0 million from $4.6 million forthe three months ended January 31, 2005 and 2004, respectively.  Domestic product revenue increased by 15.4%to $3.6 million in 2005 compared to $3.1 million in 2004.  Internationally, product revenue decreased4.9% to $730,000 in 2005 from $768,000 in 2004. Service revenue increased by 5.5% to $745,000 in 2005 from $706,000 in2004.

 

The increase in domestic product revenue for the quarter reflectson-going customer demand for both cardiorespiratory product systems and NewLeaf products.  Customer orders forcardiorespiratory product systems remained strong during the quarter with nonear term signs suggesting that order rates will decline.  The Company’s New Leaf health and fitnessproducts also had a strong quarter to contribute to overall revenue growth.

 

International product revenue decreased by $38,000 in the first quarterof 2005 when compared to the same quarter in 2004.  A decrease in revenue from Asian Pacificcustomers was partially offset by increased sales to European and LatinAmerican customers.  Although LatinAmerica continues to suffer from weak economies and devaluating currencies,recovery is still anticipated to be consistent but gradual.  Competitive pressures make placing equipmentorders with customers throughout the rest of the world difficult.  Moreover, the Company’s new products aresubject to regulatory approval before they can be sold in certain countries.

 

Service revenue increased during the first quarter of 2005 compared to2004 due to the Company’s on-going focus on increasing the number ofnon-warranty service visits.

 

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**Gross Margin**

 

Gross margin percentage for the three months ended January 31, 2005increased to 46.4% of revenue compared to 45.2% for the same period in2004.  Improved manufacturingefficiencies more than offset an unfavorable sales mix of lower marginproducts.  Although margins for the remainingquarters of 2005 may not exceed margins for the comparable quarter of 2004, theCompany believes gross margin for the year ending on October 31, 2005 willexceed the gross margin of 47.1% reported for the year ended October 31, 2004.

 

**Selling and Marketing**

 

Selling and marketing expenses for the three months ended January 31 increasedby 11.9% to $1.7 million in 2005 compared to $1.5 million in 2004.  The increase in selling and marketingexpenses was planned as we increased selling expenses associated with bothcardiorespiratory products and New Leaf health and fitness products.  In addition, the Company has increased themarketing expenses associated with the anticipated introduction of newcardiorespiratory products.

 

**General and Administrative**

 

General and administrative expenses for the three months ended January31 increased by 5.1% to $664,000 in 2005 compared to $632,000 in 2004.  The increase in general and administrativeexpenses is attributed to consulting costs associated with compliance withSarbanes-Oxley mandates and increased personnel expenses that are partially offsetby decreased insurance expenses and a reduction in bad debt expense.  The Company expects general andadministrative expenses for the remaining quarters of 2005 to exceed prior yearquarters due in part to increased costs associated with Section 404 Sarbanes-Oxleycompliance.

 

**Research and Development**

 

Research and development expenses for the three months ended January 31increased by 20.1% to $478,000 in 2005 from $398,000 in 2004.  The increase in research and developmentexpenses is due to costs associated with developing additionalcardiorespiratory diagnostic products. The first of these products, the CPX Ultima, was shipped to customersduring the second quarter of 2004 while two additional products were introducedlater in the year.  Another new product,the CPFS/D-USB spirometer, was released for sale at the end of the firstquarter of 2005.  Additional new productsare scheduled for release throughout 2005 with the next product planned forrelease during the second quarter of 2005.

 

**Amortization of Intangibles**

 

Amortization of intangibles, consisting primarily of developedtechnology, for the three months ended January 31 decreased to $203,000 in 2005compared to $238,000 in 2004.  Thedecrease in amortization expense resulted from the fact that the Companyincurred a $243,000 impairment charge to its ICD patents during the fourthquarter of 2004.

 

**Discontinued Operations**

 

The Company determined that no further adjustments are necessary atJanuary 31, 2005 for either the current assets or current liabilitiesassociated with the ELA Medical claim. For additional details, see Note 8, “Discontinued Operations andLitigation,” Notes to Consolidated Financial Statements in this Form 10-QSB.

 

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**Liquidity and Capital Resources**

 

The Company has financed its liquidity needs over the past severalyears through revenue generated by the operations of its wholly ownedsubsidiary, Medical Graphics Corporation, through revenue from licenseagreements for patented ICD technology and through the use of cash balances.

 

The Company had cash of $2.3 million and working capital of $4.9million as of January 31, 2005.  Duringthe three months ended January 31, 2005, the Company used $79,000 in cash foroperating activities, partly as a result of its net loss of $711,000, which wasoffset by $323,000 of depreciation and amortization.  Cash was generated by a decrease of $709,000in accounts receivable offset by $415,000 in cash used to reduce accountspayable.  The decreases in accountsreceivable and accounts payable in the first quarter of 2005 reflect a $1.0million reduction of revenue from the fourth quarter of 2004, typically theCompany’s largest quarter, to the first quarter of 2005.  This use of cash was partially offset withcash generated by changes in other current asset and liability balances.

 

During the three months ended January 31, 2005, the Company used$49,000 in cash for investing activities to purchase property andequipment.  The Company has no materialcommitments for capital expenditures for the remainder of fiscal year 2005.

 

With respect to the ELA Medical claim associated with the discontinuedICD products, the Company vigorously intends to pursue its available defensesagainst ELA Medical and asserts that Medmarc is required to provide insurancecoverage with respect to these matters. The lawsuit is just beginning and is currently only in the discoverystage.  The Company expects that anytrial in this matter will not occur until the spring of 2006.  The ultimate amount of both the liability dueto ELA Medical and the amount recoverable from the insurance carriers issubject to future development and additional information.  It is always possible that the Company willnot prevail in this effort and the resulting expenses could besubstantial.  Furthermore, the Company’sliability insurance coverage for claims associated with its ICD productsexpires on July 11, 2005.  The Companymay incur additional expenses, which could be substantial, in connection withany purchase of insurance coverage beyond July 11, 2005.  For additional details, see Note 8, “DiscontinuedOperations and Litigation,” Notes to Consolidated Financial Statements in thisForm 10-QSB.

 

The Company expects that its continuing operating results will be cashflow positive for fiscal 2005.  Subjectto the ELA Medical claim discussed above, the Company believes that itsliquidity and capital resource needs for fiscal year 2005 will be met through itscurrent cash and cash equivalents and cash flows from operations.

 

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### **Other Commitments**

 

The Company has made various financial commitments in the ordinarycourse of conducting its business operations. The following table summarizes all significant commitments as of January31, 2005:

 
| ** **                                                | ** ** | **Payments due by period (in thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                               | ** ** | **Total**                                 | ** ** | **Nine  months  ending  October  31, 2005** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                               |       | $                                         | 1,639      |   | $ | 269 |   | $ | 737 |   | $ | 625 |   | $ | 8 |   |
| Minimum royalty payments for sales of  AeroSport products |       | 192                                       |       | 75 |   | 117 |   | — |   | — |   |
|                                                      |       | $                                         | 1,831      |   | $ | 344 |   | $ | 854 |   | $ | 625 |   | $ | 8 |   |

 

### **Item 3. Controls and Procedures.**

 

**(a)****           Evaluation of Disclosure Controls andProcedures**

 

The Company’s Chief ExecutiveOfficer, Rodney A. Young, and Chief Financial Officer, Dale H. Johnson, haveevaluated the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport and through the date of the filing of this Form 10-QSB.  As a result of this review and consultationwith outside legal counsel, the Company’s officers have implemented additionaldisclosure controls and procedures to ensure that all required filings underForm 8-K are completed in a timely manner. In connection with the preparation of this Form 10-QSB, managementdetermined that additional disclosures were required with respect to actionstaken by the Company in the quarter ended January 31, 2005, regarding the entryof material contracts with executive officers that required disclosure pursuantto Item 2.02 of Form 8-K.  In addition,the Company is filing descriptions of its management incentive bonus plans andform of stock option agreements as exhibits to this Form 10-QSB.

 

**(b)****          ****Changes in Internal Controls**

 

There have been no significant changes in internal control overfinancial reporting that occurred during the fiscal quarter covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

The Company is subject to certain claims and lawsuits that have beenfiled in the ordinary course of business.  From time to time, the Company brings suitagainst others to enforce patent rights or to collect debts in the ordinarycourse of business.  Except as notedbelow, the ultimate settlement of any pending legal matter will not have amaterial impact on the Company or its financial statements

 

As disclosed in Item 3 of the Form 10-KSB for the year ended October31, 2004, the Company is involved in a lawsuit brought by Medmarc InsuranceCompany in United States District Court for the District of Minnesota involvinga claim for indemnification by ELA Medical and the Company’s claim forinsurance coverage by Medmarc.  Therehave been no material developments in this litigation since the date of theForm 10-KSB.  See Note 8, “DiscontinuedOperations and Litigation,” Notes to Consolidated Financial Statements in thisForm 10-QSB for additional discussion of that matter.

 

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

# ***Recent Sales of Unregistered Securities***

 

The Company had no unregistered sales of equity securities during thethree months ended January 31, 2005.

 

##### ***SmallBusiness Issuer Purchases of Equity Securities***

 

The Company did not purchase any equity securities during the threemonths ended January 31, 2005.

 

### **Item3.  Defaults Upon Senior Securities.**

 

None

 

**Item 4.  Submission of Matters toa Vote of Security Holders.**

 

None

 

**Item 5.  Other Information.**

 

##### ***ExecutiveOfficer Compensation***

 

On January 20, 2005, the Board of Directors of Angeion Corporationapproved the 2005 Management Incentive Bonus Plan (the “2005 Bonus Plan”).  The 2005 Bonus Plan provides for the paymentof cash compensation to eligible employees, including the Company’s executiveofficers, upon achievement of predetermined targets.  The 2005 Bonus Plan is similar to bonus plansoperated by the Company in past years and provides that bonuses will be earnedduring 2005 if Angeion achieves specified levels of (i) earnings beforeinterest, taxes, depreciation and amortization, (ii) revenues from sales ofcardiorespiratory diagnostic products, and (iii) revenues from sales of NewLeaf health and fitness products.

 

Under the 2005 Bonus Plan, Mr. Rodney A. Young, the Company’s ChiefExecutive Officer, is eligible for a bonus ranging from 21.0% of base salary ifthe threshold level is met in each of the three

 

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areas to 50.0% of base salaryif the maximum level is met in each of the three areas.  The Company’s Chief Financial Officer, DaleH. Johnson, is eligible for a bonus ranging from 10.8% of base salary if thethreshold is met in each of the three areas to36.0% of base salary if themaximum level is met in each of the three areas.

 

# **As disclosed in the Company’s Form 10-KSB forthe year ended October 31, 2004, bonuses were paid under the 2004 ManagementIncentive Bonus Plan.  Mr. Young receiveda bonus of $19,608 and Mr. Johnson received a bonus of $18,653 under the 2004Management Incentive Bonus Plan.**

# ** **

**Item 6.  Exhibits.**

 

(a)           The following exhibitsare included herein:

 

10.1         Summaryof 2005 Management Incentive Bonus Plan.

10.2         Summaryof Long-Term Incentive Plan.

10.3         Formof Change in Control Agreement.

10.4         Formof $2.00 Incentive Stock Option Agreement.

10.5         Formof $6.23 Incentive Stock Option Agreement.

10.6         Formof $7.79 Incentive Stock Option Agreement.

10.7         Formof Director Stock Option Agreement.

31            Certifications pursuant to Section 302 of theSarbanes-Oxley Act of 2002 (Rules 13a-

14 and 15d-14 of the Exchange Act).

32            Certifications pursuant Section 906 of theSarbanes-Oxley Act of 2002 (18 U.S.C.

§1350).

99.1         Pressrelease dated March 11, 2005 reporting Angeion Corporation results ofoperations for the three months ended January 31, 2005.

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|   | Angeion Corporation                   |   |
|--------|---------------------------------------|--------|
|   | (Registrant)                          |
|   |                                  |
|   |                                  |
| Date:  | March 11, 2005                        |   | /s/ Rodney A. Young |   |
|   | Rodney A. Young                       |
|   | President and Chief Executive Officer |
|   | (Principal Executive Officer)         |
|   |                                  |
|   |                                  |
| Date:  | March 11, 2005                        |   | /s/ Dale H. Johnson |   |
|   | Dale H. Johnson                       |
|   | Chief Financial Officer               |
|   | (Chief Accounting Officer)            |
|        |                                       |        |  |  |  |

 

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