**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM10-QSB**

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

**For the quarterly period ended June 30, 2002**

 

**OR**

 
| **o** | **Transition  report under Section 13 or 15(d) of the Exchange Act.** |
|-------|-----------------------------------------------------------------------|

** **

 

**For the transition period from                          to                           .**

** **

 

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

 

 

## **Angeion Corporation**

(Exactname of small business issuer as specified in its charter)

 
| **Minnesota**                    | **41-1579150**       |
|----------------------------------|----------------------|
| (State  or other jurisdiction of | (I.R.S.  Employer    |
| incorporation  or organization)  | Identification  No.) |

 

# **350Oak Grove Parkway, Saint Paul, Minnesota 55127-8599**

(Addressof principal executive offices)

 

**(651) 484-4874**

(Issuer’stelephone number, including area code)

 

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934during the past 12 months (or for such shorter period that the issuer wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
| Yes | ý |   No | o |
|-----|--------|-----------|---|

 

The Company had 3,594,627 shares of commonstock, $0.01 par value, outstanding as of August 12, 2002.

----

 

Transitional Small Business Disclosure Format(Check one):
| Yes | o |   No | ý |
|-----|---|-----------|--------|

 

 

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**PART I -FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

** ANGEION CORPORATIONAND SUBSIDIARIES**

 

**ConsolidatedBalance Sheets**

(unaudited,in thousands except share data)

 

 
|                                                                                                                      |   | **June 30,** |       | **December  31,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|-------------------|--------|
|                                                                                                                      |   | **2002**     |       | **2001**          |   |
| **Assets**                                                                                                                |   |         |       |              |   |
| **Current assets:**                                                                                                       |   |         |       |              |   |
| Cash and cash equivalents                                                                                                 |   | $            | 1,098      |              | $      | 1,361 |   |
| Accounts receivable, net of allowance for doubtfulaccounts of $301 and $244, respectively                                 |   | 3,896        |       | 4,268             |   |
| Inventories                                                                                                               |   | 3,192        |       | 4,145             |   |
| Prepaid expenses and other current assets                                                                                 |   | 192          |       | 196               |   |
| Total current assets                                                                                                      |   | 8,378        |       | 9,970             |   |
|                                                                                                                      |   |         |       |              |   |
| Net non-current assets of discontinued operations                                                                         |   | 34           |       | 100               |   |
| Equipment and fixtures, net                                                                                               |   | 1,043        |       | 1,338             |   |
| Intangible assets, net                                                                                                    |   | 10,211       |       | 11,379            |   |
| Other assets                                                                                                              |   | —       |       | 176               |   |
| Goodwill, net                                                                                                             |   | 1,935        |       | 1,935             |   |
|                                                                                                                      |   | **$**        | **21,601** | ** **        | **$**  | **24,898** |   |
|                                                                                                                      |   |         |       |              |   |
| **Liabilities  and Shareholders’ Equity (Deficit)**                                                                  |   |         |       |              |   |
| **Current liabilities:**                                                                                                  |   |         |       |              |   |
| Accounts payable                                                                                                          |   | $            | 724        |              | $      | 942 |   |
| Employee compensation                                                                                                     |   | 474          |       | 658               |   |
| Deferred income                                                                                                           |   | 1,053        |       | 1,017             |   |
| Warranty reserve                                                                                                          |   | 121          |       | 141               |   |
| Net current liabilities of discontinued operations                                                                        |   | 78           |       | 718               |   |
| Other liabilities and accrued expenses                                                                                    |   | 508          |       | 790               |   |
| Total current liabilities not subject to compromise                                                                       |   | 2,958        |       | 4,266             |   |
| Current liabilities subject to compromise                                                                                 |   | 21,642       |       | —            |   |
| Total current liabilities                                                                                                 |   | 24,600       |       | 4,266             |   |
|                                                                                                                      |   |         |       |              |   |
| **Long-term debt**                                                                                                        |   | —       |       | 20,198            |   |
|                                                                                                                      |   |         |       |              |   |
| **Shareholders’ equity (deficit):**                                                                                  |   |         |       |              |   |
| Common stock, $.01 par value.   Authorized 10,000,000shares; issued and outstanding 3,594,627 shares in2002 and 2001 |   | 36           |       | 36                |   |
| Additional paid-in capital                                                                                                |   | 124,011      |       | 124,011           |   |
| Accumulated deficit                                                                                                       |   | (127,046     | )          | (123,613          | )      |
| Total shareholders’ equity (deficit)                                                                                 |   | (2,999       | )          | 434               |   |
|                                                                                                                      |   | **$**        | **21,601** | ** **        | **$**  | **24,898** |   |

 

See accompanying notes to financialstatements

 

2

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

**(unaudited, in thousands except per share amounts)**

 

 
|                                            |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                            |   | **June 30,**            |   | **June 30,**          |   |
|                                            |   | **2002**                |   | **2001**              |   | **2002** |   | **2001** |   |
| **Revenues**                                    |   |                    |   |                  |   |   |   |   |   |
| Equipment and supply sales                      |   | $                       | 3,556  |                  | $      | 3,600 |   | $ | 6,798 |   | $ | 7,019 |   |
| Service revenue                                 |   | 719                     |   | 624                   |   | 1,511 |   | 1,266 |   |
|                                            |   | 4,275                   |   | 4,224                 |   | 8,309 |   | 8,285 |   |
| **Cost of goods sold**                          |   |                    |   |                  |   |   |   |   |   |
| Cost of equipment and supplies                  |   | 2,420                   |   | 2,282                 |   | 4,735 |   | 4,537 |   |
| Cost of service revenue                         |   | 130                     |   | 98                    |   | 251 |   | 227 |   |
|                                            |   | 2,550                   |   | 2,380                 |   | 4,986 |   | 4,764 |   |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Gross margin**                                |   | 1,725                   |   | 1,844                 |   | 3,323 |   | 3,521 |   |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Operating expenses:**                         |   |                    |   |                  |   |   |   |   |   |
| Selling and marketing                           |   | 1,266                   |   | 1,332                 |   | 2,414 |   | 2,482 |   |
| General and administrative                      |   | 647                     |   | 647                   |   | 1,225 |   | 1,297 |   |
| Research and development                        |   | 289                     |   | 343                   |   | 621 |   | 763 |   |
| Amortization of intangibles                     |   | 180                     |   | 324                   |   | 360 |   | 648 |   |
| Impairment loss on intangible assets            |   | 1,085                   |   | —                |   | 1,085 |   | — |   |
| Reorganization items                            |   | 273                     |   | —                |   | 273 |   | — |   |
|                                            |   | 3,740                   |   | 2,646                 |   | 5,978 |   | 5,190 |   |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Operating loss**                              |   | (2,015                  | )      | (802                  | )      | (2,655 | ) | (1,669 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Other income (expense):**                     |   |                    |   |                  |   |   |   |   |   |
| Interest income                                 |   | 3                       |   | 48                    |   | 7 |   | 131 |   |
| Interest expense                                |   | (367                    | )      | (510                  | )      | (877 | ) | (1,020 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Loss before taxes**                           |   | (2,379                  | )      | (1,264                | )      | (3,525 | ) | (2,558 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| Provision (benefit) for taxes                   |   | —                  |   | —                |   | (92 | ) | — |   |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Loss from continuing operations**             |   | (2,379                  | )      | (1,264                | )      | (3,433 | ) | (2,558 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Loss from discontinued operations**           |   | —                  |   |                  |   | — |   | (29 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Net loss**                                    |   | $                       | (2,379 | )                     | $      | (1,264 | ) | $ | (3,433 | ) | $ | (2,587 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Net loss per share — basic and diluted** |   |                    |   |                  |   |   |   |   |   |
| Continuing operations                           |   | $                       | (0.66  | )                     | $      | (0.36 | ) | $ | (0.96 | ) | $ | (0.73 | ) |
| Discontinued operations                         |   | —                  |   | —                |   | — |   | (0.01 | ) |
| Net loss                                        |   | $                       | (0.66  | )                     | $      | (0.36 | ) | $ | (0.96 | ) | $ | (0.74 | ) |
|                                            |   |                    |   |                  |   |   |   |   |   |
| **Weighted average common shares outstanding**  |   |                    |   |                  |   |   |   |   |   |
| Basic and diluted                               |   | 3,595                   |   | 3,482                 |   | 3,595 |   | 3,482 |   |

 

See accompanying notes to financialstatements

 

 

3

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(unaudited, in thousands)**

 

 
|                                                                                           |   | **Six Months  Ended** |       |
|------------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                           |   | **June 30,**          |       |
|                                                                                           |   | **2002**              |       | **2001** |   |
| **Cash Flows From Operating Activities:**                                                      |   |                  |       |   |   |
| Net loss                                                                                       |   | $                     | (3,433     | ) | $ | (2,587 | ) |
| Adjustments to reconcile net loss to net cashflows provided by (used in) operating activities: |   |                  |       |   |   |
| Loss from discontinued operations                                                              |   | —                |       | 29 |   |
| Depreciation and amortization                                                                  |   | 672                   |       | 984 |   |
| Impairment loss on intangible assets                                                           |   | 1,085                 |       | — |   |
| Reorganization items                                                                           |   | 273                   |       | — |   |
| Changes in operating assets and liabilities:                                                   |   |                  |       |   |   |
| Accounts receivable                                                                            |   | 372                   |       | 226 |   |
| Inventories                                                                                    |   | 953                   |       | (730 | ) |
| Prepaid expenses and other assets                                                              |   | 180                   |       | (109 | ) |
| Accounts payable                                                                               |   | (218                  | )          | 24 |   |
| Employee compensation                                                                          |   | (184                  | )          | (7 | ) |
| Other liabilities and accrued expenses                                                         |   | 541                   |       | 234 |   |
| Net cash provided by (used in) continuing operations                                           |   | 241                   |       | (1,936 | ) |
| Net cash used in discontinued operations                                                       |   | (213                  | )          | (177 | ) |
| Net cash provided by (used in) operating activities                                            |   | 28                    |       | (2,113 | ) |
|                                                                                           |   |                  |       |   |   |
| **Cash Flows From Investing Activities:**                                                      |   |                  |       |   |   |
| Purchase of equipment and fixtures                                                             |   | (17                   | )          | (43 | ) |
| Investment in proprietary software                                                             |   | (207                  | )          | (300 | ) |
| Investment in perpetual license                                                                |   | (70                   | )          | — |   |
| Net cash used in continuing operations                                                         |   | (294                  | )          | (343 | ) |
| Net cash provided by discontinued operations                                                   |   | 3                     |       | 45 |   |
| Net cash used in investing activities                                                          |   | (291                  | )          | (298 | ) |
|                                                                                           |   |                  |       |   |   |
| **Cash Flows From Financing Activities:**                                                      |   |                  |       |   |   |
| Proceeds from stock transactions                                                               |   | —                |       | 14 |   |
| Net cash provided by financing activities                                                      |   | —                |       | 14 |   |
|                                                                                           |   |                  |       |   |   |
| **Net decrease in cash and cash equivalents**                                                  |   | (263                  | )          | (2,397 | ) |
|                                                                                           |   |                  |       |   |   |
| **Cash and cash equivalents at beginning of period**                                           |   | 1,361                 |       | 6,350 |   |
|                                                                                           |   |                  |       |   |   |
| **Cash and cash equivalents at end of period**                                                 |   | **$**                 | **1,098**  | ** ** | **$** | **3,953** |   |
|                                                                                           |   |                  |       |   |   |
| **Cash paid for interest expense**                                                             |   | **$**                 | **—** | ** ** | **$** | **757** |   |

See accompanying notes to financialstatements

 

 

4

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

June30, 2002

(Unaudited)

 

**1.             Basis ofPresentation**

 

Theconsolidated balance sheet as of June 30, 2002, the consolidated statements of operations andcash flows for the three and six months ended June 30, 2002 and 2001, and the related information presentedin these notes have been prepared by management in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-QSB and Rule 10-01of Regulation S-X, without audit. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments considered necessary for afair presentation of results have been included.  The balance sheet at December 31, 2001 was derived from theaudited financial statements as of that date. Operating results for the three and six months ended June 30,2002 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2002.  For further information, refer to thefinancial statements and notes thereto included in Angeion Corporation’s AnnualReport on Form 10-KSB for the year ended December 31, 2001.

 

DuringMarch 2000, Angeion Corporation discontinued its historical business, theresearch, development, manufacturing and marketing of implantable cardioverterdefibrillators (“ICD”).  Consequently,the accompanying consolidated statements of operations present all activitiesof the ICD business under discontinued operations accounting rules.  Although the last sales of ICD products weremade during the second quarter of 2000, the Company continues to pursue thelicense or transfer of its ICD technology.

 

Comprehensiveincome is a measure of all non-owner changes in shareholders’ equity andincludes such items as net income, certain foreign currency translation items,minimum pension liability adjustments and changes in the value ofavailable-for-sale securities.  For thethree and six months ended June 30, 2002 and 2001, comprehensive income (loss) for Angeion Corporation wasequivalent to net income (loss) as reported.

 

**2.             Restructuringof Parent Company’s Debt**

 

On June 17, 2002, AngeionCorporation, the parent company, filed a voluntary petition for reorganizationunder chapter 11 of the federal bankruptcy laws (“Chapter 11” or “BankruptcyCase”) in the United States Bankruptcy Court for the District of Minnesotaunder case number 02-32260.  The JointPlan of Reorganization (“Plan”) was filed jointly with the noteholders of theCompany’s 7-1⁄2% Senior Convertible Notes (“Notes”) due April 2003.  Since the petition date, the Company hascontinued to operate as Debtor in Possession. As Debtor in Possession, the Company is authorized to continue tooperate as an ongoing business, but may not engage in transactions outside theordinary course of business without approval of the Bankruptcy Court.

 

TheCompany’s subsidiary, Medical Graphics Corporation, is not part of the Chapter11 filing and continues to do business as usual.  Thus far, the restructuring has not had an adverse impact uponthe day-to-day operations, customers or suppliers of its Medical Graphicsoperations.

 

                ***Events Prior to Bankruptcy Filing.***  At December 31, 2001, the Company had$20,198,000 in Notes due April 2003 outstanding.  The Company believed it would resolve repayment of the Notes in acombination of one or more of several ways, including the restructuring of theNotes’ terms, conversion of the Notes to equity or raising additional funds torefinance the Notes.  The Companysettled litigation 

5

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withthe noteholders in November 2001 and engaged in negotiations with thenoteholders from January 2002 until June 2002 to restructure the debtrepresented by the Notes.

In a letter dated February 14,2002, Nasdaq notified Angeion that its stock had closed below the minimum $1.00per share requirement for continued listing on the SmallCap Market.  Accordingly, Angeion has been provided 180calendar days or until August 13, 2002 to regain compliance.  In order to achieve compliance, the bidprice of Angeion’s common stock must close at $1.00 per share or more for aminimum of ten consecutive trading days. There were a number of developments that Angeion believed would resultin an improved stock price, including possible restructuring of the noteholderindebtedness and further licensing agreements for the Company’s patentedtechnology.  In addition, the Companyhad the ability under its Articles of Incorporation and Minnesota law, withoutshareholder approval, to affect a reverse stock split thereby reducing thenumber of shares outstanding and, in essence, increasing the price of thecommon stock.

 

In a letter dated April 19,2002, Nasdaq advised the Company that Nasdaq believed that the Company did notcomply with Marketplace Rule 4310(c)(2)(B), which requires the Company tocomply with Nasdaq's shareholder equity or net income requirements.  If the Company's stock were to be delisted,it would have constituted an Event of Default under the Indenture governing theNotes and the Notes would have become due and payable.

 

During the second quarter of 2002, the price of the Company’s stock inthe market continued to decline because of the uncertainty surrounding theCompany’s ability to repay the Notes when due. Furthermore, the Company was concerned that the uncertainty associatedwith repayment of the Notes would affect its ongoing business.  In addition, the Company believed thatrestructuring the Notes in a manner that resulted in conversion to equity wouldenable the Company to achieve profitability more rapidly by virtue of theelimination of the debt.  The Companyalso believed that any restructuring that enabled the Company to maintain itsnet operating loss (“NOL”) carryovers would result in increased value in thefuture to its creditors and shareholders when it regained profitability.

6

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***Chapter 11 Bankruptcy Filing.***  On June 17, 2002 the Company announced that it had reached anagreement with the holders of the $20,198,000 in outstanding Notes torestructure the debt by converting it to equity.  It also announced that, in order to retain an unimpaired tax losscarryover in excess of $125 million that the debt restructuring would takeplace under a Chapter 11 bankruptcy filing. The noteholders represent substantially all of the contested debtaffected by the Chapter 11 proceedings and both the Company and thenoteholders, prior to filing, agreed to terms of the Plan.

 

***Joint Plan of Reorganization.***  The Plan provides that all of the Company’s$20,198,000 in outstanding Notes due April 2003, plus accrued interest of$1,017,000, will be converted into common stock of the Company.  Immediately after the conversion, thenoteholders as a group will own 95% of the Company’s outstanding stock andcurrent shareholders of the Company will own 5% of the Company’s outstandingstock.  Current shareholders will alsobe issued five-year warrants to purchase one additional share for each sharethat they are issued in the conversion. The Plan also provides for the authorization of a new 2002 Stock OptionPlan that would be authorized to issue up to 600,000 shares of common stock,but provides that options to purchase no more than 359,463 shares may be issuedduring the two (2) years after the Confirmation Date without the approval ofthe Reorganized Board, including board representatives of the UnsecuredCreditors Committee.

 

Bankruptcylaw empowers a debtor in possession to assume or reject executory contracts andunexpired leases and limits the amount that a landlord may claim.  The Company previously leased space inBrooklyn Park, Minnesota that served as office, manufacturing and warehousespace for its discontinued ICD business. In May 2000, the Company entered into an agreement that terminatedits future rental obligations for approximately 64% of its Brooklyn Park spacein exchange for a payment of $476,000. In early 2002, the Company signed a sublease with CHF Solutions, Inc.for the balance of the leased Brooklyn Park building.  The Company is responsible for a rental difference approximating$427,000 through February 2008. The Company has negotiated an acceptable amendment to the lease thatwould require it to continue making lease payments for one year through June2003, at which time all obligations of the Company would be released.  This amendment is subject to BankruptcyCourt approval.

***Nasdaq Hearing.***  On June 19, 2002, Nasdaq advised the Companythat its common stock would be delisted as of June 27, 2002, due to the Chapter11 Bankruptcy filing, unless the Company requested a hearing.  The Company requested a hearing that wassubsequently granted with the Listing Qualifications Hearings Department of theNasdaq and held on August 1, 2002.  Atthe hearing, the Company presented its plan for achieving compliance with allof the listing requirements of the Nasdaq SmallCap Market upon confirmation ofthe Joint Plan of Reorganization.  TheNasdaq can make a decision at any time and should the decision be to delist theCompany’s common stock, it would likely be without notice.

 

If the Company’s common stockwere not listed for trading on the Nasdaq SmallCap Market, trading of thecommon stock would likely be on the over-the-counter market system.  Inclusion of the Company’s common stock onthe over-the-counter market system could adversely affect the liquidity of theCompany’s common stock and may impact the public’s perception of theCompany.  There can be no assurance thatdelisting would not have a material adverse effect on liquidity or businessoperations.

 

***Confirmation of The Plan.***  The Bankruptcy Court has scheduled a hearingfor September 4, 2002 to determine whether the Disclosure Statement isadequate.  Subsequent to Court approvalof the

7

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 Disclosure Statement, a ballot for purposes of voting to accept or reject the Plan will be mailed along with a copy of the Disclosure Statement to all shareholders and noteholders.  The Bankruptcy Court will determine whether sufficient acceptances have been received to confirm the Plan.  Assuming the Bankruptcy Court approves the Plan, the Company expects the Plan to become effective shortly after the confirmation hearing.  The Company expects confirmation to occur during the fourth quarter of 2002.  However, there is no assurance that the Court will confirm the Plan.

 

**3.             Accounting Policies for EntitiesUnder the Bankruptcy Code**

 

Since the Petition Date, the Company has operated its business as a debtor-in-possession under the Bankruptcy Code.  The American Institute of Certified Public Accountants' Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) provides guidance for financial reporting by entities that have filed petitions with the Bankruptcy Court and expect to reorganize under Chapter 11 of the Bankruptcy Code.

 

Under SOP 90-7, the financial statements of an entity in a Chapter 11 reorganization proceeding should distinguish transactions and events that are directly associated with the reorganization from the operations of the ongoing business as it evolves.  Accordingly, SOP 90-7 requires the following financial reporting or accounting treatments with respect to the financial statements:

 

***Balance Sheet.***  The balance sheet should distinguish (i) pre-petition liabilities subject to compromise from those that are not subject to compromise, such as fully secured liabilities, and (ii) post-petition liabilities.  Pre-petition liabilities that may be affected by the plan should be reported at the expected amounts to be allowed, even if they may ultimately be settled for lesser amounts.

 

Consolidated financial statements that include one or more entities in reorganization proceedings and one or more entities not in reorganization proceedings should include condensed combined financial statements of the entities in reorganization proceedings.  Intercompany receivables and payables of entities in reorganization proceedings should be disclosed in the condensed combined financial statements.

 

***Statement of Operations.***  The statement of operations should portray the results of operations of the reporting entity while it is in Chapter 11 proceedings.  Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported separately as reorganization items, except for those required to be reported as discontinued operations in conformity with APB Opinion 30, “Reporting the Results of Operations.”  Professional fees and similar types of expenditures directly relating to the Chapter 11 proceeding should be expensed as incurred and reported as reorganization items.

 

Interest should be reported only to the extent that it will be paid during the Chapter 11 proceeding or that it is probable that it will be an allowed claim.  Interest expense is not a reorganization item.  The extent to which reported interest expense differs from stated contractual interest should be disclosed.

 

***Statement of Cash Flows.***  Reorganization items should be disclosed separately within the operating, investing and financing categories of the statement of cash flows.

 

**4.             Current Liabilities Subject toCompromise**

 

Currentliabilities subject to compromise refer to liabilities incurred prior to theChapter 11 filing excluding those claims that will not be impaired.  The liabilities subject to compromiserepresent management’s best estimate of known and potential claims to beresolved in connection with the Chapter 

 

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11 filing.  These claims may be subject to futureadjustments depending on Court action, further developments with respect todisputed claims or other events.  Theliabilities subject to compromise are listed in the following table:

 

| **(In  thousands)**                             |   | **June 30,  2002** |   |
|-------------------------------------------------|--------|--------------------|--------|
| 7—1⁄2% Senior Convertible Notes         |   | $                  | 20,198 |   |
| Accrued interest on the Notes                   |   | 1,017              |   |
| Real estate lease for discontinued ICD business |   | 427                |   |
|                                            |   | $                  | 21,642 |   |

 

The Company has negotiatedan acceptable amendment to the real estate lease that would require it tocontinue making lease payments for one year through June 2003, at which timeall obligations of the Company would be released.  This amendment is subject to Bankruptcy Court approval and ahearing scheduled for August 21, 2002. The Company believes that Court rejection of this favorable amendment isunlikely.  SOP 90-7, paragraph 22 states“an objective of financial statements issued by an entity in Chapter 11 shouldbe to reflect its financial evolution during the proceeding.”  SOP 90-7, paragraph 23 goes on to state,“liabilities that may be affected by the plan should be reported at the amountsexpected to be allowed, even if they may be settled for lesser amounts.”  Despite that, SOP 90-7, paragraph 14acknowledges that “some entities report the resulting claims at the estimatedamounts of the allowed claims, while others report them at the estimatedamounts at which they will be settled.” The Company has elected to recognize the $292,000 gain resulting fromamending the real estate lease during the month of August 2002.

 

**5.             Reorganization Items**

 

A summary of the expensesrecognized during the three months ended June 30, 2002 is listed in thefollowing table.

 

| **(In  thousands)**                   |   | **Three  Months Ended June 30, 2002** |   |
|---------------------------------------|--------|---------------------------------------|--------|
| Provision for professional fees       |   | $                                     | 210    |   |
| Write-down of equipment held for sale |   | 63                                    |   |
|                                  |   | $                                     | 273    |   |

 

**6.             Condensed Financial Statements ofthe Debtor**

 

SOP 90-7 requirespresentation of condensed financial statements of the debtor when theconsolidated financial statements include entities that are not part of thereorganization proceedings.  Angeion’ssubsidiary, Medical Graphics Corporation, is not included in the Chapter 11proceedings and continues to do business as usual.  The following table presents the condensed balance sheet ofAngeion Corporation.

 

 

 

9

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| **(In  thousands)**                       |   | **June 30,   2002** |   | **December  31,   2001** |   |
|-------------------------------------------|--------|---------------------|--------|--------------------------|--------|
| Current assets:                           |   |                |   |                     |   |
| Cash and cash equivalents                 |   | $                   | 148    |                     | $      | 1,011 |   |
| Prepaid expenses                          |   | 60                  |   | 54                       |   |
|                                      |   | 208                 |   | 1,065                    |   |
|                                      |   |                |   |                     |   |
| Intercompany receivable                   |   | 10,451              |   | 10,282                   |   |
| Equity in subsidiary                      |   | 8,198               |   | 10,174                   |   |
| Other assets                              |   | 34                  |   | 276                      |   |
|                                      |   | 18,891              |   | 21,797                   |   |
|                                      |   |                |   |                     |   |
| Current liabilities:                      |   |                |   |                     |   |
| Current liabilities subject to compromise |   | 21,642              |   | -                        |   |
| Other current liabilities                 |   | 248                 |   | 1,165                    |   |
|                                      |   | 21,890              |   | 1,165                    |   |
|                                      |   |                |   |                     |   |
| Long term debt                            |   | -                   |   | 20,198                   |   |
| Shareholders’ equity                 |   | (2,999              | )      | 434                      |   |
|                                      |   | $                   | 18,891 |                     | $      | 21,797 |   |

 

**7.             IntangibleAssets**

 

On January 1, 2002, newaccounting rules for business combinations and accounting for goodwill andother intangibles (SFAS 141 and 142) became effective for the Company.  Accordingly, goodwill is no longer beingamortized against earnings and goodwill balances are subject to an impairmentreview on an annual basis or sooner if indicators of potential impairmentexist.  In addition, the new rulesfurther defined the classes of intangible assets, which caused the Company toreclassify the $1,448,000 unamortized balance of an intangible asset representedby the estimated value of assembled workforce to goodwill as of January 1,2002.  The value of assembled workforceat December 31, 2001 was also reclassified in these financial statements forcomparative purposes.  The company hascompleted a goodwill impairment review for the Medical Graphics Corporationacquisition, which represents the Company’s only goodwill, and found noimpairment.

 

  The Company completed a review of intangible asset residualvalues and found no impairment, except for its investment in the perpetuallicense to use certain INTERXVENTUSA intellectualproperty.  The Company has purchased aperpetual license agreement for existing INTERXVENT technology to berevised in the form of a self-help program. Since completion of the self-help program  has been delayed and therefore not been introduced to the market,the Company has reduced the value of its current investment by $1,085,000 to$325,000.  The Company intends toamortize the remaining value of $325,000 over three years.

 

The impairment review wasbased on a discounted cash flow approach that uses estimates for revenues andexpenses as well an appropriate discount rate. The estimates used for the review are consistent with the plans andestimates being used to manage the underlying business.  If the business fails to achieve the revenueand expense levels forecasted or if market conditions for the Company’sproducts deteriorate, the Company may incur charges for the impairment ofgoodwill and or intangible assets.

 

 

10

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Intangible assets as of June30, 2002 consisted of the following:

 
| **(In  thousands)**          |   | **Gross   Carrying   Amount** |   | **Accumulated  Amortization** |   |
|------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
| Amortized intangible assets: |   |                          |   |                          |   |
| Proprietary software         |   | $                             | 3,498  |                          | $      | 996 |   |
| Patents                      |   | 2,342                         |   | 488                           |   |
| Perpetual license            |   | 325                           |   | -                             |   |
| Purchased technology         |   | 293                           |   | 65                            |   |
|                         |   | 6,458                         |   | 1,549                         |   |
|                         |   |                          |   |                          |   |
| Unamortized trade name       |   | $                             | 5,302  |                          |   |   |
|                         |   |                          |   | Net                           |   |
| Intangible assets, net       |   |                          |   | $                             | 10,211 |   |

 

The change in the carryingamount of goodwill is as follows:

 
| **(In  thousands)**                                          |   | **Goodwill** |   |
|--------------------------------------------------------------|--------|--------------|--------|
| Balance as of December 31, 2001                              |   | $            | 487    |   |
| Reclassification of assembled workforce pursuant to SFAS 142 |   | 1,448        |   |
| Balance as of June 30, 2002                                  |   | $            | 1,935  |   |

 

The following tablediscloses reported net loss and the adjusted net loss that would have beenreported assuming that SFAS 142 were to have been effective for all reportedperiods.

 
| **(In thousands, except for**          |   | **Three  Months Ended   June 30,** |   | **Six Months  Ended   June 30,** |   |
|----------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
| **per share amounts)**                 |   | **2002**                           |   | **2001**                         |   | **2002** |   | **2001** |   |
| Net loss, as reported                  |   | $                                  | (2,379 | )                                | $      | (1,264 | ) | $ | (3,433 | ) | $ | (2,587 | ) |
| Add back amortization:                 |   |                               |   |                             |   |   |   |   |   |
| Goodwill                               |   | -                                  |   | 9                                |   | - |   | 19 |   |
| Trade name                             |   | -                                  |   | 75                               |   | - |   | 150 |   |
| Assembled workforce                    |   | -                                  |   | 80                               |   | - |   | 160 |   |
| Net loss, as adjusted                  |   | (2,379                             | )      | (1,100                           | )      | (3,433 | ) | (2,258 | ) |
|                                   |   |                               |   |                             |   |   |   |   |   |
| Earnings per share, basic and diluted: |   |                               |   |                             |   |   |   |   |   |
| Net loss per share, as reported        |   | (0.66                              | )      | (0.36                            | )      | (0.96 | ) | (0.74 | ) |
| Add back amortization:                 |   |                               |   |                             |   |   |   |   |   |
| Goodwill                               |   | -                                  |   | -                                |   | - |   | 0.01 |   |
| Trade name                             |   | -                                  |   | 0.02                             |   | - |   | 0.04 |   |
| Assembled workforce                    |   | -                                  |   | 0.02                             |   | - |   | 0.04 |   |
| Net loss per share, as adjusted        |   | $                                  | (0.66  | )                                | $      | (0.32 | ) | $ | (0.96 | ) | $ | (0.65 | ) |

 

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Amortizationexpense for the three and six months ended June 30, 2002 was $180,000 and$360,000, respectively.  Estimatedamortization expense for the remainder of 2002 and for each of the succeedingyears based on the intangible assets as of June 30, 2002 is as follows:

 
| **(In  thousands)**                |   | **Amortization** |   |
|------------------------------------|--------|------------------|--------|
| Six months ended December 31, 2002 |   | $                | 406    |   |
| 2003                               |   | 832              |   |
| 2004                               |   | 832              |   |
| 2005                               |   | 780              |   |
| 2006                               |   | 722              |   |
| Thereafter                         |   | 1,337            |   |
|                               |   | $                | 4,909  |   |

 

**8.             Reclassifications**

 

Certainamounts in Angeion’s financial statements for the three and six months ended June 30, 2001 have been reclassified to conform to the2002 presentation.  Thesereclassifications had no effect on net income or shareholders’ equity aspreviously reported.

 

**9.             NetIncome (Loss) Per Share**

 

Basic earnings per share arecomputed by dividing net earnings by the weighted average shares outstandingduring the reporting period.  Dilutedearnings per share are computed similar to basic earnings per share except thatthe weighted average shares outstanding are increased to include additionalshares from the assumed exercise of stock options, warrants or convertibledebt, if dilutive.  The number ofadditional shares is calculated by assuming that outstanding stock options orwarrants were exercised and that the proceeds from such exercise were used toacquire shares of common stock at the average market price during the reportingperiod.  If the Notes are dilutive, theassociated interest expense and amortization of debt issuance costs, net oftaxes, are removed from operations and the shares issued are assumed to beoutstanding for the dilutive period. All potentially dilutive common shareswere excluded from the calculation because they were anti-dilutive for allperiods presented.

 

**10.          OtherCommitments**

 

On March 4, 2002, theCompany completed a revision of its agreement with INTERXVENTUSA,a Georgia corporation engaged in the business of developing and delivering riskassessment and lifestyle management materials and services to patients forimproved cardio-vascular health.  TheCompany modified the agreement such that the previous payment of $1,340,000together with an additional $75,000 represents payment for a perpetual licenseto use certain INTERXVENTUSA intellectual property aspart of a custom developed private label product that is a web enabled selfhelp lifestyle management program.  Inaddition, the Company has agreed to make royalty payments of 15% on all amountsreceived for the program with a $5.00 per participant minimum applicable toeach consumer.  This product is plannedto be a new product that will be marketed under the New Leaf brand and will be madeavailable to all New Leaf Personal Exercise System delivery sites.

 

**11.          NewAccounting Pronouncements**

 

In August 2001, theFinancial Accounting Standards Board approved SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for theimpairment or disposal of long-lived assets and supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.”  However, this statementretains the fundamental provisions of SFAS No. 121 for (a) recognition andmeasurement of the impairment of long-lived assets to be held and used and (b)measurement of long-lived assets to be disposed of by sale.

 

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SFAS No. 144 also supersedesthe accounting and reporting provisions of APB Opinion No. 30, “Reporting theResults of Operations-Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions,” for the disposal of a segment of a business.  However, this Statement retains therequirement of APB No. 30 to report discontinued operations separately fromcontinuing operations and extends that reporting to a component of an entitythat either has been disposed of or is classified as held for sale.  The Company adopted the provisions of SFASNo. 144 as of January 1, 2002.  Theadoption of SFAS No. 144 did not have a material effect on the Company’sfinancial statements.

 

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

# **Forward-Looking Statements**

 

Statements included in thisQuarterly Report on Form 10-QSB that are not historical or current facts are“forward-looking statements” made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  The words “believe,” “expect,” “will,” “can,” “estimate,”“anticipate,” and similar expressions are intended to identify forward-lookingstatements.  Forward-looking statementsare subject to certain risks and uncertainties that could cause actual resultsto differ materially including the following: (i) the Company’s ability tosuccessfully emerge from Chapter 11 Bankruptcy proceedings during the fourthquarter of 2002, (ii) the Company’s ability to successfully increase revenuefrom its new Leaf Product line, (iii) the Company’s ability to develop andprotect its intellectual property, (iv) potential product liability claimsrelated to the Company’s medical products, (v) dependence upon third partyvendors and (vi) the Company’s ability to remain listed on the Nasdaq Small CapMarket as well as other factors not now anticipated.  Additional factors are set forth in the Section entitled “CertainRisk Factors” in Part I, Item 1, “Business” of the Company’s Form 10-KSB forthe year ended December 31, 2001. Various forward-looking statements have been made in this QuarterlyReport on Form 10-QSB and may also be made in other Angeion reports filed underthe Securities Exchange Act of 1934, in its press releases and in otherdocuments.  In addition, from time totime, the Company through its management may make oral forward-lookingstatements.  The Company undertakes noobligation to update any forward-looking statement.

 

# **Overview**

 

Angeion, through its MedicalGraphics Corporation subsidiary, develops, manufactures and marketsnon-invasive cardiorespiratory diagnostic systems and related software for themanagement and improvement of cardiorespiratory health under the MedGraphicstrade name.  The primary MedGraphicsproducts include pulmonary function and cardiopulmonary exercise testingsystems.  The Company also develops,manufactures and markets health and fitness products and services designed toassist consumers with fitness improvement, weight management and cardiacrehabilitation.  These new products andservices are sold under the New Leaf brand name to consumers through variousdelivery sites such as health and fitness clubs, weight management and cardiacrehabilitation centers.

 

On June 17, 2002, AngeionCorporation, the parent company, filed a voluntary petition for reorganizationunder chapter 11 of the federal bankruptcy laws (“Chapter 11” or “BankruptcyCase”) in the United States Bankruptcy Court for the District of Minnesotaunder case number 02-32260.  The JointPlan of Reorganization (“Plan”) was filed jointly with the noteholders of theCompany’s 7-1⁄2% Senior Convertible Notes (“Notes”) due April 2003.  Since the petition date, the Company hascontinued to operate as Debtor in Possession. As Debtor in Possession, the Company is authorized to continue tooperate as an ongoing business, but may not engage in transactions outside theordinary course of business without approval of the Bankruptcy Court.

 

TheCompany’s subsidiary, Medical Graphics Corporation, is not part of the Chapter11 filing and continues to do business as usual.  Thus far, the restructuring has not had an adverse impact uponthe day-to-day operations, customers or suppliers of its Medical Graphicsoperations.

 

                ***Events Prior to Bankruptcy Filing.***  At December 31, 2001, the Company had$20,198,000 in Notes due April 2003 outstanding.  The Company believed it would resolve repayment of the Notes in acombination of one or more of several ways, including the restructuring of theNotes’ terms, conversion of the Notes to equity or raising additional funds torefinance the Notes.  The Company settledlitigation with the noteholders in November 2001 and engaged innegotiations with the noteholders from January 2002 until June 2002to restructure the debt represented by the Notes.

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In a letter dated February14, 2002, Nasdaq notified Angeion that its stock had closed below the minimum$1.00 per share requirement for continued listing on the SmallCap Market.  Accordingly, Angeion has been provided 180calendar days or until August 13, 2002 to regain compliance.  In order to achieve compliance, the bidprice of Angeion’s common stock must close at $1.00 per share or more for aminimum of ten consecutive trading days. There were a number of developments that Angeion believed would resultin an improved stock price, including possible restructuring of the noteholderindebtedness and further licensing agreements for the Company’s patentedtechnology.  In addition, the Companyhad the ability under its Articles of Incorporation and Minnesota law, withoutshareholder approval, to affect a reverse stock split thereby reducing thenumber of shares outstanding and, in essence, increasing the price of thecommon stock.

 

In a letter dated April 19,2002, Nasdaq advised the Company that Nasdaq believed that the Company did notcomply with Marketplace Rule 4310(c)(2)(B), which requires the Company tocomply with Nasdaq's shareholder equity or net income requirements.  If the Company's stock were to be delisted,it would have constituted an Event of Default under the Indenture governing theNotes and the Notes would have become due and payable.

 

During the second quarter of 2002, the price of the Company’s stock inthe market continued to decline because of the uncertainty surrounding theCompany’s ability to repay the Notes when due. Furthermore, the Company was concerned that the uncertainty associatedwith repayment of the Notes would affect its ongoing business.  In addition, the Company believed thatrestructuring the Notes in a manner that resulted in conversion to equity wouldenable the Company to achieve profitability more rapidly by virtue of theelimination of the debt.  The Companyalso believed that any restructuring that enabled the Company to maintain itsnet operating loss (“NOL”) carryovers would result in increased value in thefuture to its creditors and shareholders when it regained profitability.

 

15

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***Chapter 11 Bankruptcy Filing.***  On June 17, 2002 the Company announced that it had reached anagreement with the holders of the $20,198,000 in outstanding Notes torestructure the debt by converting it to equity.  It also announced that, in order to retain an unimpaired tax losscarryover in excess of $125 million that the debt restructuring would take placeunder a Chapter 11 bankruptcy filing.  Thenoteholders represent substantially all of the contested debt affected by theChapter 11 proceedings and both the Company and the noteholders, prior tofiling, agreed to terms of the Plan.

 

***Joint Plan of Reorganization.***  The Plan provides that all of the Company’s$20,198,000 in outstanding Notes due April 2003, plus accrued interest of$1,017,000, will be converted into common stock of the Company.  Immediately after the conversion, thenoteholders as a group will own 95% of the Company’s outstanding stock andcurrent shareholders of the Company will own 5% of the Company’s outstandingstock.  Current shareholders will alsobe issued five-year warrants to purchase one additional share for each sharethat they are issued in the conversion. The Plan also provides for the authorization of a new 2002 Stock OptionPlan that would be authorized to issue up to 600,000 shares of common stock,but provides that options to purchase no more than 359,463 shares may be issuedduring the two (2) years after the Confirmation Date without the approval ofthe Reorganized Board, including board representatives of the UnsecuredCreditors Committee.

 

Bankruptcylaw empowers a debtor in possession to assume or reject executory contracts andunexpired leases and limits the amount that a landlord may claim.  The Company previously leased space inBrooklyn Park, Minnesota that served as office, manufacturing and warehousespace for its discontinued ICD business. In May 2000, the Company entered into an agreement that terminatedits future rental obligations for approximately 64% of its Brooklyn Park spacein exchange for a payment of $476,000. In early 2002, the Company signed a sublease with CHF Solutions, Inc.for the balance of the leased Brooklyn Park building.  The Company is responsible for a rental difference approximating$427,000 through February 2008. The Company has negotiated an acceptable amendment to the lease thatwould require it to continue making lease payments for one year through June2003, at which time all obligations of the Company would be released.  This amendment is subject to BankruptcyCourt approval.

***Nasdaq Hearing.***  On June 19, 2002, Nasdaq advised the Companythat its common stock would be delisted as of June 27, 2002, due to the Chapter11 Bankruptcy filing, unless the Company requested a hearing.  The Company requested a hearing that wassubsequently granted with the Listing Qualifications Hearings Department of theNasdaq and held on August 1, 2002.  Atthe hearing, the Company presented its plan for achieving compliance with allof the listing requirements of the Nasdaq SmallCap Market upon confirmation ofthe Joint Plan of Reorganization.  TheNasdaq can make a decision at any time and should the decision be to delist theCompany’s common stock, it would likely be without notice.

 

If the Company’s common stockwere not listed for trading on the Nasdaq SmallCap Market, trading of thecommon stock would likely be on the over-the-counter market system.  Inclusion of the Company’s common stock onthe over-the-counter market system could adversely affect the liquidity of theCompany’s common stock and may impact the public’s perception of theCompany.  There can be no assurance thatdelisting would not have a material adverse effect on liquidity or businessoperations.

 

 

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***Confirmation of The Plan.***  The Bankruptcy Court has scheduled a hearing for September 4, 2002 to determine whether the Disclosure Statement is adequate.  Subsequent to Court approval of the Disclosure Statement, a ballot for purposes of voting to accept or reject the Plan will be mailed along with a copy of the Disclosure Statement to all shareholders and noteholders.  The Bankruptcy Court will determine whether sufficient acceptances have been received to confirm the Plan and, assuming the Bankruptcy Court approves the Plan, the Company expects the Plan to become effective shortly after the confirmation hearing.  The Company expects confirmation to occur during the fourth quarter of 2002.  However, there is no assurance that the Court will confirm the Plan.

 

***After Emerging from Bankruptcy.***  The Company believes that the restructuring,which represents a strong vote of confidence by the noteholders in thebusiness, will result in a solid balance sheet and no debt.

 

***Operating Matters.***  The Company continues to focus a significant portion of itsresources on new products that target middle-aged adults that are concernedabout their health or fitness.  These newproducts are a logical extension of the Company’s core cardiorespiratorydiagnostic systems business and will add a much larger consumer focused marketto the Company’s business.  Managementis committed to this new strategy, which builds upon our existing business andcore competencies and expands the business model from one based on one-timesales of capital equipment to one that includes providing a product thatultimately gets sold to each customer.

 

The Company’s first productbeing marketed under the New Leaf brand is the New Leaf Personal ExerciseSystem.  The system provides deliverysites, such as health clubs, wellness centers and cardiac rehabilitationfacilities, with the tools to develop individualized fitness, weight managementand athletic training plans for their clients. At June 30, 2002, there were 39 delivery sites for the New Leaf PersonalExercise System.  Revenue from these newproducts was $49,000 and $80,000 for the three and six months ended June 30,2002.

 

The second New Leaf healthand fitness product that the Company will be offering is a result of its jointmarketing alliance with INTERXVENT, which began in 2001.  INTERXVENT developed and marketsa comprehensive cardiovascular disease risk reduction lifestyle managementprogram that involves a combination of printed materials, audio CDs andone-on-one personal mentoring or counseling sessions that has been shown to beboth clinically and economically effective on over 20,000 participants.  The Company has purchased a perpetuallicense agreement for the INTERXVENT technology in the form of aself-help program, with no mentoring required, that can be marketed to healthyconsumers at fitness clubs and other retail outlets.  The program can be purchased as a multi-subject comprehensiveprogram or the consumer can select individual modules of interest such asnutrition or smoking cessation.  TheInterVent product is planned to be marketed under the New Leaf brand and willbe made available to be marketed by all New Leaf Personal Exercise Systemsites.  The Company expects to begin theintroduction of this new product during the second half of 2002.  See Note 10, “Other Commitments,” Notes toConsolidated Financial Statements in this Form 10-QSB.

 

***Defense of ICD Patents.***  In addition to the products discussed above, the Company remainsthe owner of several patents related to its cardiac stimulation technology fromwhich it has generated significant licensing revenue in recent years.  Despite the decision to exit the business ofmanufacturing ICDs in 2000, the Company is continuing to defend its patents andexpects to generate additional revenue through new license agreements for itspatented cardiac stimulation technology. During March 2002, the Company commenced litigation against a medicaldevice manufacturer under which the Company alleges that the defendant companyinfringed Angeion’s cardiac stimulation technology.

 

 

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**Results ofOperations**

 

Angeion Corporation recordeda net loss of $2,379,000 for the three months ended June 30, 2002 compared to anet loss of $1,264,000 for the same period in 2001.  For the six months ended June 30, the Company recorded net lossesof $3,433,000 and $2,587,000 for 2002 and 2001, respectively.  The net loss for 2001 included a loss of$29,000 from discontinued operations.

 

**Revenues**

 

Revenues consist of productsales and service revenues.  Productsales reflect sales of Medical Graphic’s non-invasive cardiorespiratorydiagnostic systems and related software, sales of New Leaf health and fitnessproducts and services, and aftermarket sales of peripherals and supplies.  Service revenues reflect contract revenuesfrom extended service contracts, non-warranty service visits and training.

 

Total revenue increased by$51,000 or 1.2% to $4,275,000 from $4,224,000 for the three months ended June30, 2002 and 2001, respectively. Domestic revenue increased by $258,000 or 10.1% to $2,821,000 in 2002compared to $2,563,000 in 2001. International revenue decreased by $302,000 or 29.1% to $735,000 in 2002from $1,037,000 in 2001.  Servicerevenue increased by $95,000 or 15.2% to $719,000 in 2002 from $624,000 in2001.

 

Total revenue for the sixmonths ended June 30 increased by $24,000 or 0.3% to $8,309,000 in 2002 from$8,285,000 in 2001.  Domestic revenueincreased by $81,000 or 1.6% to $5,117,000 in 2002 compared to $5,036,000 in2001.  International revenue decreasedby $302,000 or 15.2% to $1,681,000 in 2002 from $1,983,000 in 2001.  Service revenue increased by $245,000 or19.4% to $1,511,000 in 2002 from $1,266,000 in 2001.

 

Domestic systems revenuerebounded from a negative 7.2% first quarter performance to a positive 10.1% inthe second quarter thus yielding a 1.6% increase for the first six months.  The second quarter more than offset the firstquarter in part because our customers delayed some planned first quarterbusiness.  In general, the Companybelieves that domestic customers are continuing to exercise caution in makingcapital expenditures due to the overall uncertainty of the United Stateseconomy as well as the atmosphere created in the wake of the September 11, 2001events.

 

First quarter internationalrevenue was even with the prior year while second quarter revenue decreased byover 29% leaving year to date performance off by over 15%.  There are two reasons driving the decline ininternational revenue.  The Europeaneconomy is acting much like that of the United States where customers aredelaying capital expenses unless there is a clear immediate need while LatinAmerica is also suffering from very weak economies and devaluating currencies.

 

The service revenue increasefor both quarters is primarily due to an increase in service contract revenueand non-warranty service calls associated with expiring warranties.  For a period of nine months from July 1996to March 1997, the Company had provided 5-year warranties with the sale of itssystems.  All of those 5-year warrantieshave now expired.  The service revenueincrease also reflects the Company’s continued emphasis on the sale of extendedservice contracts.

 

**Gross Margin**

 

For the three months endedJune 30, gross margin percentage decreased to 40.4% of revenue in 2002 from43.7% in 2001.  For the six months endedJune 30, gross margin percentage decreased to 40.0% of revenue in 2002 from42.5% in 2001.  Gross margins decreasesare due to labor costs associated 

 

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with revising certain productspecifications.  The Company believesthat these additional labor costs are temporary and that margins for the restof 2002 should return to prior year levels.

 

**Selling and Marketing**

 

Selling and marketingexpenses decreased $66,000 or 5.0% to $1,266,000 for the three months endedJune 30, 2002 compared to $1,332,000 in 2001. For the six months ended June 30, selling and marketing expensesdecreased $68,000 or 2.7% to $2,414,000 in 2002 from $2,482,000 in 2001.  Increases in expenses associated with theCompany’s focus on selling and marketing its New Leaf personal exercise systemof $145,000 and $273,000 for the three and six months ended June 30, 2002,respectively, have been more than offset by lower travel, product demonstrationand other selling and marketing expenses associated with core products.

 

**General and Administrative**

 

General and administrativeexpenses were $647,000 for the three months ended June 30, 2002 and 2001.  For the six months ended June 30, generaland administrative expenses decreased $72,000 or 5.6% to $1,225,000 in 2002from $1,297,000 in 2001.  Both periodsinclude reduced personnel costs that were offset by increased professional feesduring the second quarter.

 

**Research and Development**

 

Research and developmentexpenses for the three months ended June 30 decreased $54,000 or 15.7% to$289,000 in 2002 from $343,000 in 2001. For the six months ended June 30, research and development expensesdecreased $142,000 or 18.6% to $621,000 in 2002 from $763,000 in 2001.  The Company’s previous focus on theconversion and consolidation of software platforms is now complete, resultingin the decrease in research and development expenses for both the three and sixmonths ended June 30, 2002.  Researchand development expenses that have been capitalized as part of the Company’sproprietary software were $110,000 and $158,000 for the three months ended June30 and $207,000 and $300,000 for the six months ended June 30, 2002 and 2001,respectively.

 

**Amortization of Intangibles**

 

Amortization of intangiblesfor the three months ended June 30 decreased $144,000 or 44.4% to $180,000 in2002 from $324,000 in 2001.  For the sixmonths ended June 30, amortization of intangibles decreased $288,000 or 44.4%to $360,000 in 2002 from $648,000 in 2001. The decrease reflects the Company’s adoption of SFAS Statement No. 141, *Goodwill andOther Intangible Assets*.  SeeNote 7, “Intangible Assets,” Notes to Consolidated Financial Statements in thisForm 10-QSB.

 

**ImpairmentLoss on Intangible Assets**

 

As noted in Note 7,“Intangible Assets,” Notes to Consolidated Financial Statements in this Form10-QSB, the Company completed a review of intangible asset residual values andfound impairment for its investment in the perpetual license to use certainINTERXVENTUSA intellectual property.  Since completion of the self-help programhas been delayed and therefore not been introduced to the market, the Companyhas reduced the value of its current investment by $1,085,000 to $325,000.  Moreover, the Company intends to amortizethe remaining value of $325,000 over three years.

 

 

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**Other Income (Expense)**

 

Interest income for thethree months ended June 30 decreased by $45,000 to $3,000 in 2002 from $48,000in 2001.  For the six months ended June30, interest income decreased by $124,000 to $7,000 in 2002 from $131,000 in2001.  The decrease in interest incomereflects lower excess cash balances available for short-term investment as wellas lower interest rates.

 

Interest expense decreased$143,000 to $367,000 from $510,000 for the three months ended June 30, 2002 and2001, respectively.  For the six monthsended June 30, interest expense decreased $143,000 to $877,000 in 2002 from$1,020,000 in 2001.  Historically,interest expense included $132,000 of amortization of debt issuance costs on aquarterly basis.  The debt issuancecosts became fully amortized in April 2002. In addition, the Company discontinued accruing for interest expense onJune 17, 2002, the date the Company filed the Joint Plan of Reorganization.  The amount of stated contractual interestthat was not charged to operations for the 13 days ended June 30, 2002, wasapproximately $54,000.  The Joint Planof Reorganization provides for the conversion of all unpaid interest expense,$1,017,000 at June 17, 2002, into common stock of the Company after the BankruptcyCourt approves the Plan.

 

# **Benefit for income taxes**

 

                Duringthe first quarter of 2002, the Company recorded a refund of $92,000 for federalincome taxes that were previously paid for 1999.  The refund became available due to a tax law revision enactedinto law during the first quarter of 2002.

 

**Liquidity and Capital Resources**

 

The Company has financed itsliquidity needs over the last several years through revenue generated by theoperations of its wholly owned subsidiary, Medical Graphics Corporation,through revenue from license agreements for patented ICD technology and throughthe use of cash balances.

 

Although the Company hadcash and cash equivalents of $1,771,000 at March 31, 2002, the Company, afterconsultation with the noteholders, did not make the $757,425 interest paymenton the indebtedness that was due on April 15, 2002, pending continuingdiscussions and negotiations regarding restructuring of the indebtedness.  On June 17, 2002, the Company announced anagreement with the noteholders under which the $20,198,000 in outstanding notesplus accrued interest of $1,017,000 would be converted into common stock of theCompany through a Chapter 11 Bankruptcy proceeding and a Plan of Reorganizationfiled jointly between the Company and its noteholders.  See Note 2, “Restructuring of ParentCompany’s Debt,” Notes to Consolidated Financial Statements in this Form10-QSB.

 

The Company had cash of$1,098,000 and negative working capital of $16,222,000, including $20,198,000in principal amount of Notes due April 2003, as of June 30, 2002.  During the six months ended June 30, 2002,the Company generated $241,000 in cash from continuing operations.  Cash was generated by decreases of $372,000,$953,000 and $180,000 in accounts receivable, inventories and prepaid expensesand other assets, respectively, as well as an increase of $541,000 in otherliabilities and accrued expenses.  Thereduction in inventories included $335,000 for disposition of the remainingdiscontinued sleep diagnostic product inventories.  The principal use of cash included funding the $1,676,000 netloss before depreciation and amortization and the impairment loss on intangibleassets.  In addition, the Company used$213,000 in cash for discontinued operations, which represented real estatecommissions and rental of the facility formerly used for the Company’s ICDproducts.

 

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During the six months endedJune 30, 2002, the Company used $291,000 in cash for investing activities.  Cash was used to increase the Company’sinvestment in proprietary software by $207,000, to invest $70,000 in theINTERVENT perpetual license and to purchase $17,000 of equipment and fixtures.

 

During the fourth quarter of2001, the Company implemented cost reduction measures that resulted in adecrease of approximately 8% in annual operating expenses.  In addition, the Company’s operating plansallow for significant changes in commitments for operating expenses, particularlywith respect to incremental expenses associated with the introduction of theNew Leaf personal exercise system to the market.  Apart from these, the Company has no material commitments forcapital expenditures for 2002.  

 

The Company believes that itwill emerge from its Chapter 11 Bankruptcy in the fourth quarter of 2002 withall of the Notes converted to equity, thus eliminating the Company’s debt.  Upon emerging from the Chapter 11Bankruptcy, the Company believes that its liquidity and capital resource needsfor the foreseeable future will be met through its current cash and cashequivalents, cash flows from operations and working capital.  There can be no assurance, however, that theCompany’s business will continue to generate cash flows at or above currentrates of cash flow.

 

**Item3.  Quantitative****and Qualitative DisclosuresAbout Market Risk**

 

The Company invests its cashin money market instruments or short-term investment grade securities.  The Company believes that a decrease of 100basis points in prevailing interest rates would not have a significant adverseeffect on its net income or financial position.

 

The Company’s product salesoutside the United States are denominated in United States dollars.  Accordingly, the Company believes itsexposure to foreign exchange rate fluctuation is minimal.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

On June 17, 2002, AngeionCorporation, the parent company, filed a voluntary petition for reorganizationunder chapter 11 of the federal bankruptcy laws.  See Note 2, “Restructuring of Parent Company's Debt,” Notes toConsolidated Financial Statements in this Form 10-QSB.

 

The Company is subject tocertain claims and lawsuits that have been filed in the ordinary course ofbusiness.  Management is of the opinionthat ultimate settlement of these matters will not have a material impact onits financial statements.

 

**Item 2. Changes in Securities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

Under the terms of the Indenturecovering the Company’s Senior Convertible Notes, the Company is required tomake interest payments of $757,425 on April 15 and October 15 of eachyear.  Although the Company had cash andcash equivalents of $1,771,000 at March 31, 2002, the Company, afterconsultation with the noteholders, did not make the $757,425 interest paymenton the indebtedness that was due on April 15, 2002, pending continuingdiscussions and negotiations regarding restructuring of the indebtedness.  On May 15, 2002, the Company entered into aForbearance Agreement with U.S. Bank as Trustee under the Indenture, underwhich the Bank agreed it would not declare a Default under the Indenture forfailure to make the April 15, 2002 interest payment.  On June 17, 2002, the Company filed a voluntary petition forreorganization under chapter 11 of the federal bankruptcy laws in the UnitedStates Bankruptcy Court for the District of Minnesota and together with thenoteholders filed a Joint Plan of Reorganization under which the Notes would beconverted into common stock of the Company. See Note 2, “Restructuring of Parent Company’s Debt,” Notes toConsolidated Financial Statements in this Form 10-QSB.

 
| **Item 4.  Submission  of Matters to a Vote of Security Holders** |
|------------------------------------------------------------------------|
|                                                                   |   |   |
|                                                                   | None |
|                                                                   |   |   |
| **Item 5.  Other  Information**                                   |
|                                                                   |   |   |

                InJune 2002, Company's former joint venture partner, ELA Medical, notified theCompany that some of the ICD's formerly manufactured by Angeion wereexperiencing premature battery depletion. The Company advised the attending physicians of the patients with theseICD's of the problems and provided the physicians with a recommended procedureto determine what action is required. As part of the May 1999 agreement between the Company and ELA in whichthe Company withdrew from a joint venture with ELA, ELA is responsible for thewarranty coverage, technical service, and regulatory compliance service forthese ICDs.  The Company remainsresponsible for third party claims relating to these ICDs made on behalf of apatient (i.e. product liability claims). The Company believes that if any such claims are made, it has adequateproduct liability insurance to cover them, subject to deductibles.

 
| **Item 6.  Exhibits  and Reports on Form 8-K** |
|-----------------------------------------------------|
|                                                |   |   |
| (a)                                                 | Exhibits List |
|                                                |   |   |
|                                                | 99.1 | Certification of Chief  Executive Officer and Chief Financial Officer |
|                                                |   |   |
| (b)                                                 | Reports on Form 8-K |

 

 

During the three monthsended June 30, 2002, the Companyfiled a Report on Form 8-K reporting that ithad requested a hearing with regard to a decision of the staff of the NasdaqStock Market that the Company’s stock be delisted as a result of the Company’sJune 17, 2002 Chapter 11 bankruptcy filing.

 

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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:  | August 14, 2002 |   |   | /s/ Richard E. Jahnke                     |   |
|   |            |   |   |                                      |
|   |            |   |   | Richard E. Jahnke,  President and Chief   |
|   |            |   |   | Executive Officer                         |
|   |            |   |   | (Principal Executive  Officer)            |
|   |            |   |   |                                      |
| Date:  | August 14, 2002 |   |   | /s/ Dale H. Johnson                       |   |
|   |            |   |   |                                      |
|   |            |   |   | Dale H. Johnson, Chief  Financial Officer |
|   |            |   |   | (Chief Accounting Officer)                |

 

 

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