** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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# **FORM10-Q**

** **

**ý****        QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for thequarterly period ended September 30, 2001.**

** **

**OR**

** **

**o****        TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

** **

**For the transition period from __________ to __________.**

** **

**Commission file number 001-13543**

 

 

## **ANGEION CORPORATION**

(Exactname of registrant 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)                       |

 

Registrant’stelephone number, including area code: **(651)484-4874**

 

 

Indicate by check mark whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.
| Yes | ý |   No | o |
|-----|--------|-----------|---|

 

As of November 13, 2001, theCompany had outstanding 3,556,589 shares of common stock, $0.01 par value.

 

 
| **PART I - FINANCIAL  INFORMATION**                                                                                                                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Item 1.  Financial Statements**                                                                                                                     |
|                                                                                                                                                       |   |   |   |   |   |
| **ANGEION CORPORATION AND  SUBSIDIARIES**                                                                                                                  |
|                                                                                                                                                       |   |   |   |   |   |
| **Consolidated Balance  Sheets**                                                                                                                           |
| (unaudited,  in thousands except share data)                                                                                                               |
|                                                                                                                                                       |   |   | ** ** |   | ** ** |
|                                                                                                                                                       |   | **September 30,** | ** ** | **December 31,** | ** ** |
|                                                                                                                                                       |   | **2001** | ** ** | **2000** | ** ** |
| **Assets**                                                                                                                                                 |   |   |   |   |   |
| **Current assets:**                                                                                                                                        |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                  |   | $ | 3,052 |   | $ | 6,350 |   |
| Accounts receivable, net of allowance for doubtful accounts of $232  and $153, respectively                                                                |   | 4,171 |   | 4,631 |   |
| Inventories                                                                                                                                                |   | 5,197 |   | 3,979 |   |
| Prepaid expenses and other current assets                                                                                                                  |   | 521 |   | 218 |   |
| Total current assets                                                                                                                                       |   | 12,941 |   | 15,178 |   |
|                                                                                                                                                       |   |   |   |   |   |
| Net non-current assets of discontinued operations                                                                                                          |   | 191 |   | 236 |   |
| Equipment and fixtures, net                                                                                                                                |   | 1,449 |   | 1,895 |   |
| Intangible assets, net                                                                                                                                     |   | 11,507 |   | 12,000 |   |
| Other assets                                                                                                                                               |   | 329 |   | 724 |   |
| Goodwill, net                                                                                                                                              |   | 497 |   | 524 |   |
|                                                                                                                                                       |   | **$** | **26,914** |   | **$** | **30,557** |   |
|                                                                                                                                                       |   |   |   |   |   |
| **Liabilities and Shareholders' Equity**                                                                                                                   |   |   |   |   |   |
| **Current liabilities:**                                                                                                                                   |   |   |   |   |   |
| Accounts payable                                                                                                                                           |   | $ | 794 |   | $ | 812 |   |
| Employee compensation                                                                                                                                      |   | 681 |   | 549 |   |
| Deferred income                                                                                                                                            |   | 1,021 |   | 984 |   |
| Warranty reserve                                                                                                                                           |   | 186 |   | 239 |   |
| Net current liabilities of discontinued operations                                                                                                         |   | 234 |   | 457 |   |
| Other liabilities and accrued expenses                                                                                                                     |   | 1,233 |   | 474 |   |
| Total current liabilities                                                                                                                                  |   | 4,149 |   | 3,515 |   |
|                                                                                                                                                       |   |   |   |   |   |
| **Long-term debt**                                                                                                                                         |   | 20,198 |   | 20,198 |   |
|                                                                                                                                                       |   |   |   |   |   |
| **Shareholders' equity:**                                                                                                                                  |   |   |   |   |   |
| Common stock, $.01 par value.   Authorized 10,000,000 shares; issued and outstanding  3,556,589 shares in 2001 and 3,481,584 shares in 2000 |   | 36 |   | 35 |   |
| Additional paid-in capital                                                                                                                                 |   | 123,990 |   | 123,905 |   |
| Cumulative translation adjustment                                                                                                                          |   | (9 | ) | (9 | ) |
| Accumulated deficit                                                                                                                                        |   | (121,450 | ) | (117,087 | ) |
| Total shareholders' equity                                                                                                                                 |   | 2,567 |   | 6,844 |   |
|                                                                                                                                                       |   | **$** | **26,914** | ** ** | **$** | **30,557** | ** ** |
| See accompanying notes to financial statements                                                                                                             |   |   |   |   |   |

 
| **ANGEION CORPORATION AND  SUBSIDIARIES**                              |
|------------------------------------------------------------------------|
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Consolidated Statements of  Operations**                             |
| **(unaudited, in thousands except per share amounts)**                 |
|                                                                   |   |   |   |   |   |   |   |   |   |
|                                                                   |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|                                                                   |   | **September 30,** | ** ** | **September 30,** | ** ** |
|                                                                   |   | **2001** |   | **2000** |   | **2001** |   | **2000** | ** ** |
| **Revenues**                                                           |   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Equipment and supply sales                                             |   | $ | 3,349 |   | $ | 3,446 |   | $ | 10,368 |   | $ | 10,995 |   |
| Service revenue                                                        |   | 659 |   | 622 |   | 1,925 |   | 1,839 |   |
|                                                                   |   | 4,008 |   | 4,068 |   | 12,293 |   | 12,834 |   |
| **Cost of goods sold**                                                 |   |   |   |   |   |   |   |   |   |
| Cost of equipment and supplies                                         |   | 2,231 |   | 2,473 |   | 6,768 |   | 8,061 |   |
| Cost of service revenue                                                |   | 104 |   | 122 |   | 331 |   | 385 |   |
|                                                                   |   | 2,335 |   | 2,595 |   | 7,099 |   | 8,446 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Gross margin**                                                       |   | 1,673 |   | 1,473 |   | 5,194 |   | 4,388 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Operating expenses:**                                                |   |   |   |   |   |   |   |   |   |
| Selling and marketing                                                  |   | 1,284 |   | 1,187 |   | 3,766 |   | 3,551 |   |
| General and administrative                                             |   | 966 |   | 680 |   | 2,263 |   | 2,036 |   |
| Research and development                                               |   | 441 |   | 425 |   | 1,204 |   | 1,243 |   |
| Amortization of intangibles                                            |   | 276 |   | 294 |   | 924 |   | 873 |   |
|                                                                   |   | 2,967 |   | 2,586 |   | 8,157 |   | 7,703 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Operating loss**                                                     |   | (1,294 | ) | (1,113 | ) | (2,963 | ) | (3,315 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Other income (expense):**                                            |   |   |   |   |   |   |   |   |   |
| Interest income                                                        |   | 29 |   | 134 |   | 160 |   | 350 |   |
| Interest expense                                                       |   | (511 | ) | (511 | ) | (1,531 | ) | (1,595 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Loss before taxes**                                                  |   | (1,776 | ) | (1,490 | ) | (4,334 | ) | (4,560 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |
| Provision for taxes                                                    |   | - |   | - |   | - |   | - |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Loss from continuing operations**                                    |   | (1,776 | ) | (1,490 | ) | (4,334 | ) | (4,560 | ) |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from discontinued** **operations,  net of taxes** |   | - |   | 22 |   | (29 | ) | 11,085 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Net income (loss)**                                                  |   | $ | (1,776 | ) | $ | (1,468 | ) | $ | (4,363 | ) | $ | 6,525 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Net income (loss) per share - basic and diluted**                    |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                  |   | $ | (0.50 | ) | $ | (0.43 | ) | $ | (1.24 | ) | $ | (1.25 | ) |
| Discontinued operations                                                |   | - |   | 0.01 |   | (0.01 | ) | 3.04 |   |
| Net income (loss)                                                      |   | (0.50 | ) | (0.42 | ) | (1.25 | ) | 1.79 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| **Weighted average common shares outstanding**                         |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                      |   | 3,543 |   | 3,466 |   | 3,502 |   | 3,645 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |
| See accompanying notes to financial statements                         |   |   |   |   |   |   |   |   |   |

 
| **ANGEION CORPORATION AND  SUBSIDIARIES**                                                       |
|-------------------------------------------------------------------------------------------------|
|                                                                                            |   |   |   |   |   |
| **Consolidated Statements of Cash Flows**                                                       |
| **(unaudited, in thousands)**                                                                   |
|                                                                                            |   |   |   |   |   |
|                                                                                            |   | **Nine Months Ended** |   |
|                                                                                            |   | **September 30,** |   |
|                                                                                            |   | **2001** |   | **2000** | ** ** |
| **Cash Flows From Operating Activities:**                                                       |   |   |   |   |   |
| Net income (loss)                                                                               |   | $ | (4,363 | ) | $ | 6,525 |   |
| Adjustments to reconcile net income (loss) to net cash flows used in operating activities: |   |   |   |   |   |
| (Income) loss from discontinued operations                                                      |   | 29 |   | (11,085 | ) |
| Depreciation and amortization                                                                   |   | 1,428 |   | 1,377 |   |
| Changes in operating assets and liabilities:                                                    |   |   |   |   |   |
| Accounts receivable                                                                             |   | 460 |   | 832 |   |
| Inventory                                                                                       |   | (1,218 | ) | 682 |   |
| Prepaid expenses and other current assets                                                       |   | 92 |   | 257 |   |
| Accounts payable                                                                                |   | (18 | ) | (272 | ) |
| Employee compensation                                                                           |   | 132 |   | (130 | ) |
| Other liabilities and accrued expenses                                                          |   | 815 |   | 395 |   |
| Net cash used in continuing operations                                                          |   | (2,643 | ) | (1,419 | ) |
| Net cash used in discontinued operations                                                        |   | (252 | ) | (3,076 | ) |
| Net cash used in operating activities                                                           |   | (2,895 | ) | (4,495 | ) |
|                                                                                            |   |   |   |   |   |
| **Cash Flows From Investing Activities:**                                                       |   |   |   |   |   |
| Purchase of equipment and fixtures                                                              |   | (58 | ) | (256 | ) |
| Investment in proprietary software                                                              |   | (404 | ) | (559 | ) |
| Acquisition of operating assets                                                                 |   | - |   | (468 | ) |
| Net cash used in continuing operations                                                          |   | (462 | ) | (1,283 | ) |
| Net cash provided by discontinued operations                                                    |   | 45 |   | 9,293 |   |
| Net cash provided by (used in) investing activities                                             |   | (417 | ) | 8,010 |   |
|                                                                                            |   |   |   |   |   |
| **Cash Flows From Financing Activities:**                                                       |   |   |   |   |   |
| Borrowings under bank line of credit                                                            |   | - |   | 6,927 |   |
| Payments under bank line of credit                                                              |   | - |   | (6,927 | ) |
| Proceeds from stock transactions                                                                |   | 14 |   | 24 |   |
| Net cash provided by financing activities                                                       |   | 14 |   | 24 |   |
|                                                                                            |   |   |   |   |   |
| **Net increase (decrease) in cash and cash equivalents**                                        |   | (3,298 | ) | 3,539 |   |
|                                                                                            |   |   |   |   |   |
| **Cash and cash equivalents at beginning of period**                                            |   | 6,350 |   | 5,263 |   |
|                                                                                            |   |   |   |   |   |
| **Cash and cash equivalents at end of period**                                                  |   | **$** | **3,052** | ** ** | **$** | **8,802** | ** ** |
|                                                                                            |   |   | ** ** |   | ** ** |
| **Cash paid for interest expense**                                                              |   | **$** | **757** | ** ** | **$** | **812** | ** ** |
|                                                                                            |   |   |   |   |   |
| See accompanying notes to financial statements                                                  |   |   |   |   |   |

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

September30, 2001

(Unaudited)

 

**1.             Basis of Presentation**

 

The consolidatedbalance sheet as of September 30,2001, the consolidated statements of operations and cash flows for the threeand nine months ended September 30,2001 and 2000, and the related information presented in these notes have beenprepared by management in accordance with accounting principles generallyaccepted in the United States of America for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, withoutaudit.  Accordingly, they do not includeall of the information and notes required by accounting principles generallyaccepted in the United States of America for complete financial statements.  In the opinion of management, alladjustments considered necessary for a fair presentation of results have beenincluded.  The balance sheet at December31, 2000 was derived from the audited financial statements as of that date.  Operating results for the three and ninemonth periods ended September 30,2001 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2001.  Forfurther information, refer to the financial statements and notes theretoincluded in Angeion Corporation’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2000.

 

During March 2000,Angeion Corporation discontinued its historical business, the research,development, manufacturing and marketing of implantable cardioverterdefibrillators (“ICD”).  Consequently, theaccompanying consolidated statements of operations present all activities ofthe 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. As a result of the December 21, 1999 acquisition of Medical GraphicsCorporation and discontinuance of the ICD business, Medical Graphics nowcomprises a majority of the Company’s total assets and generates all of itssales.  Moreover, the Company is nowfocusing its efforts on the markets served by and business operations of itswholly owned subsidiary, Medical Graphics Corporation, and the acquisition anddevelopment of future businesses that contribute to shareholder value.

 

Comprehensive income isa measure of all non-owner changes in shareholders’ equity and includes suchitems as net income, certain foreign currency translation items, minimumpension liability adjustments and changes in the value of available-for-salesecurities.  For the three and ninemonths ended September 30,2001 and 2000, comprehensive income (loss) for Angeion Corporation wasequivalent to net income (loss) as reported.

 

**2.             Reclassifications**

 

Certain amounts inAngeion’s Form 10-Q for the three and nine months ended September 30, 2000 have been reclassified to conform to the 2001presentation.  These reclassificationshad no effect on net income or shareholders’ equity as previously reported.

 

**3.             Net Income (Loss) Per Share**

 

Basic net income (loss) per share iscalculated by dividing net income (loss) by the weighted-average common sharesoutstanding during the period.  Netincome (loss) per share assuming dilution reflects the potential dilution tobasic net income per share that could occur upon conversion or exercise ofsecurities, options, or other such items, to common shares using theif-converted and treasury stock methods based upon the weighted-average fairvalue of the Company’s common shares during the period.  The Company uses loss from continuingoperations as the “control” number in determining whether these potentialcommon shares are dilutive or antidilutive because it has reported adiscontinued operation.  Therefore, the samenumber of potential common shares used in computing the diluted per-shareamount for income (loss) from continuing operations for a reporting period isused in computing all other reported diluted per-share amounts, even if theseamounts are antidilutive to their respective basic per-share amounts.

 

**4.             Other Commitments**

 

On December 21, 2000, as part of its strategyto leverage its core technologies and market reputation to enter the cardiacrehabilitation and disease prevention market, the Company entered into a letterof intent and term sheet with a Georgia corporation engaged in the business ofdeveloping and delivering risk assessment and lifestyle management materialsand services to patients for improved cardio-vascular health.  The agreement gave the Company exclusivedistribution rights to a cardiac rehabilitation product for testing until July1, 2001 in exchange for payments of $750,000 over a six-month period.  These payments may be applied, at theCompany’s discretion toward either the purchase of the cardiac rehabilitationproducts or equity in the Georgia corporation. The agreement automaticallyrenewed by its terms and now continues on a month-to-month basis with paymentsof $100,000 per month until December 31, 2001, unless notice is given 60 daysprior to a proposed termination date. The letter of intent and term sheet also defines the general terms underwhich the Company has the right, but not the obligation, to acquire the Georgiacorporation during the distribution period. The Company has $1,045,000 of these cardiac rehabilitation productsincluded in inventory at September 30, 2001.

 

**5.             Litigation**

 

On November 1, 2001, theCompany entered into a settlement agreement that resolved all outstandinglitigation with U.S. Bank National Association, as Trustee for the holders of theCompany’s 7-1/2% Senior Convertible Notes due 2003.  Under the settlement, the Company paid the Trustee $300,000subsequent to September 30, 2001 and has been released from all claims assertedin the complaint.  In turn, the Trusteehas been released from all counterclaims asserted by the Company.  The lawsuit had been brought by the Trusteein September 1999, and alleged that certain actions by the Company violated theterms of the Indenture and required prepayment of amounts due under theIndenture.

 

**6.             New Accounting Pronouncements**

 

In July 2001, the FASB issued Statement No.141, *Business Combinations*, andStatement No. 142, *Goodwill and OtherIntangible Assets*.  Statement141 requires that the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001 as well as all purchase method businesscombinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired ina purchase method business combination must meet to be recognized and reportedapart from goodwill, noting that any purchase price allocable to an assembledworkforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment at least annually in accordance with the provisions of Statement142.  Statement 142 will also requirethat intangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with FASB Statement No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*.

 

The Company is required to adopt theprovisions of Statement 141 immediately, and Statement 142 effective January 1,2002.  Furthermore, goodwill andintangible assets determined to have an indefinite useful life acquired in apurchase business combination completed after June 30, 2001, but beforeStatement 142 is adopted in full, will not be amortized, but will continue tobe evaluated for impairment in accordance with the appropriate pre-Statement142 accounting literature.  Goodwill andintangible assets acquired in business combinations completed before July 1,2001 will continue to be amortized and tested for impairment in accordance withthe appropriate pre-Statement 142 accounting literature prior to the fulladoption of Statement 142.

 

Statement 141 will require, upon adoption ofStatement 142, that the Company evaluate its existing intangible assets andgoodwill that were acquired in a prior purchase business combination, and tomake any necessary reclassifications in order to conform with the new criteriain Statement 141 for recognition apart from goodwill.  Upon adoption of Statement 142, the Company will be required toreassess the useful lives and residual values of all intangible assetsacquired, and make any necessary amortization period adjustments by the end ofthe first interim period after adoption. In addition, to the extent an intangible asset is identified as havingan indefinite useful life, the Company will be required to test the intangibleasset for impairment in accordance with the provisions of Statement 142 withinthe first interim period.  Anyimpairment loss will be measured as of the date of adoption and recognized asthe cumulative effect of a change in accounting principle in the first interimperiod.

 

In connection with Statement 142’stransitional impairment evaluation, the Statement requires the Company toperform an assessment of whether there is an indication that goodwill isimpaired as of the date of adoption.  Toaccomplish this, the Company must identify its reporting units and determinethe carrying value of each reporting unit by assigning the assets andliabilities, including the existing goodwill and intangible assets, to thosereporting units as of the date of adoption. The Company has up to six months from the date of adoption to determinethe fair value of each reporting unit and compare it to the carrying amount ofthe reporting unit.  To the extent thecarrying amount of a reporting unit exceeds the fair value of the reportingunit, an indication exists that the reporting unit goodwill may be impaired andthe Company must perform the second step of the transitional impairmenttest.  In the second step, the Companymust compare the implied fair value of the reporting unit goodwill with thecarrying amount of the reporting unit goodwill, both of which would be measuredas of the date of adoption.  The impliedfair value of goodwill is determined by allocating the fair value of thereporting unit to all of the assets (recognized and unrecognized) andliabilities of the reporting unit in a manner similar to a purchase priceallocation, in accordance with Statement 141. The residual fair value after this allocation is the implied fair valueof the reporting unit goodwill.  Thissecond step is required to be completed as soon as possible, but no later thanthe end of the year of adoption.  Anytransitional impairment loss will be recognized as the cumulative effect of achange in accounting principle in the Company’s statement of operations.

 

As of the date of adoption, the Companyexpects to have unamortized goodwill in the amount of $487,000, unamortizedidentifiable intangible assets in the amount of $11,346,000, both of which willbe subject to the transition provisions of Statements 141 and 142.  Amortization expense related to goodwill was$37,000 and $27,000 for the year ended December 31, 2000 and the nine monthsended September 30, 2001, respectively. Because of the extensive effort needed to comply with adoptingStatements 141 and 142, it is not practicable to reasonably estimate the impactof adopting these Statements on the Company’s financial statements at the dateof this report, including whether it will be required to recognize anytransitional impairment losses as the cumulative effect of a change inaccounting principle.

 

In August 2001, the Financial AccountingStandards Board approved SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accountingand reporting for the impairment or disposal of long-lived assets andsupersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of.” However, this statement retainsthe fundamental provisions of SFAS No. 121 for (a) recognition and measurementof the impairment of long-lived assets to be held and used and (b) measurementof long-lived assets to be disposed of by sale.

 

SFAS No. 144 also supersedes the accountingand reporting provisions of APB Opinion No. 30, “Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” forthe disposal of a segment of a business. However, this Statement retains therequirement of APB No. 30 to report discontinued operations separately from continuingoperations and extends that reporting to a component of an entity that eitherhas been disposed of or is classified as held for sale. This statement alsoamends ARB No. 51, “Consolidated Financial Statements” to eliminate theexception to consolidation for a temporarily controlled subsidiary. The Companyis required and plans to adopt the provisions of SFAS No. 144 in the firstquarter of fiscal 2003.

 

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

 

# **Forward-Looking Statements**

 

Statements included in this Quarterly Reporton Form 10-Q that are not historical or current facts are “forward-lookingstatements” made pursuant to the safe harbor provision of the PrivateSecurities 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 factors set forth in the Section entitled“Certain Risk Factors” in Part I, Item 1, “Business” of the Company’s Form 10-Kfor the year ended December 31, 2000 as well as others not now anticipated.  Various forward-looking statements have beenmade in this Quarterly Report on Form 10-Q and may also be made in otherAngeion reports filed under the Securities Exchange Act of 1934, in its pressreleases and in other documents.  In addition,from time to time, the Company through its management may make oralforward-looking statements.  The Companyundertakes no obligation to update any forward-looking statement.

 

# **Overview**

 

Angeion, through its Medical GraphicsCorporation subsidiary, develops, manufactures and markets non-invasivecardiorespiratory diagnostic systems and related software for the managementand improvement of cardiorespiratory health under the MedGraphics tradename.  The primary MedGraphics productsinclude pulmonary function and cardiopulmonary exercise testing systems.  Traditionally, Medical Graphics’ revenue hasbeen generated from this area.

 

On December 13, 2000, theCompany announced that it intended to focus a significant portion of itsresources on the cardiac rehabilitation and disease prevention markets, whichare a logical extension of its core diagnostic systems business.  This will add a much larger consumer focusedmarket to the Company’s business and if successful, will lessen its dependenceon one-time sales of capital equipment to large medical facilities.  Angeion stated that new product offeringswould build on the Company’s core exercise stress testing technologiesincluding expert system software products and its AeroSport metabolic analyzerproducts.

 

As part of its strategy, the Company enteredinto a letter of intent and term sheet with a Georgia corporation engaged inthe business of developing and delivering risk assessment and lifestylemanagement materials and services to patients for improved cardiovascularhealth.  See Note 4, “Other Commitments”in this Form 10-Q.

 

On January 16, 2001, the Company announcedthat Medical Graphics was adding the Personal Digital CoachTM to itscardiorespiratory products.  ThePersonal Digital CoachTM is a proprietary device that providesverbal feedback to the user regarding exercise intensity.  The Company will market this new product tothe cardiac rehabilitation, fitness club and weight-loss industries throughrights obtained under an exclusive OEM distribution agreement with a thirdparty.

 

During the third quarter 2001, the Companycompleted the branding strategy for its new product and continued to developthe related packaging and marketing materials. In addition, the Company began selling its new product, the New LeafTMPersonal Exercise System that includes the Personal Digital Coach, inconjunction with selected early-adopting customers, initially cardiacrehabilitation centers and fitness clubs. Moreover, the Company is continuing to develop and refine its marketingplans while at the same time expanding its customer base.

 

**Results ofOperations**

 

Angeion Corporation recorded a net loss of$1,776,000 for the three months ended September 30, 2001compared to a net loss of $1,468,000 for the same period in 2000.  These amounts included no income fromdiscontinued operations for the three months ended September 30, 2001 andincome of $22,000 from discontinued operations for 2000.

 

For the nine months ended September 30, 2001, theCompany recorded a loss of $4,363,000 compared to net income of $6,525,000 forthe same period in 2000.  Net income for2000 included income from discontinued operations of $11,085,000, which isrepresented by a one-time gain of $11,696,000, net of taxes, from thenon-exclusive licensing of patent rights and sale of certain assets, offset by$611,000 of discontinued operating expenses.

 

**Revenues**

 

Revenues consist of product sales and servicerevenues.  Product sales reflect salesof Medical Graphic’s non-invasive cardiorespiratory diagnostic systems andrelated software and aftermarket sales of peripherals and supplies.  Service revenues reflect contract revenuesfrom extended warranties, non-warranty service visits and training.

 

Total revenue decreased 1.5% to $4,008,000from $4,068,000 for the three months ended September 30, 2001 and 2000,respectively.  Domestic revenuedecreased by 3.0% to $2,587,000 in 2001 compared to $2,667,000 in 2000.  International revenue decreased 2.2% to$762,000 in 2001 from $779,000 in 2000. Service revenue increased by 5.9% to $659,000 in 2001 from $622,000 in2000.

 

The third quarter revenue decrease of 1.5%reflects a delay of customer orders, both domestically and internationally, dueprimarily to the shock and uncertainty caused by the September 11, 2001 eventson the East coast.  While difficult tomeasure, there is clear indication that some customers have delayed orders thatwould have been received in September while others are taking a wait and seestance.  Moreover, domestic customerswith government funding are now permitted to “obligate funds” in one fiscalyear and make their purchase in the next fiscal year.  The Company has received a number of product orders from UnitedStates government agencies during the month of October 2001 that can beattributed to funds obligated during the government fiscal year ended September30, 2001.  The service revenue increasefor the second quarter reflects the Company’s continuing success in placingmore emphasis on sales of extended service warranties.

 

For the nine months ended September 30, 2001,total revenue decreased by 4.2% to $12,293,000 in 2001 from $12,834,000 in2000.  Domestic revenue decreased 8.6%to $7,623,000 in 2001 from $8,336,000 in 2000. International revenue increased 3.2% to $2,745,000 in 2001 from$2,659,000 in 2000.  Service revenueincreased by 4.7% to $1,925,000 in 2001 from $1,839,000 in 2000.

 

While year to date revenue for 2001 reflectsthe delays in customer orders experienced in September, it also continues toreflect several events occurring during the first quarter of 2000.  Domestic revenue for 2000 included thecarryover of 1999 software upgrade orders associated with year 2000compliance.  Moreover, the first ninemonths of 2000 included $824,000 in sales from the now discontinued sleepdiagnostics products.  The Company’songoing focus on rebuilding international markets has more than offset thefirst quarter 2001 decrease in international revenue.  The year to date increase in service revenue reflects an increasein sales of extended service warranties that has offset the first quarterdecrease caused by the carryover of non-warranty service calls from 1999 to2000 due to the heavy demand and limited resources associated with installationof year 2000 upgrades late in 1999.The Company has devoted a significant amount of its resources during the pastyear to developing its New Leaf Personal Exercise System for the cardiacrehabilitation, disease prevention, fitness club and weight-loss markets.  Although the Company began selling its NewLeaf Personal Exercise System during September 2001, revenue from thefirst sales of this new product was not significant for the three and ninemonths ended September 30, 2001.

 

**GrossMargin**

 

Gross margin percentage increased to 41.7% ofrevenue for the three months ended September 30, 2001 compared to 36.2% for thesame period of 2000.  For the ninemonths ended September 30, gross margin percentage increased to 42.3% in 2001from 34.2% in 2000.  The margin increasefor the third quarter reflects the results of cost reduction programs.  The margin increase for the nine monthsended September 30, 2001 also reflects a $332,000 reduction in the 2000 valueof sleep diagnostic product inventory in conjunction with the decision todiscontinue distribution of those products. Moreover, the year-to-date margin increase also reflects the impact ofcost reduction programs and discontinuance of lower margin sleep diagnosticsproducts, partially offset by lower sales of high margin software upgradeproducts associated with year 2000 compliance. The Company does not expect gross margins percentages to changesignificantly for the balance of 2001.

 

**Selling andMarketing**

 

Selling and marketing expenses increased 8.2%to $1,284,000 for the three months ended September 30, 2001 from $1,187,000 in2000.  For the nine months endedSeptember 30, selling and marketing expenses increased 6.1% to $3,766,000 in2001 from $3,551,000 in 2000.  Bothperiods reflect increased expenses associated with the Company’s focus ondeveloping its New Leaf Personal Exercise System.  The year to date increase also reflects additional costs insupport of the focus on international revenue, which is somewhat offset bylower commissions due primarily to the decrease in sales of sleep diagnosticsproducts.

 

**General andAdministrative**

 

General and administrative expenses increasedby 42.1% to $966,000 for the three months ended September 30, 2001 from$680,000 in 2000.  For the nine monthsended September 30, general and administrative expenses increased 11.1% to$2,263,000 in 2001 from $2,036,000 in 2000. Both the quarter and nine-month periods include $300,000 paid subsequentto September 30, 2001 as part of a settlement agreement that resolved theon-going litigation with U.S. Bank National Association, as Trusteefor the holders of the Company’s 7-1/2% Senior Convertible Notes.  See “Note Holder Litigation,” Item 1. LegalProceedings, Part II of this Form 10-Q. In addition, both periods include higher legal expenses associated withthat litigation somewhat offset by lower personnel costs andshareholder communications expenses.

 

**Researchand Development**

 

Research and development expenses for thethree months ended September 30 increased by 3.8% to $441,000 in 2001 from$425,000 in 2000.  For the nine monthsended September 30, research and development expenses decreased 3.1% to$1,204,000 in 2001 from $1,243,000 in 2000.

The third quarter of 2001 includes anincrease in engineering expenses associated with product redesign as well asthe cost of software changes required by Microsoft’s decision to force a changefrom Windows 2000 to Windows XP.  Lowerongoing expenses associated with the March 2000 acquisition of AeroSportproducts somewhat offset these increased expenses for the quarter.  Moreover, total research and developmentexpenses for the nine months ended September 30, 2001 have been more thanoffset by lower on-going expenses associated with AeroSport.  One of the products acquired from AeroSport has beenrepackaged and integrated with new software and hardware and now represents akey component in the Company’s current growth initiative for the cardiacrehabilitation, disease prevention, fitness club and weight-loss markets

 

Both the three and nine month periods of 2001reflect the Company's now completed transition to a Windows98/NT/2000platform.  The expenses for 2001 alsoreflect development of new software and hardware platforms that address newmarket requirements such as the Health Insurance Portability and AccountabilityAct (HIPAA) of 1996 which will become a requirement in 2002 as well as ongoingreplacement of older products.

 

**Amortizationof Intangibles**

 

Amortization of intangibles represents theamortization of goodwill and other intangible assets associated withacquisitions.  Amortization expenses forthe three months ended September 30 decreased by 6.1% to $276,000 in 2001 from$294,000 in 2000.  For the nine monthsended September 30, amortization of intangibles increased 5.8% to $924,000 in2001 from $873,000 in 2000.  The year todate increase reflects the acquisition of AeroSport’s technology in March 2000and the capitalization of eligible costs associated with on-going enhancementof the Company’s proprietary software products.

 

**OtherIncome (Expense)**

 

Interest income for the three months ended September30 decreased to $29,000 in 2001 from $134,000 in 2000.  Interest income for the nine months endedSeptember 30 decreased to $160,000 in 2001 from $350,000 in 2000.  The decrease in interest income for bothperiods reflects lower excess cash balances available for short-term investmentas well as lower interest rates.

 

Interest expense was $511,000 for the threemonths ended September 30, 2001 and 2000. For the nine months ended September 30, interest expense decreased to$1,531,000 in 2001 from $1,595,000 in 2000. The year to date decrease reflects the minimum interest charges incurredduring the first quarter of 2000 for the Medical Graphics bank line of creditthat expired by its terms on March 31, 2000.

 

**Income FromDiscontinued Operations**

 

Income from discontinued operations of$11,085,000 for the nine months ended September 30, 2000, includes a one-timegain of $11,696,000, net of taxes, related to the non-exclusive licensing ofpatent rights and sale of certain assets. The gain was partially offset by $593,000 of rental expenses associatedwith the building previously used for ICD products as well as other expenses of$18,000 related to discontinued operations.

 

**Liquidityand Capital Resources**

 

The Company had cash of $3,052,000 andworking capital of $8,792,000 as of September 30, 2001.  During the nine months ended September 30,2001, the Company used $2,643,000 in cash for continuing operations.  The principal uses of cash included net lossbefore depreciation and amortization of $2,935,000 and an increase in inventoryof $1,218,000.  A $460,000 decrease inaccounts receivable, an increase of $815,000 in other liabilities and accruedexpenses and an increase in employee compensation of $132,000 offset these usesof cash.  In addition, the Company used$252,000 in cash for discontinued operations, which included $220,000 forrental of the facility formerly used for the Company’s ICD products.

 

During the nine months ended September 30,2001, the Company used $417,000 in cash for investing activities.  Cash was used to increase the Company’sinvestment in proprietary software by $404,000 and to purchase $58,000 ofequipment and fixtures.  Cash of $45,000was generated from the sale of assets related to discontinued operations.

 

At September 30, 2001 the Company had nomaterial commitments for capital expenditures. The Company believes that its cash flows from operations together withits existing cash will be adequate to satisfy its liquidity and capital resourceneeds through September 2002.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company invests its cash in money marketinstruments or short-term investment grade securities.  The Company believes that a decrease of 100basis points in prevailing interest rates would not have an adverse effect onits net income or financial position.

 

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

**PART II - OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

***Note Holder Litigation***

 

On November 1, 2001, the Company entered into asettlement agreement that resolved all outstanding litigation with U.S. BankNational Association, as Trustee for the holders of the Company’s 7-1/2% SeniorConvertible Notes due 2003.  Under thesettlement, the Company agreed to pay the Trustee $300,000 and will be releasedfrom all claims asserted in the complaint. In turn, the Trustee has been released from all counterclaims assertedby the Company and has agreed to assist the Company and the note holders intheir good faith negotiations to restructure the debt represented by the SeniorConvertible Notes.  In connection with thesettlement, the parties agreed that the lawsuit would be dismissed withprejudice. The lawsuit had been brought by the Trustee in September 1999, andalleged that certain actions by the Company violated the terms of the Indentureand required prepayment of amounts due under the Indenture.

 

 

**Item2.  Changes in Securities and Use ofProceeds**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

The Company held its 2001 Annual Meeting ofShareholders on July 25, 2001.  At themeeting, the shareholders of the Company took the following action:

 

##### ***Election of Directors***

 

The shareholders elected the followingpersons to serve as directors of the Company for a period of one year or untiltheir successor is elected and qualified:

 
| **Name**             |   | **Votes  for** |   | **Votes  Withheld** |   |
|----------------------|--------|----------------|--------|---------------------|--------|
| Arnold A. Angeloni   |   | 3,144,332      |   | 41,086              |   |
| Dennis E. Evans      |   | 3,144,967      |   | 40,451              |   |
| James B. Hickey, Jr. |   | 3,139,398      |   | 46,020              |   |
| Richard E. Jahnke    |   | 3,143,662      |   | 41,756              |   |
| John C. Penn         |   | 3,144,517      |   | 40,901              |   |
| Mark W. Sheffert     |   | 3,144,537      |   | 40,881              |   |
| Glen Taylor          |   | 3,143,484      |   | 41,934              |   |

 

**Item5.  Other Information**

 

None

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)           ExhibitsList

 

None

 

(b)           Reportson Form 8-K

 

                Noreports on Form 8-K were filed during the three months ended September 30, 2001.

 

**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:  | November 13, 2001 |   | /s/ Richard E. Jahnke                                     |
|   |              |   |                                                      |
|   |              |   | Richard E. Jahnke,  President and Chief Executive Officer |
|   |              |   | (Principal Executive  Officer)                            |
|   |              |   |                                                      |
|   |              |   |                                                      |
|   |              |   |                                                      |
| Date:  | November 13, 2001 |   | /s/ Dale H. Johnson                                       |
|   |              |   |                                                      |
|   |              |   | Dale H. Johnson, Chief  Financial Officer                 |
|   |              |   |                                                      |