###### ** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM10-QSB**

# ** **

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

 

**For the quarterly period ended April 30, 2004**

 

**OR**

 

**o****                                ****Transition report under Section 13 or 15(d) of theExchange Act.**

 

**Forthe transition period from              to              .**

 

## **Commission file number001-13543**

## ** **

## **Angeion Corporation**

(Exact name of small business issuer asspecified in its charter)

 

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

 

Check whether the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 afterdistribution of securities under a plan confirmed by a court:
| Yes | ý | No | o |
|-----|--------|----|---|

 

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

 

The Company had 3,597,638 shares of common stock, $0.10 par value,outstanding as of June 4, 2004.

 

 

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**PART I - FINANCIAL INFORMATION**

**Item 1.  FinancialStatements.**

 

**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**April 30, 2004 and October 31, 2003**

(inthousands except share and per share data)

 
|                                                                                                                                        |   | **April 30,  2004** |       | **October  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                                                                                        |   | **(unaudited)**     |       |                   |   |
| **Assets**                                                                                                                                  |   |                |       |                   |   |
| **Current assets:**                                                                                                                         |   |                |       |                   |   |
| Cash and cash equivalents                                                                                                                   |   | $                   | 2,346      |                   | $      | 3,588 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $437 and $428, respectively                                                 |   | 3,605               |       | 3,429                  |   |
| Inventories                                                                                                                                 |   | 3,257               |       | 2,774                  |   |
| Current assets of discontinued operations                                                                                                   |   | 970                 |       | 756                    |   |
| Prepaid expenses and other current assets                                                                                                   |   | 364                 |       | 262                    |   |
| Total current assets                                                                                                                        |   | 10,542              |       | 10,809                 |   |
|                                                                                                                                        |   |                |       |                   |   |
| Property and equipment, net                                                                                                                 |   | 1,363               |       | 1,565                  |   |
| Intangible assets, net                                                                                                                      |   | 7,027               |       | 7,503                  |   |
|                                                                                                                                        |   | **$**               | **18,932** |                   | **$**  | **19,877** |   |
|                                                                                                                                        |   |                |       |                   |   |
| **Liabilities and Shareholders’ Equity**                                                                                               |   |                |       |                   |   |
| **Current liabilities:**                                                                                                                    |   |                |       |                   |   |
| Accounts payable                                                                                                                            |   | $                   | 1,222      |                   | $      | 1,027 |   |
| Employee compensation                                                                                                                       |   | 785                 |       | 1,037                  |   |
| Deferred income                                                                                                                             |   | 1,154               |       | 1,096                  |   |
| Warranty reserve                                                                                                                            |   | 134                 |       | 133                    |   |
| Current liabilities of discontinued  operations                                                                                             |   | 1,555               |       | 991                    |   |
| Other liabilities and accrued expenses                                                                                                      |   | 565                 |       | 471                    |   |
| Total current liabilities                                                                                                                   |   | 5,415               |       | 4,755                  |   |
|                                                                                                                                        |   |                |       |                   |   |
| **Shareholders’ equity:**                                                                                                              |   |                |       |                   |   |
| Common stock, $0.10 par value, authorized  25,000,000 shares, issued and outstanding 3,597,638 shares in 2004 and  3,594,433 shares in 2003 |   | 360                 |       | 359                    |   |
| Additional paid-in capital                                                                                                                  |   | 17,550              |       | 17,547                 |   |
| Accumulated deficit                                                                                                                         |   | (4,393              | )          | (2,784                 | )      |
| Total shareholders’ equity                                                                                                             |   | 13,517              |       | 15,122                 |   |
|                                                                                                                                        |   | **$**               | **18,932** |                   | **$**  | **19,877** | ** ** |

 

See accompanying notes toconsolidated financial statements

 

2

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

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

 
|                                                                |   | **Three  Months Ended  April 30,** |   | **Six Months  Ended  April 30,** |   |
|---------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                |   | **2004**                           |   | **2003**                         |   | **2004** |   | **2003** |   |
| **Revenues**                                                        |   |                               |   |                             |   |   |   |   |   |
| Equipment and supply sales                                          |   | $                                  | 4,107  |                             | $      | 3,780 |   | $ | 7,956 |   | $ | 7,721 |   |
| Service revenue                                                     |   | 849                                |   | 739                              |   | 1,555 |   | 1,468 |   |
|                                                                |   | 4,956                              |   | 4,519                            |   | 9,511 |   | 9,189 |   |
| **Cost of goods sold**                                              |   |                               |   |                             |   |   |   |   |   |
| Cost of equipment and supplies                                      |   | 2,527                              |   | 2,340                            |   | 4,890 |   | 4,882 |   |
| Cost of service revenue                                             |   | 126                                |   | 185                              |   | 260 |   | 372 |   |
|                                                                |   | 2,653                              |   | 2,525                            |   | 5,150 |   | 5,254 |   |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Gross margin**                                                    |   | 2,303                              |   | 1,994                            |   | 4,361 |   | 3,935 |   |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Operating expenses:**                                             |   |                               |   |                             |   |   |   |   |   |
| Selling and marketing                                               |   | 1,544                              |   | 1,282                            |   | 3,069 |   | 2,772 |   |
| General and administrative                                          |   | 611                                |   | 735                              |   | 1,243 |   | 1,283 |   |
| Research and development                                            |   | 442                                |   | 401                              |   | 840 |   | 743 |   |
| Amortization of intangibles                                         |   | 238                                |   | 217                              |   | 476 |   | 412 |   |
|                                                                |   | 2,835                              |   | 2,635                            |   | 5,628 |   | 5,210 |   |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Operating loss**                                                  |   | (532                               | )      | (641                             | )      | (1,267 | ) | (1,275 | ) |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| Interest income                                                     |   | 3                                  |   | 8                                |   | 8 |   | 18 |   |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Loss before taxes**                                               |   | (529                               | )      | (633                             | )      | (1,259 | ) | (1,257 | ) |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| Tax benefit                                                         |   | —                             |   | —                           |   | — |   | — |   |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Loss from continuing operations**                                 |   | (529                               | )      | (633                             | )      | (1,259 | ) | (1,257 | ) |
| **Loss from discontinued operations**                               |   | (350                               | )      | —                           |   | (350 | ) | — |   |
| **Net loss**                                                        |   | $                                  | (879   | )                                | $      | (633 | ) | $ | (1,609 | ) | $ | (1,257 | ) |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Loss per share - basic and diluted**                              |   |                               |   |                             |   |   |   |   |   |
| Continuing operations                                               |   | $                                  | (0.14  | )                                | $      | (0.18 | ) | $ | (0.35 | ) | $ | (0.35 | ) |
| Discontinued operations                                             |   | (0.10                              | )      | —                           |   | (0.10 | ) | — |   |
| Net loss                                                            |   | $                                  | (0.24  | )                                | $      | (0.18 | ) | $ | (0.45 | ) | $ | (0.35 | ) |
|                                                                |   |                               |   |                             |   |   |   |   |   |
| **Weighted average common shares outstanding  - basic and diluted** |   | 3,598                              |   | 3,594                            |   | 3,597 |   | 3,594 |   |

 

See accompanying notes to consolidated financial statements

 

3

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(unaudited, in thousands)**

 
|                                                                               |   | **Six Months  Ended  April 30,** |      |
|------------------------------------------------------------------------------------|--------|----------------------------------|-----------|
|                                                                               |   | **2004**                         |      | **2003** |   |
| **Cash Flows From Operating Activities:**                                          |   |                             |      |   |   |
| Net loss                                                                           |   | $                                | (1,609    | ) | $ | (1,257 | ) |
| Loss from discontinued operations                                                  |   | 350                              |      | — |   |
| Adjustments to reconcile net loss to net  cash flows used in operating activities: |   |                             |      |   |   |
| Depreciation and amortization                                                      |   | 770                              |      | 730 |   |
| Changes in operating assets and  liabilities:                                      |   |                             |      |   |   |
| Accounts receivable                                                                |   | (176                             | )         | (311 | ) |
| Inventories                                                                        |   | (483                             | )         | 362 |   |
| Prepaid expenses and other current assets                                          |   | (102                             | )         | (254 | ) |
| Accounts payable                                                                   |   | 195                              |      | (2 | ) |
| Employee compensation                                                              |   | (252                             | )         | 419 |   |
| Deferred income                                                                    |   | 58                               |      | 204 |   |
| Warranty reserve                                                                   |   | 1                                |      | 14 |   |
| Other liabilities and accrued expenses                                             |   | 94                               |      | (303 | ) |
| Net cash used in operating activities                                              |   | (1,154                           | )         | (398 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash Flows From Investing Activities:**                                          |   |                             |      |   |   |
| Purchase of property and equipment                                                 |   | (92                              | )         | (17 | ) |
| Net cash used in investing activities                                              |   | (92                              | )         | (17 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash Flows From Financing Activities:**                                          |   |                             |      |   |   |
| Proceeds from issuance of common stock                                             |   | 4                                |      | — |   |
| Net cash provided by financing activities                                          |   | 4                                |      | — |   |
|                                                                               |   |                             |      |   |   |
| **Net decrease in cash and cash equivalents**                                      |   | (1,242                           | )         | (415 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash and cash equivalents at beginning of  period**                              |   | 3,588                            |      | 4,434 |   |
|                                                                               |   |                             |      |   |   |
| **Cash and cash equivalents at end of period**                                     |   | **$**                            | **2,346** | ** ** | **$** | **4,019** | ** ** |

 

See accompanying notes toconsolidated financial statements

 

4

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

April 30, 2004

(Unaudited)

 

**1.****                                      Basisof Presentation**

 

The consolidated balance sheet as of April 30, 2004, theconsolidated statements of operations for the three and six months endedApril 30, 2004 and 2003, the consolidated statements of cash flows for thesix months ended April 30, 2004 and 2003, and the related informationpresented in these notes have been prepared by management in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-QSB and Rule10-01 of 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 consolidated balance sheet at October 31, 2003 wasderived from the audited consolidated financial statements as of that date.  Operating results for the three and sixmonths ended April 30, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending October 31, 2004.  For further information, refer to theconsolidated financial statements and notes thereto included in AngeionCorporation’s Annual Report on Form 10-KSB for the year ended October 31,2003.

 

Comprehensive income is a measure of all non-owner changes inshareholders’ equity and includes such items as net income, certain foreigncurrency translation items, minimum pension liability adjustments and changesin the value of available-for-sale securities. For the three and six months ended April 30, 2004 and 2003,comprehensive loss for Angeion Corporation was equivalent to net loss asreported.

 

**2.****                                      StockBased Compensation**

 

TheCompany applies the intrinsic value method as prescribed under AccountingPrinciples Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees,*and related interpretations to account for the issuance of stock incentives toemployees and directors.  Accordingly,no compensation expense related to employees’ and directors’ stock incentiveshas been recognized in the consolidated financial statements.  In accordance with the provisions of SFASNo. 123, *Accountingfor Stock-Based Compensation*, the Company is required to present proforma information reflecting compensation cost for such issuances.  Had the Company determined compensationcosts based on the fair value at the date of grant for options granted, theCompany’s net loss would have been increased to the pro forma amounts indicatedin the following table.  There were nooptions issued or outstanding until the fourth quarter of FY 2003.

 

5

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| **(In thousands, except for per  share amounts)**                                                       |     | **Three Months  Ended April 30,** |     | **Six Months  Ended April 30,** |     |
|---------------------------------------------------------------------------------------------------------|----------|----------------------------------------|----------|--------------------------------------|----------|
|                                                                                                    | **2004** |                                   | **2003** |                                 | **2004** |   | **2003** |   |
| Net loss:                                                                                               |     |                                   |     |                                 |     |   |   |   |   |
| As reported                                                                                             |     | $                                      | (879     | )                                    | $        | (633 | ) | $ | (1,609 | ) | $ | (1,257 | ) |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all awards |     | (57                                    | )        | —                               |     | (114 | ) | — |   |
| Pro forma                                                                                               |     | (936                                   | )        | (633                                 | )        | (1,723 | ) | (1,257 | ) |
| Net loss per share – basic and diluted                                                             |     |                                   |     |                                 |     |   |   |   |   |
| As reported                                                                                             |     | (0.24                                  | )        | (0.18                                | )        | (0.45 | ) | (0.35 | ) |
| Pro forma                                                                                               |     | $                                      | (0.26    | )                                    | $        | (0.18 | ) | $ | (0.48 | ) | $ | (0.35 | ) |

 

**3.****                                      IntangibleAssets**

 

The Company adopted fresh start reporting as defined in SOP 90-7 uponits emergence from bankruptcy on October 31, 2002.  SOP 90-7 required the Company’s assets to berecorded at their respective fair values as of October 31, 2002.  The Company, with the assistance of anindependent third-party appraiser, determined the fair values of the Company’sintangible assets.  Accordingly,intangible assets were valued at fair value as of October 31, 2002.  Intangible assets as of April 30, 2004consisted of the following:

 
| **(In thousands)**             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Intangible  Assets, net** |   |
|--------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                           |   |                        |   |                          |   |                        |   |
| Amortized developed technology |   | $                           | 7,350  |                          | $      | 1,323                       |   | $ | 6,027 |   |
|                           |   |                        |   |                          |   |                        |   |
| Unamortized trade name         |   | 1,000                       |   | —                        |   | 1,000                       |   |
|                           |   | $                           | 8,350  |                          | $      | 1,323                       |   | $ | 7,027 |   |

 

Amortizationexpense was $476,000 and $412,000 for the six months ended April 30, 2004and 2003, respectively.  Intangibleassets are being amortized using the straight-line method over the estimateduseful lives of the assets that range from three to ten years.  Estimated amortization expense for theremainder of fiscal year 2004 and for each of the succeeding years based on theintangible assets as of April 30, 2004 is as follows:

 
| **(In thousands)**                      |   | **Amortization** |   |
|-----------------------------------------|--------|------------------|--------|
| Six months ending October 31, 2004 |   | $                | 475    |   |
| 2005                                    |   | 950              |   |
| 2006                                    |   | 916              |   |
| 2007                                    |   | 779              |   |
| 2008                                    |   | 778              |   |
| Thereafter                              |   | 2,129            |   |
|                                    |   | $                | 6,027  |   |

 

6

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**4.****                                      WarrantyReserve**

 

Sales of the Company’s equipment are subject to a warranty.  Equipment warranties typically extend for aperiod of twelve months from the date of installation.  Standard warranty terms are included incustomer contracts.  Under the terms ofthese warranties, the Company is obligated to repair or replace any componentsor assemblies that it deems defective in workmanship or materials.  The Company reserves the right to rejectwarranty claims where it determines that failure is due to normal wear,customer modifications, improper maintenance or misuse.  The Company adjusts the warranty reservebased on the number and type of equipment that is subject to warranty, adjustedfor the remaining months of warranty coverage. The warranty reserve adjustment reflects the Company’s historicalwarranty experience based on type of equipment.  Warranty provisions are evaluated and adjusted periodically.  Warranty provisions for the six months endedApril 30, 2004 and 2003 were as follows:

 
|                         |   | **Six Months  Ended April 30,** |   |
|------------------------------|--------|--------------------------------------|--------|
| **(In thousands)**           |   | **2004**                             |   | **2003** |   |
| Balance, beginning of period |   | $                                    | 133    |   | $ | 111 |   |
| Warranty provisions          |   | 114                                  |   | 119 |   |
| Warranty claims              |   | (113                                 | )      | (105 | ) |
| Balance, end of period       |   | $                                    | 134    |   | $ | 125 |   |

 

**5.****                                      Reclassifications**

 

Certain amounts in Angeion’s consolidated financial statements for thethree and six months ended April 30, 2003 have been reclassified toconform to the 2004 presentation.  Thesereclassifications had no effect on net loss or shareholders’ equity.

 

**6.****                                      NetLoss Per Share**

 

Basicloss per share is computed by dividing net loss by the weighted average sharesoutstanding during the reporting period. Diluted loss per share is computed similar to basic loss per shareexcept that the weighted average shares outstanding are increased to includeadditional shares from the assumed exercise of stock options and warrants, ifdilutive.  The number of additionalshares is calculated by assuming that outstanding stock options or warrantswere exercised and that the proceeds from such exercise were used to acquireshares of common stock at the average market price during the reporting period.  As a result of the net losses, there were nodilutive common shares outstanding for the three and six months endedApril 30, 2004 and 2003.  TheCompany had warrants outstanding at April 30, 2004 to purchase 179,537shares of its common stock that were considered antidilutive and therefore notconsidered to have been exercised.  TheCompany also had options outstanding at April 30, 2004 to purchase 373,800shares of its common stock that were considered antidilutive and therefore notconsidered exercised.

 

**7.****                                      DiscontinuedOperations and N****otice for Indemnification**

 

Prior to 2000, Angeion Corporation was engaged inthe manufacture and sale of Implantable Cardioverter Defibrillators.  Under agreements with ELA Medical, Angeion’sformer partner in connection with the distribution of ICD’s, Angeion retainedpotential product recall and product liability obligations from patients andagreed to maintain specified product liability insurance through May 10,2004.  The Company transferred operatingresponsibilities for its ICD’s to ELA Medical on May 11, 1999 and subsequentlyaccounted for ICD activities as a discontinued operation.

 

7

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ELA Medical advised Angeion in a letter datedJune 6, 2002 that some of the ICD’s formerly manufactured by Angeion wereexperiencing premature battery depletion. Following the June 6, 2002 letter, Angeion advised the attendingphysicians of the patients with these ICD’s of the problems and provided arecommended procedure to determine what action is required.  The text of these letters was reviewed andorally approved by the FDA during a site visit at Angeion.  ELA Medical thereafter distributed bothletters to physicians who subsequently reported that the devices in questionhad been implanted in 385 patients, excluding 14 explantations reported in theJune 6, 2002 letter.  OnJuly 31, 2002, the FDA issued a Field Corrective Action Report providingthat certain Angeion Lyra Model 2020, 2021, and 2022 ICD’s be replaced (FieldCorrective Action # Z-1152-2/Z-1154-2) because “the devices could stopproviding therapy due to premature battery depletion.”

 

ELA Medical updated its notice on April 27,2004 for indemnification by Angeion for replacement of the ICD’s pursuant tothe previous agreements.  ELA Medicalhas advised Angeion that ELA Medical had been regularly monitoringexplantations of the ICD products in patients and compiling an assessment ofthe costs borne by ELA Medical, including, without limitation, the costs of (i)locating and contacting patients and customers, (ii) explantation of therecalled Products and implantation of replacement devices, and (iii)replacement devices for all recalled Products throughMarch 31, 2004.  Moreover, ELAMedical (i) provided additional information regarding cost breakdown, (ii)included copies of analysis reports for initial explanted devices, and (iii)provided notice of a potential claim made by the family of a deceased patientwho was implanted with the recalled ICD in question.  ELA Medical advised the Company that between June 6, 2002and March 31, 2004, a total of154 explantations have occurred (excluding the first 14 explantationspreviously reported) and that all of the associated costs and expenses wereborne by ELA Medical.  ELA Medicalestimated that ithad suffered costs in excess of 1,292,798 euros (approximately $1,552,000 atApril 30, 2004) through March 31, 2004.  ELA Medical indicated that it would compileinformation regarding any additional costs as they become available and wouldadvise Angeion accordingly.  ELA Medicalhas advised Angeion that 167 devices remain implanted in patients as ofMarch 31, 2004.

 

The Company acquired insurance policies aggregating$50 million of product liability insurance coverage, subject to $50,000self-insured retention per occurrence, $500,000 aggregate, which expired on May11, 2004.  The Company has extended oneof these insurance policies for $5 million of product liability insurancecoverage, subject to the continuing $50,000 self-insured retention peroccurrence, $500,000 aggregate.  Theextended coverage remains in force through July 9, 2004.

 

The Company has conducted a preliminaryinvestigation into the cause of the premature battery failure and hastentatively determined that an integrated circuit chip is the single cause ofthe premature battery depletion in the ICD’s. Based on the language of its insurance policies, the Company believesthat the battery failure is a single occurrence within the meaning of theinsurance coverage and that therefore, the applicable self-retention is$50,000.  Although one insurance carrierhas raised the issue whether this is a single or multiple occurrences and hasasserted each explantation is an occurrence, the Company believes that thefailures were due to one occurrence and has advised the carrieraccordingly.  There can be no assurance,however, that a more thorough investigation might not result in additionalfacts that support other causes of the premature battery depletion.  In addition, there can be no assurance thatthe insurance carrier will agree with the Company’s analysis.

 

The Company believes that, although it has someliability to ELA Medical, for several reasons it is not liable to ELA Medicalfor the entire amount alleged.  TheCompany currently believes that the amount of its potential liability to ELAMedical ranges from $801,000 to $1,552,000 at April 30, 2004.  The Company also believes that the amountrecoverable under existing insurance policies ranges from $301,000 to $1,502,000,depending on both the amount ultimately paid to ELA Medical and whether theapplicable self-retention is $50,000 or $500,000.  At April 30, 2004, the Company has recorded a liability

 

8

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for discontinued operations of $1,555,000, whichincludes (i) an estimate of any claim ultimately paid to ELA Medical, (ii)actual as well as estimated legal fees, (iii) actual as well as estimatedadditional insurance expenses, and (iv) other expenses related to theclaim.  In addition, the Company hasrecorded $970,000, as an amount that it believes is probable of recovery underexisting insurance policies.  As aresult, the Company estimates that its liability associated with discontinuedoperations, net of probable insurance recoveries, is $585,000, of which$235,000 was previously recorded during the year ended October 31, 2003and $350,000 was recorded during the three months ended April 30, 2004.

 

The ultimate amount of both the liability due to ELA Medical and theamount recoverable from the insurance carriers is subject to future developmentand additional information.  The amountscurrently estimated for the claim and associated expenses as well as theprobable insurance recovery are based on data provided by ELA Medical forexplantations that occurred through March 31, 2004and other information related to the cause of the battery depletion.  Since 167 devices remain implanted inpatients at March 31,2004, the amount of the claim may increase.  While it is not possible to predict the ultimate amount of theclaim or the associated expenses, the Company believes that if the amount ofthe claim increases, the amount recoverable from the insurance company wouldalso increase.

 

As noted above, the Company’s liability insurance coverage for claimsassociated with its ICD products expired on May 11, 2004.  The Company has extended one of theseinsurance policies for $5 million of product liability insurance coverage,subject to the continuing $50,000 self-insured retention per occurrence,$500,000 aggregate, through July 9, 2004. The Company expects to purchase product liability insurance for thirdparty claims through July 9, 2005 and has included an estimate of theassociated cost in its accrual discussed above.  The Company may incur additional expenses, which could besubstantial, in connection with any purchase of insurance coverage beyondJuly 9, 2005.

 

9

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**Item 2.****           Management’s Discussion and Analysis or Planof Operation.**

 

# **Forward-Looking Statementsand Risk Factors**

 

Statements included in this Quarterly Report on Form 10-QSB that arenot historical or current facts are “forward-looking statements” made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995.  The words “believe,” “expect,”“will,” “can,” “estimate,” “anticipate,” and similar expressions are intendedto identify forward-looking statements. Forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially includingthe following: (i) the Company’s ability to successfully operate its MedicalGraphics business including its ability to develop, improve and update itscardiorespiratory diagnostic products, (ii) the Company’s ability tosuccessfully introduce its New Leaf products including its New Leaf Weight LossProgram, (iii) the Company’s ability to successfully defend itself from productliability claims related to its Medical Graphics and New Leaf products orclaims associated with its prior cardiac stimulation products, (iv) theCompany’s ability to protect its intellectual property, (v) the Company’sdependence on third party vendors and (vi) the Company’s ability to comply with Nasdaq listing requirements,including maintenance of the $1.00 per share bid price, as well as otherfactors not now anticipated.

 

From time to time, the Company through its management may make oralforward-looking statements.  The Companyundertakes no obligation to update any forward-looking statement.  Additional information with respect to therisks and uncertainties faced by the Company may be found in, and the priordiscussion is qualified in its entirety by, the other risk factors that aredescribed from time to time in Angeion’s Securities and Exchange Commissionreports, including but not limited to the Annual Report on Form 10-KSB for theyear ended October 31, 2003, and subsequently filed reports.

 

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

 

***DiscontinuedOperations and ELA Medical Claim for Indemnification. ***Prior to 2000, Angeion Corporationwas engaged in the manufacture and sale of Implantable CardioverterDefibrillators.  The Company transferredoperating responsibilities for its ICD’s to ELA Medical on May 11, 1999 andsubsequently accounted for ICD activities as a discontinued operation.

 

Under agreements with ELA Medical, Angeion’s former partner inconnection with the distribution of ICD’s, Angeion retained potential productrecall and product liability obligations from patients and agreed to maintainspecified product liability insurance through May 10, 2004.  On June 18, 2003, the Company receivednotice of a claim for reimbursement of costs associated with the explantationof ICD products that were previously manufactured and sold to ELA Medical, Inc.and ELA Medical, S.A.

 

TheCompany believes that, although it has some liability to ELA Medical, forseveral reasons it is not liable to ELA Medical for the entire amountalleged.  The Company estimates that itsliability associated with discontinued operations is $585,000, of which$235,000 was previously recorded during the year ended October 31, 2003and $350,000 was recorded during the three months ended April 30,2004.  This expense is net of probableinsurance recoveries and includes other expenses associated with theclaim.  See Note 7, “DiscontinuedOperations and Notice for Indemnification,” Notes to Consolidated Financial Statementsin this Form 10-QSB.

 

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The issues associated with the ICD products and the insurance coverageprovisions are extremely complex and may be subject to interpretation differentfrom the Company’s.  Accordingly, therecan be no assurance that the Company will not incur expenses in excess of the$1,555,000 recorded as a liability or that the Company will recover the entire$970,000 recorded as recoverable under the insurance policies.

 

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

 

# **Overview**

 

Angeion Corporation is a medical products company that reported revenueof $18.7 million for the year ended October 31, 2003.  Domestic product sales and service revenuesaccounted for 84.1% of revenue for the year ended October 31, 2003 whileinternational product sales accounted for the remaining 15.9%.

 

The Company, through its Medical Graphics Corporation subsidiary,designs non-invasive diagnostic systems under the “MedGraphics” trade name thatassist health care professionals in the prevention, early detection andcost-effective treatment of heart and lung disease.  It also markets a version of some of these products under the NewLeaf brand to health and fitness clubs and personal trainers to assist them indeveloping exercise programs to help their clients meet their personalgoals.  Revenues consist of equipmentand supply sales and service revenues. Equipment and supply sales reflect sales of Medical Graphics’non-invasive cardiorespiratory diagnostic equipment, sales of New Leaf healthand fitness products, and aftermarket sales of peripherals and supplies.  Service revenues reflect contract revenuesfrom extended service contracts, non-warranty service visits and training.

 

The Company transitioned from a somewhat soft first quarter in 2004 toa relatively stronger second quarter with revenue increasing 9.7% over theprior year.  Revenue gains were achievedin both domestic and international equipment and supply sales as well asservice revenue.  Customer demand forcardiorespiratory products as well as New Leaf health and fitness productscontributed to the revenue increase.

 

The Company continued its effort to resolve issues related to theindemnification claim for some of the ICD’s formerly manufactured by theCompany that experienced premature battery depletion.  The Company’s primary product liability insurance coverage hasbeen extended for 60 days through July 9, 2004 and the Company isexploring alternatives for continuing insurance coverage.  See Note 7, “Discontinued Operations andNotice for Indemnification,” Notes to Consolidated Financial Statements in thisForm 10-QSB for additional discussion of that matter.

 

The Company remains focused on bringing its new cardiorespiratoryproducts to market while continuing to refine its marketing efforts forexpanding the distribution of New Leaf fitness products.  The Company shipped its newest generation cardiorespiratory product forassessing exercise and metabolic function during the second quarter.  The product, named the CPX Ultima, is beingmarketed

 

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through existing sales and distributionnetworks worldwide and is expected to expand market share.  The CPX Ultima incorporates an array of newtechnology and features resulting from research and development efforts overthe past year.  The CPX Ultima is thefirst of a series of new product introductions planned to expand existingmarket share as well as to enter new markets.

 

# **Results of Operations**

 

Angeion Corporation recorded a net loss of $879,000 for the threemonths ended April 30, 2004 compared to a net loss of $633,000 for thesame period in 2003.  For the six monthsended April 30, the Company recorded a net loss of $1,609,000 and$1,257,000 for 2004 and 2003, respectively. The loss for both the three and six months ended April 30, 2004 includeda $350,000 loss from discontinued operations, which is related to ICD’s thatwere formerly manufactured by the Company.

 

**Revenues**

 

Second quarter revenue increased by 9.7% to $5.0 million from $4.5million for the three months ended April 30, 2004 and 2003, respectively.  Domestic product revenue increased by 3.6%to $3.0 million in 2004 compared to $2.9 million in 2003.  Internationally, product revenue increased26.2% to $1.1 million in 2004 from $852,000 in 2003.  Service revenue increased by 14.9% to $849,000 in 2004 from$739,000 in 2003.

 

For the six months ended April 30, revenue increased 3.5% to $9.5million in 2004 from $9.2 million in 2003. Domestic product revenue decreased by less than 1% to $6.1 million in2004 compared to 2003.  Internationally,product revenue increased 18.4% to $1.8 million in 2004 from $1.6 million in2003.  Service revenue increased by 5.9%to $1.6 million in 2004 from $1.5 million in 2003.

 

The increase in domestic product revenue for the quarter reflects solidcustomer demand for both cardiorespiratory product systems and New Leafproducts.  The Company has now had fourstrong months in a row for cardiorespiratory product systems orders and thereare no near term signs suggesting that order rates will decline.  Moreover, the Company shipped the firstunits of its new CPX Ultima during the second quarter.

 

Internationalproduct revenue turned positive to the prior year during the second and thirdquarters of fiscal year 2003 and that trend has continued thorough the firstand second quarters of 2004.  TheCompany attributes the increase in international product revenue to anincreased focus on its European distributors as well as the weakened U.S.Dollar compared to the Euro, which has improved the business climate inEurope.  Latin America continues tosuffer from weak economies and devaluating currencies with recovery anticipatedto be consistent but gradual.  Equipmentorders from customers throughout the rest of the world are increasinglydifficult to place because of the competitive climate for those orders.  Moreover, the Company’s new products aresubject to regulatory approval before they can be sold in certain countries.

 

Servicerevenue turned positive to prior year during the second quarter due toincreased focus on increasing the number of non-warranty service visits.  Those new initiatives are expected tocontribute to service revenue growth through the end of fiscal 2004.

 

**Gross Margin**

 

Grossmargin percentage for the second quarter increased to 46.5% of revenue in 2004compared to 44.1% in 2003.  For the sixmonths ended April 30, gross margin percentage increased to 45.9% ofrevenue in 2004 compared to 42.8% in 2003. Prior year margins were depressed due to last year’s fresh-startaccounting adjustments.  Without thoseadjustments, last year’s second quarter and six-month gross margin percentagewould have been 45.8% and 45.1%, respectively. The general improvement in gross

 

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margins, after excluding prior year fresh-start adjustments, was due toproduct mix changes and improved manufacturing efficiencies.  The Company expects gross margins tocontinue at their current level throughout the remaining months of fiscal 2004.

 

**Selling and Marketing**

 

Selling and marketing expenses for the three months ended April 30increased by 20.4% to $1.5 million in 2004 compared to $1.3 million in2003.  For the six months endedApril 30, selling and marketing expenses increased by 10.7% to $3.1million in 2004 compared to $2.8 million in 2003.  Selling and marketing expenses for both the quarter and sixmonths ended April 30, 2004 exceeded the prior year due to increasedmarketing expenses associated with the Company’s New Leaf health and fitnessproducts.  In addition, selling and marketingexpenses are higher for both first and the second quarter of 2004 due toincreased trade show expenses.  Lowercommissions due to lower domestic revenue offset the first quarter 2004increase in selling and marketing expenses..

 

**General and Administrative**

 

General and administrative expenses for the three months endedApril 30 decreased by 16.9% to $611,000 in 2004 compared to $735,000 in2003.  For the six months endedApril 30, general and administrative expenses decreased by 3.1% to $1.2million in 2004 compared to $1.3 million in 2003.  The second quarter 2004 decrease in general and administrativeexpenses is attributed to a decrease in personnel expenses compared to theprior year.  Moreover, the Company’sprovision for doubtful accounts has decreased for both the first and secondquarters compared to prior year to contribute generally to lower general andadministrative expenses.

 

**Research andDevelopment**

 

Researchand development expenses for the three months ended April 30 increased10.2% to $442,000 in 2004 compared to $401,000 in 2003.  For the six months ended April 30,research and development expenses increased by 13.1% to $840,000 in 2004compared to $743,000 in 2003.  TheCompany’s research and development costs are focused on developing additionalcardiorespiratory diagnostic products. The increase in research and development expenses for both the first andsecond quarters reflects the incremental costs of developing those newproducts.  The first of these products,the CPX Ultima, was shipped to customers during the second quarter of2004.  Research and development expensesfor the remainder of 2004 are expected to exceed the expenses incurred duringthe comparable period for 2003 by at least 10%.

 

**Amortization ofIntangibles**

 

Amortization of intangibles for the three months ended April 30increased to $238,000 in 2004 compared to $217,000 in 2003.  For the six months ended April 30,amortization of intangibles increased to $476,000 in 2004 compared to $412,000in 2003.  The increase in amortizationexpenses is due to the acquisition of a Technology License Agreement underwhich the Company obtained a license related to the design and manufacture oftalking heart rate monitors.

 

**DiscontinuedOperations**

 

During the three months ended April 30, 2004,the Company recorded a $350,000 loss from discontinued operations, which isrelated to formerly manufactured ICD’s. See Note 7, “Discontinued Operations and Notice for indemnification,”Notes to Consolidated Financial Statements in this Form 10-QSB for additionaldiscussion of that matter.

 

**Liquidity and CapitalResources**

 

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

 

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TheCompany had cash of $2.3 million and working capital of $5.1 million as ofApril 30, 2004.  During the sixmonths ended April 30, 2004, the Company used $1,154,000 in cash foroperating activities, partly as a result of its net loss before depreciationand amortization and loss from discontinued operations of $489,000.  In addition, the Company used cash forincreases of $176,000 and $483,000 in accounts receivable and inventories,respectively, as well as a decrease of $252,000 in employee compensation.  Inventory levels have increased due to theCompany’s new CPX Ultima product.  Thesehigher inventory levels are expected to gradually decrease over the next sixmonths.  These uses of cash werepartially offset with cash generated by an increase of $195,000 in accountspayable.

 

During the six months ended April 30, 2004, the Company used $92,000in cash for investing activities to purchase property and equipment.  The Company has no material commitments forcapital expenditures for the remainder of fiscal year 2004.

 

The Company believes that its liquidity and capital resource needs forthe next twelve months will be met through its current cash and cashequivalents, cash flows from operations and working capital.

 

**Other Commitments**

 

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

 
| **(Amounts in thousands)  Description**                   |   | **Six months  ending  October 31,  2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   |
|-----------------------------------------------------------|--------|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Minimum lease payments                                    |   | $                                              | 153    |     | $      | 298      |   | $        | 303    |     | $      | 314      |   | $ | 312 |   | $ | 211 |   |
| Minimum royalty payments for sales of  AeroSport products |   | 50                                             |   | 100      |   | 100      |   | 25       |   | —   |   | —   |   |
|                                                      |   | $                                              | 203    |     | $      | 398      |   | $        | 403    |     | $      | 339      |   | $ | 312 |   | $ | 211 |   |

 

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

 

**(a)****                                  Evaluationof Disclosure Controls and Procedures**

 

The Company’s Chief ExecutiveOfficer, Richard E. Jahnke, and Chief Financial Officer, Dale H. Johnson, haveevaluated the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon that review, theyhave concluded that these controls and procedures are effective in ensuringthat material information related to the Company is made known to them byothers within the Company.

 

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

 

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

 

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**PARTII - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

The Company is subject to certain claims and lawsuits that have beenfiled in the ordinary course of business. Management is of the opinion that ultimate settlement of these matterswill not have a material impact on its financial statements.  In addition, the Company received notice ofa claim for reimbursement of costs associated with the explantation of ICDproducts that were previously manufactured and sold to ELA Medical, Inc.  See Note 7, “Discontinued Operations andNotice for Indemnification,” Notes to Consolidated Financial Statements in thisForm 10-QSB for additional discussion of that matter.

 

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

 

**Recent Sales of Unregistered Securities**

 

The Company had no unregisteredsales of equity securities during the three months ended April 30, 2004.

 

**Small Business Issuer Purchases of EquitySecurities**

 

The Company did not purchase anyequity securities during the three months ended April 30, 2004.

 

### **Item 3. Defaults Upon Senior Securities.**

 

None

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

# **None**

# ** **

**Item 5.  Other Information.**

 

# **OnJune 9, 2004, Angeion announced that Richard E. Jahnke, President and CEOof Angeion and its Medical Graphics Corporation subsidiary, would retire at theend of the fiscal year on October 31, 2004.  Angeion also announced that the Board of Directors had selectedRodney A. Young to succeed Mr. Jahnke. Mr. Young will join Angeion as Executive Vice President in July andassume the President and CEO role on November 1, 2004.  A copy of the Press release is attached asExhibit 99.1.**

# ** **

**Item 6.  Exhibits and Reports on Form 8-K.**

 

(a)                                  Thefollowing exhibits are included herein:

 

31                                    Certifications pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 ofthe Exchange Act).

32                                    Certifications pursuant Section 906of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

99.1                           Press release dated June 9, 2004announcing the retirement of Richard E. Jahnke, President and CEO.

 

(b)                                 Reports on Form8-K.

 

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On March 16, 2004, the Company filed a Current Report on Form 8-Kdated February 11, 2004 reporting under Items 5 and 12 and attached asExhibit 99.1 a press release that disclosed material non-public informationregarding its results of operations for the three months ended January 31,2004.

 

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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:  | June 14, 2004                    |   | /s/ Richard E. Jahnke |   |
|   | Richard E. Jahnke                     |
|   | President and Chief Executive Officer |
|   | (Principal Executive Officer)         |
|   |                                  |
|   |                                  |
| Date:  | June 14, 2004                    |   | /s/ Dale H. Johnson |   |
|   | Dale H. Johnson                       |
|   | Chief Financial Officer               |
|   | (Chief Accounting Officer)            |
|        |                                       |        |  |  |  |  |

 

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