###### ** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

# **FORM10-QSB**

# ** **

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

 

**For the quarterly period ended July 31, 2004**

 

**OR**

 

**o****                                ****Transition report under Section 13 or 15(d) of the ExchangeAct.**

 

**For the transitionperiod from               to               .**

 

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

## ** **

## **Angeion Corporation**

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

 

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

 

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act of 1934 after distribution ofsecurities under a plan confirmed by a court:

Yes     ý       No     o

 

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

Yes     ý       No     o

 

The Company had 3,601,517shares of common stock, $0.10 par value, outstanding as of September 1, 2004.

 

 

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**PART I - FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**July 31, 2004 and October 31, 2003**

(unaudited, in thousands except share and per share data)

 
|                                                                                                                                        |   | **July 31,  2004** |       | **October  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
| **Assets**                                                                                                                                  |   |               |       |                   |   |
| Current assets:                                                                                                                             |   |               |       |                   |   |
| Cash and cash equivalents                                                                                                                   |   | $                  | 2,633      |                   | $      | 3,588 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $443 and $428, respectively                                                 |   | 3,462              |       | 3,429                  |   |
| Inventories                                                                                                                                 |   | 2,727              |       | 2,774                  |   |
| Current assets of discontinued operations                                                                                                   |   | 970                |       | 756                    |   |
| Prepaid expenses and other current assets                                                                                                   |   | 237                |       | 262                    |   |
| Total current assets                                                                                                                        |   | 10,029             |       | 10,809                 |   |
|                                                                                                                                        |   |               |       |                   |   |
| Property and equipment, net                                                                                                                 |   | 1,328              |       | 1,565                  |   |
| Intangible assets, net                                                                                                                      |   | 6,790              |       | 7,503                  |   |
|                                                                                                                                        |   | **$**              | **18,147** |                   | **$**  | **19,877** | ** ** |
|                                                                                                                                        |   |               |       |                   |   |
| **Liabilities and Shareholders’ Equity**                                                                                               |   |               |       |                   |   |
| **Current liabilities:**                                                                                                                    |   |               |       |                   |   |
| Accounts payable                                                                                                                            |   | $                  | 830        |                   | $      | 1,027 |   |
| Employee compensation                                                                                                                       |   | 1,011              |       | 1,037                  |   |
| Deferred income                                                                                                                             |   | 1,182              |       | 1,096                  |   |
| Warranty reserve                                                                                                                            |   | 130                |       | 133                    |   |
| Current liabilities of discontinued  operations                                                                                             |   | 1,453              |       | 991                    |   |
| Other current liabilities and accrued  expenses                                                                                             |   | 506                |       | 471                    |   |
| Total current liabilities                                                                                                                   |   | 5,112              |       | 4,755                  |   |
|                                                                                                                                        |   |               |       |                   |   |
| **Shareholders’ equity:**                                                                                                              |   |               |       |                   |   |
| Common stock, $0.10 par value, authorized  25,000,000 shares, issued and outstanding 3,601,517 shares in 2004 and  3,594,433 shares in 2003 |   | 360                |       | 359                    |   |
| Additional paid-in capital                                                                                                                  |   | 17,556             |       | 17,547                 |   |
| Accumulated deficit                                                                                                                         |   | (4,881             | )          | (2,784                 | )      |
| Total shareholders’ equity                                                                                                             |   | 13,035             |       | 15,122                 |   |
|                                                                                                                                        |   | **$**              | **18,147** |                   | **$**  | **19,877** |   |

 

See accompanying notes to consolidatedfinancial statements.

 

2

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**ANGEION CORPORATION AND SUBSIDIARIES**

** **

**Consolidated Statements of Operations**

(unaudited, in thousands except per share amounts)

 
|                                                                |   | **Three  Months Ended  July 31,** |   | **Nine  Months Ended  July 31,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                                |   | **2004**                          |   | **2003**                         |   | **2004** |   | **2003** |   |
| **Revenues**                                                        |   |                              |   |                             |   |   |   |   |   |
| Equipment and supply sales                                          |   | $                                 | 4,389  |                             | $      | 3,774 |   | $ | 12,345 |   | $ | 11,495 |   |
| Service revenue                                                     |   | 776                               |   | 777                              |   | 2,331 |   | 2,245 |   |
|                                                                |   | 5,165                             |   | 4,551                            |   | 14,676 |   | 13,740 |   |
| **Cost of goods sold**                                              |   |                              |   |                             |   |   |   |   |   |
| Cost of equipment and supplies                                      |   | 2,753                             |   | 2,424                            |   | 7,643 |   | 7,306 |   |
| Cost of service revenue                                             |   | 118                               |   | 178                              |   | 378 |   | 550 |   |
|                                                                |   | 2,871                             |   | 2,602                            |   | 8,021 |   | 7,856 |   |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Gross margin**                                                    |   | 2,294                             |   | 1,949                            |   | 6,655 |   | 5,884 |   |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Operating expenses:**                                             |   |                              |   |                             |   |   |   |   |   |
| Selling and marketing                                               |   | 1,543                             |   | 1,363                            |   | 4,612 |   | 4,135 |   |
| General and administrative                                          |   | 586                               |   | 597                              |   | 1,829 |   | 1,880 |   |
| Research and development                                            |   | 420                               |   | 420                              |   | 1,260 |   | 1,163 |   |
| Amortization of intangibles                                         |   | 237                               |   | 206                              |   | 713 |   | 618 |   |
|                                                                |   | 2,786                             |   | 2,586                            |   | 8,414 |   | 7,796 |   |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Operating loss**                                                  |   | (492                              | )      | (637                             | )      | (1,759 | ) | (1,912 | ) |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| Interest income                                                     |   | 4                                 |   | 6                                |   | 12 |   | 24 |   |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Loss before taxes**                                               |   | (488                              | )      | (631                             | )      | (1,747 | ) | (1,888 | ) |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| Tax benefit                                                         |   | —                            |   | —                           |   | — |   | — |   |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Loss from continuing operations**                                 |   | (488                              | )      | (631                             | )      | (1,747 | ) | (1,888 | ) |
| **Loss from discontinued operations**                               |   | —                            |   | (50                              | )      | (350 | ) | (50 | ) |
| **Net loss**                                                        |   | $                                 | (488   | )                                | $      | (681 | ) | $ | (2,097 | ) | $ | (1,938 | ) |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Loss per share - basic and diluted**                              |   |                              |   |                             |   |   |   |   |   |
| Continuing operations                                               |   | $                                 | (0.14  | )                                | $      | (0.18 | ) | $ | (0.48 | ) | $ | (0.53 | ) |
| Discontinued operations                                             |   | —                            |   | (0.01                            | )      | (0.10 | ) | (0.01 | ) |
| Net loss                                                            |   | $                                 | (0.14  | )                                | $      | (0.19 | ) | $ | (0.58 | ) | $ | (0.54 | ) |
|                                                                |   |                              |   |                             |   |   |   |   |   |
| **Weighted average common shares outstanding  - basic and diluted** |   | 3,599                             |   | 3,594                            |   | 3,597 |   | 3,594 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)

 
|                                                                               |   | **Nine  Months Ended  July 31,** |      |
|------------------------------------------------------------------------------------|--------|----------------------------------|-----------|
|                                                                               |   | **2004**                         |      | **2003** |   |
| **Cash Flows From Operating Activities:**                                          |   |                             |      |   |   |
| Net loss                                                                           |   | $                                | (2,097    | ) | $ | (1,938 | ) |
| Loss from discontinued operations                                                  |   | 350                              |      | 50 |   |
| Adjustments to reconcile net loss to net  cash flows used in operating activities: |   |                             |      |   |   |
| Depreciation and amortization                                                      |   | 1,154                            |      | 1,086 |   |
| Changes in operating assets and  liabilities:                                      |   |                             |      |   |   |
| Accounts receivable                                                                |   | (33                              | )         | (628 | ) |
| Inventories                                                                        |   | 47                               |      | 455 |   |
| Prepaid expenses and other current assets                                          |   | 25                               |      | (198 | ) |
| Accounts payable                                                                   |   | (197                             | )         | 159 |   |
| Employee compensation                                                              |   | (26                              | )         | 250 |   |
| Deferred income                                                                    |   | 86                               |      | 247 |   |
| Warranty reserve                                                                   |   | (3                               | )         | 9 |   |
| Other current liabilities and accrued expenses                                     |   | 35                               |      | (269 | ) |
| Net cash used in continuing operations                                             |   | (659                             | )         | (777 | ) |
| Net cash used in discontinued operations                                           |   | (102                             | )         | (50 | ) |
| Net cash used in operating activities                                              |   | (761                             | )         | (827 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash Flows From Investing Activities:**                                          |   |                             |      |   |   |
| Purchase of property and equipment                                                 |   | (204                             | )         | (34 | ) |
| Net cash used in investing activities                                              |   | (204                             | )         | (34 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash Flows From Financing Activities:**                                          |   |                             |      |   |   |
| Proceeds from issuance of common stock                                             |   | 10                               |      | — |   |
| Net cash provided by financing activities                                          |   | 10                               |      | — |   |
|                                                                               |   |                             |      |   |   |
| **Net decrease in cash and cash equivalents**                                      |   | (955                             | )         | (861 | ) |
|                                                                               |   |                             |      |   |   |
| **Cash and cash equivalents at beginning of  period**                              |   | 3,588                            |      | 4,434 |   |
|                                                                               |   |                             |      |   |   |
| **Cash and cash equivalents at end of period**                                     |   | **$**                            | **2,633** | ** ** | **$** | **3,573** |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

July 31, 2004

(Unaudited)

 

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

 

Theconsolidated balance sheet as of July 31, 2004, the consolidated statements ofoperations for the three and nine months ended July 31, 2004 and 2003, theconsolidated statements of cash flows for the nine months ended July 31, 2004and 2003, 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-QSB 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 financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation ofresults have been included.  The consolidatedbalance sheet at October 31, 2003 was derived from the audited consolidatedfinancial statements as of that date. Operating results for the three and nine months ended July 31, 2004 arenot necessarily indicative of the results that may be expected for the yearending October 31, 2004.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in Angeion Corporation’s Annual Report on Form 10-KSB for the yearended October 31, 2003.

 

Comprehensiveincome is a measure of all non-owner changes in shareholders’ equity andincludes such items as net income, certain foreign currency translation items,minimum pension liability adjustments and changes in the value ofavailable-for-sale securities.  For thethree and nine months ended July 31, 2004 and 2003, comprehensive loss forAngeion Corporation was equivalent to net loss as reported.

 

**2.****             Stock BasedCompensation**

 

The Company applies theintrinsic-value method as prescribed under Accounting Principles Board Opinion(APB) No. 25, *Accounting for Stock Issued to Employees,* and relatedinterpretations to account for the issuance of stock incentives to employeesand directors.  Accordingly, nocompensation expense related to employees’ and directors’ stock incentives hasbeen 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 July 31,** |     | **Nine  Months Ended July 31,** |     |
|------------------------------------------------------------------------------------------------------------------|----------|----------------------------------|----------|---------------------------------|----------|
|                                                                                                             | **2004** |                             | **2003** |                            | **2004** |   | **2003** |   |
| Net loss:                                                                                                        |     |                             |     |                            |     |   |   |   |   |
| As reported                                                                                                      |     | $                                | (488     | )                               | $        | (681 | ) | $ | (2,097 | ) | $ | (1,938 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects        |     | 0                                |     | 0                               |     | 0 |   | 0 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |     | (57                              | )        | —                          |     | (171 | ) | — |   |
| Pro forma                                                                                                        |     | $                                | (545     | )                               | $        | (681 | ) | $ | (2,268 | ) | $ | (1,938 | ) |
| Net loss per share – basic and diluted                                                                      |     |                             |     |                            |     |   |   |   |   |
| As reported                                                                                                      |     | $                                | (0.14    | )                               | $        | (0.19 | ) | $ | (0.58 | ) | $ | (0.54 | ) |
| Pro forma                                                                                                        |     | $                                | (0.15    | )                               | $        | (0.19 | ) | $ | (0.63 | ) | $ | (0.54 | ) |

 

**3.****             Intangible Assets**

 

The Companyadopted fresh start reporting as defined in SOP 90-7 upon its emergence frombankruptcy on October 31, 2002.  SOP90-7 required the Company’s assets to be recorded at their respective fairvalues as of October 31, 2002.  TheCompany, with the assistance of an independent third-party appraiser,determined the fair values of the Company’s intangible assets.  Accordingly, intangible assets were valuedat fair value as of October 31, 2002. Intangible assets as of July 31, 2004 consisted of the following:

 
| **(In thousands)**             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Intangible  Assets, net** |   |
|--------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                           |   |                        |   |                          |   |                        |   |
| Amortized developed technology |   | $                           | 7,350  |                          | $      | 1,560                       |   | $ | 5,790 |   |
|                           |   |                        |   |                          |   |                        |   |
| Unamortized trade name         |   | 1,000                       |   | —                        |   | 1,000                       |   |
|                           |   | $                           | 8,350  |                          | $      | 1,560                       |   | $ | 6,790 |   |

 

Amortizationexpense was $713,000 and $618,000 for the nine months ended July 31, 2004 and2003, respectively.  Intangible assetsare being amortized using the straight-line method over the estimated useful livesof the assets that range from three to ten years.  Estimated amortization expense for the remainder of fiscal year2004 and for each of the succeeding years based on the intangible assets as ofJuly 31, 2004 is as follows:

 

6

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| **(In thousands)**                   |   | **Amortization** |   |
|--------------------------------------|--------|------------------|--------|
| Three months ending October 31, 2004 |   | $                | 238    |   |
| 2005                                 |   | 950              |   |
| 2006                                 |   | 916              |   |
| 2007                                 |   | 779              |   |
| 2008                                 |   | 778              |   |
| Thereafter                           |   | 2,129            |   |
|                                 |   | $                | 5,790  |   |

 

**4.****             Warranty Reserve**

 

Sales of theCompany’s equipment are subject to a warranty. Equipment warranties typically extend for a period of twelve months fromthe date of installation.  Standardwarranty terms are included in customer contracts.  Under the terms of these warranties, the Company is obligated torepair or replace any components or assemblies that it deems defective inworkmanship or materials.  The Companyreserves the right to reject warranty claims where it determines that failureis due to normal wear, customer modifications, improper maintenance ormisuse.  The Company adjusts thewarranty reserve based on the number and type of equipment that is subject towarranty, adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects theCompany’s historical warranty experience based on type of equipment.  Warranty provisions are evaluated andadjusted periodically.  Warrantyprovisions for the nine months ended July 31, 2004 and 2003 were as follows:

 

 
| **(In thousands)**           |     | **Nine  Months Ended July 31,** |     |
|------------------------------|----------|---------------------------------|----------|
|                         | **2004** |                            | **2003** |   |
| Balance, beginning of period |     | $                               | 133      |   | $ | 111 |   |
| Warranty provisions          |     | 183                             |     | 169 |   |
| Warranty claims              |     | (186                            | )        | (160 | ) |
| Balance, end of period       |     | $                               | 130      |   | $ | 120 |   |

 

**5.****             Reclassifications**

 

Certainamounts in Angeion’s consolidated financial statements for the three and ninemonths ended July 31, 2003 have been reclassified to conform to the 2004presentation.  These reclassificationshad no effect on net loss or shareholders’ equity.

 

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

 

Basic loss per share iscomputed by dividing net loss by the weighted average shares outstanding duringthe reporting period.  Diluted loss pershare is computed similar to basic loss per share except that the weightedaverage shares outstanding are increased to include additional shares from theassumed exercise of stock options and warrants, if dilutive.  The number of additional shares iscalculated by assuming that outstanding stock options or warrants wereexercised and that the proceeds from such exercise were used to acquire sharesof 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 nine months ended July 31,2004 and 2003.  The Company had warrantsoutstanding at July 31, 2004 to purchase 179,537 shares of its common stockthat were considered antidilutive and therefore not considered to have beenexercised.  The Company also had optionsoutstanding at July 31, 2004 to purchase 373,800 shares of its common stockthat were considered antidilutive and therefore not considered exercised.

 

7

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

 

Prior to 2000, Angeion Corporation was engaged in the manufacture andsale of Implantable Cardioverter Defibrillators.  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.  The Company transferred operatingresponsibilities for its ICD’s to ELA Medical on May 11, 1999 and subsequentlyaccounted for ICD activities as a discontinued operation.

 

ELA Medical advised Angeion in a letter dated June 6, 2002 that some ofthe ICD’s formerly manufactured by Angeion were experiencing premature batterydepletion.  Following the June 6, 2002letter, Angeion advised the attending physicians of the patients with theseICD’s of the problems and provided a recommended procedure to determine whataction is required.  The text of theseletters was reviewed and orally approved by the FDA during a site visit atAngeion.  ELA Medical thereafter distributedboth letters to physicians who subsequently reported that the devices inquestion had been implanted in 385 patients, excluding 14 explantationsreported in the June 6, 2002 letter.  OnJuly 31, 2002, the FDA issued a Field Corrective Action Report (FieldCorrective Action # Z-1152-2/Z-1154-2) providing that certain Angeion LyraModel 2020, 2021, and 2022 ICD’s be replaced because “the devices could stopproviding therapy due to premature battery depletion.”

 

On June 18, 2003, the Company received notice of a claim forreimbursement of costs associated with the explantation of ICD products thatwere previously manufactured and sold to ELA Medical.  ELA Medical updated its notice on April 27, 2004.  ELA Medical has advised Angeion that ELAMedical had been regularly monitoring explantations of the ICD products inpatients and compiling an assessment of the costs borne by ELA Medical,including, without limitation, the costs of (i) locating and contactingpatients and customers, (ii) explantation of the recalled Products andimplantation of replacement devices, and (iii) replacement devices for allrecalled Products throughMarch 31, 2004.  Moreover, ELA Medical (i) providedadditional information regarding cost breakdown, (ii) included copies ofanalysis reports for initial explanted devices, and (iii) provided notice of apotential claim made by the family of a deceased patient who was implanted withthe recalled ICD in question.  ELAMedical advised the Company that between June 6, 2002 and March 31, 2004, a total of 154explantations have occurred (excluding the first 14 explantations previouslyreported) and that all of the associated costs and expenses were borne by ELAMedical.  ELA Medical estimated that it had suffered costs in excess of 1,292,798 euros(approximately $1,552,000 at April 30, 2004) through March 31, 2004.  ELA Medical indicated thatit would compile information regarding any additional costs as they becomeavailable and would advise Angeion accordingly.  ELA Medical has advised Angeion that 167 devices remain implantedin patients as of March 31, 2004.

 

The Company acquired insurance policies aggregating $50 million ofproduct liability insurance coverage, subject to $50,000 self-insured retentionper occurrence, $500,000 aggregate, which expired on May 11, 2004.  One of these insurance policies for $5million of product liability insurance coverage, subject to the continuing$50,000 self-insured retention per occurrence, $500,000 aggregate, was extendedthrough July 9, 2004.

 

The Company has conducted a preliminary investigation into the cause ofthe premature battery failure and has tentatively determined that an integratedcircuit chip is the single cause of the premature battery depletion in theICD’s.  Based on the language of itsinsurance policies, the Company believes that the battery failure is a singleoccurrence within the meaning of the insurance coverage and that therefore, theapplicable self-retention is $50,000. Although one insurance carrier has raised the issue whether this is asingle or multiple occurrences and has asserted each explantation is anoccurrence, the Company believes that the failures were due to one occurrenceand has advised the carrier accordingly.

 

8

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There can be no assurance, however, that a morethorough investigation might not result in additional facts that support othercauses of the premature battery depletion. In addition, there can be no assurance that the insurance carrier willagree with the Company’s analysis.

 

The Company believes that, although it has some liability to ELAMedical, for several reasons it is not liable to ELA Medical for the entireamount alleged.  The Company currentlybelieves that the amount of its potential liability to ELA Medical ranges from$801,000 to $1,552,000 at April 30, 2004. The Company also believes that the amount recoverable under existinginsurance policies ranges from $301,000 to $1,502,000, depending on both theamount ultimately paid to ELA Medical and whether the applicable self-retentionis $50,000 or $500,000.  At July 31, 2004,the Company has a recorded liability for discontinued operations of $1,453,000,which includes (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 $483,000 as of July 31,2004.

 

The ultimateamount of both the liability due to ELA Medical and the amount recoverable fromthe insurance carriers is subject to future development and additionalinformation.  The amounts currentlyestimated for the claim and associated expenses as well as the probableinsurance recovery are based on data provided by ELA Medical for explantationsthat occurred through March 31, 2004 and other informationrelated to the cause of the battery depletion. Since 167 devices remain implanted in patients at March 31, 2004,the amount of the claim may increase. While it is not possible to predict the ultimate amount of the claim orthe associated expenses, the Company believes that if the amount of the claimincreases, the amount recoverable from the insurance company would alsoincrease.

 

As notedabove, the Company’s liability insurance coverage for claims associated withits ICD products expired on May 11, 2004. One of these insurance policies for $5 million of product liabilityinsurance coverage, subject to the continuing $50,000 self-insured retentionper occurrence, $500,000 aggregate, was extended through July 9, 2004.  The Company has purchased product liabilityinsurance for third party claims through July 9, 2005 and has included theassociated cost in its accrual discussed above.  The Company may incur additional expenses, which could besubstantial, in connection with any purchase of insurance coverage beyond July9, 2005.

 

9

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**Item 2.****    Management’s Discussion and Analysis or Plan ofOperation.**

 

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

# ** **

Statementsincluded in this Quarterly Report on Form 10-QSB that are not historical orcurrent facts are “forward-looking statements” made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  The words “believe,” “expect,” “will,” “can,”“estimate,” “anticipate,” and similar expressions are intended to identifyforward-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 totime, the Company through its management may make oral forward-lookingstatements.  The Company undertakes noobligation to update any forward-looking statement.  Additional information with respect to the risks anduncertainties faced by the Company may be found in, and the prior discussion isqualified in its entirety by, the other risk factors that are described fromtime to time in Angeion’s Securities and Exchange Commission reports, includingbut not limited to the Annual Report on Form 10-KSB for the year ended October31, 2003, and subsequently filed reports.

 

In addition tothe risk factors and uncertainties set forth above and in our Annual Report onForm 10-KSB, the Company believes that the following factors are relevant.

 

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

 

Underagreements with ELA Medical, Angeion’s former partner in connection with thedistribution of ICD’s, Angeion retained potential product recall and product liabilityobligations from patients and agreed to maintain specified product liabilityinsurance through May 10, 2004.  On June 18,2003, the Company received notice of a claim for reimbursement of costsassociated with the explantation of ICD products that were previouslymanufactured and sold to ELA Medical, Inc. and ELA Medical, S.A.

 

The Company believes that,although it has some liability to ELA Medical, for several reasons it is notliable to ELA Medical for the entire amount alleged.  The Company estimates that its liability associated withdiscontinued operations is $483,000 as of July 31, 2004.  This expense is net of probable insurancerecoveries and includes other expenses associated with the claim.  See Note 7, “Discontinued Operations andNotice for Indemnification,” Notes to Consolidated Financial Statements in thisForm 10-QSB.

 

The issuesassociated with the ICD products and the insurance coverage provisions areextremely complex and may be subject to interpretation different from theCompany’s.  Accordingly, there can be noassurance that the Company will not incur expenses in excess of the $1,453,000recorded as a liability

 

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or that the Company will recover the entire $970,000 recorded as recoverableunder the insurance policies.

 

***Intangible Assets***. The Company assesses the impairment of identifiable intangible assets atleast annually or whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. The Company initially evaluates the recoverability of intangible assetsbased on fair value techniques, mainly undiscounted cash flows.  If the Company determines that the carryingvalue of intangible assets may not be recoverable, it measures any impairmentbased on a projected discounted cash flow method using a discount ratedetermined by management to be commensurate with the risk inherent in thecurrent business model or another valuation technique.  There can be no assurance that businesscircumstances will not change or that projected future cash flows will besufficient to justify the carrying value of intangible assets, in which casethe Company would be required to recognize an impairment for a portion or allof the intangible assets.

 

# **Overview**

# ** **

AngeionCorporation is a medical products company that reported revenue of $18.7million for the year ended October 31, 2003. Domestic product sales and service revenues accounted for 84.1% ofrevenue for the year ended October 31, 2003 while international product salesaccounted for the remaining 15.9%.

 

The Company,through its Medical Graphics Corporation subsidiary, designs non-invasivediagnostic systems under the “MedGraphics” trade name that assist health careprofessionals in the prevention, early detection and cost-effective treatmentof heart and lung disease.  It alsomarkets a version of some of these products under the New Leaf brand to healthand fitness clubs and personal trainers to assist them in developing exerciseprograms to help their clients meet their personal goals.  Revenues consist of equipment and supplysales and service revenues.  Equipmentand supply sales reflect sales of Medical Graphics’ non-invasive cardiorespiratorydiagnostic equipment, sales of New Leaf health and fitness products, andaftermarket sales of peripherals and supplies. Service revenues reflect revenues from extended service contracts,non-warranty service visits and training.

 

Total revenuefor the quarter ended July 31, 2004 increased by 13.5% over revenue for thesame period in 2003.  This increasefollows a 9.7% revenue increase for the Company’s second quarter of 2004compared to 2003, and a 2.5% decrease in the first quarter of 2004 compared to2003.  The Company has now postedquarterly revenue increases as compared to the prior year in six out of thelast seven quarters.  For the ninemonths ended July 31, 2004, total revenue increased 6.8% reflecting increasesin both domestic and international orders for the Company’s cardiorespiratoryproducts as well as increased market penetration for its New Leaf health andfitness products.

 

The Companyhas continued its effort to resolve issues related to the indemnification claimfor some of the ICD’s formerly manufactured by the Company that experiencedpremature battery depletion.  TheCompany’s primary product liability insurance coverage was extended for 60 daysthrough July 9, 2004 and the Company has purchased product liability insurancefor third party claims through July 9, 2005. See Note 7, “Discontinued Operations and Notice for Indemnification,”Notes to Consolidated Financial Statements in this Form 10-QSB for additionaldiscussion of that matter.

 

The Companyremains focused on bringing its new cardiorespiratory products to market whilecontinuing to refine its marketing efforts for expanding the distribution ofNew Leaf fitness products.  The Company has continued to ship its newestgeneration cardiorespiratory product for assessing exercise and metabolicfunction that were first shipped during the second quarter of 2004.  The product, named the CPX Ultima, is beingmarketed through existing sales and distribution networks worldwide and is

 

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expected to expand market share.  The CPX Ultima cardiopulmonary exercise testing system incorporates an array of new technology andfeatures resulting from research and development efforts over the pastyear.  The CPX Ultima is the first of aseries of new product introductions planned to expand existing market share aswell as enable the Company to enter new markets.

 

# **Resultsof Operations**

# ** **

AngeionCorporation recorded a net loss of $488,000 for the three months ended July 31,2004 compared to a net loss of $681,000 for the same period in 2003.  For the nine months ended July 31, theCompany recorded net losses of $2.1 million and $1.9 million for 2004 and 2003,respectively.  The loss for the threemonths ended July 31, 2003 included a $50,000 loss from discontinued operationswhile the net losses for the nine months ended July 31 included losses fromdiscontinued operations of $350,000 and $50,000 for 2004 and 2003,respectively.  The losses fromdiscontinued operations relate to ICD’s that were formerly manufactured by theCompany.

 

**Revenue**

 

Third quarterrevenue increased by 13.5% to $5.2 million from $4.6 million for the threemonths ended July 31, 2004 and 2003, respectively.  Domestic product revenue increased by 21.7% to $3.8 million in2004 compared to $3.1 million in 2003. Internationally, product revenue decreased 8.7% to $616,000 in 2004 from$675,000 in 2003.  Service revenue of$776,000 in 2004 was comparable to service revenue of $777,000 in 2003.

 

For the ninemonths ended July 31, total revenue increased 6.8% to $14.7 million in 2004from $13.7 million in 2003.  Domesticproduct revenue increased by 6.7% to $9.9 million in 2004 compared to $9.3million in 2003.  Internationally,product revenue increased 10.4% to $2.5 million in 2004 from $2.2 million in2003.  Service revenue increased by 3.8%to $2.3 million in 2004 from $2.2 million in 2003.

 

The increasein domestic product revenue for the quarter reflects continued customer demandfor both cardiorespiratory product systems and New Leaf products.  Customer orders for cardiorespiratoryproduct systems remained strong during the quarter with no near term signssuggesting that order rates will decline. Revenue from the Company’s new CPX Ultima products, first shipped duringthe second quarter, contributed to the increase for the quarter.

 

While international productrevenue remains positive to the prior year on a year-to-date basis, revenue forthe third quarter was $65,000 less than fiscal year 2003 due to a reduction inorders from European customers.  TheCompany believes that this reduction will prove to be temporary due to itson-going focus on its European distributors as well as the weakened U.S. Dollarcompared to the Euro, which has improved the business climate in Europe.  Latin America continues to suffer from weakeconomies and devaluating currencies with recovery still anticipated to beconsistent but gradual.  Equipmentorders from customers throughout the rest of the world remain difficult toplace because of the competitive climate for those orders.  Moreover, the Company’s new products are subjectto regulatory approval before they can be sold in certain countries.

 

Service revenue is positiveto prior year due to the Company’s focus on increasing the number ofnon-warranty service visits.  Those newinitiatives are expected to contribute to service revenue growth through theend of fiscal 2004.

 

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**Gross Margin**

 

Gross margin percentage forthe third quarter increased to 44.4% of revenue in 2004 compared to 42.8% in2003.  For the nine months ended July31, gross margin percentage increased to 45.3% of revenue in 2004 compared to42.8% in 2003.  Prior year margins weredepressed due to last year’s fresh-start accounting adjustments.  Without those adjustments, last year’s thirdquarter and nine-month gross margin percentage would have been 43.6% and 44.6%,respectively.  The general improvementin gross margins, after excluding prior year fresh-start adjustments, was dueto product mix changes and improved manufacturing efficiencies.  The Company believes gross margins willcontinue at their current level throughout the remaining months of fiscal 2004.

 

**Selling and Marketing**

 

Selling andmarketing expenses for the three months ended July 31 increased by 13.2% to$1.5 million in 2004 compared to $1.4 million in 2003.  For the nine months ended July 31, sellingand marketing expenses increased by 11.5% to $4.6 million in 2004 compared to$4.1 million in 2003.  Selling andmarketing expenses for both the quarter and nine months ended July 31, 2004 exceededthe prior year due to increased marketing expenses associated with theCompany’s New Leaf health and fitness products.

 

**General and Administrative**

 

General andadministrative expenses for the three months ended July 31 decreased by 1.8% to$586,000 in 2004 compared to $597,000 in 2003. For the nine months ended July 31, general and administrative expensesdecreased by 2.7% to $1.8 million in 2004 compared to $1.9 million in 2003.  The third quarter 2004 decrease in generaland administrative expenses is attributed to a decrease in insurance expensescompared to prior year.  Moreover, theCompany’s provision for doubtful accounts has decreased for all quarterscompared to prior year to contribute generally to lower general andadministrative expenses.

 

**Research and Development**

 

Research and developmentexpenses of $420,000 for the three months ended July 31, 2004 were comparableto 2003.  For the nine months ended July31, research and development expenses increased by 8.3% to $1.3 million in 2004compared to $1.2 million in 2003.  TheCompany’s research and development costs are focused on developing additionalcardiorespiratory diagnostic products. The increase in research and development expenses for the year reflectsthe incremental costs of developing those new products.  The first of these products, the CPX Ultima,was shipped to customers during the second quarter of 2004.  The Company believes that research anddevelopment expenses for the fourth quarter of 2004 will exceed expensesincurred during the comparable period of 2003.

 

**Amortization of Intangibles**

 

Amortizationof intangibles for the three months ended July 31 increased to $237,000 in 2004compared to $206,000 in 2003.  For thenine months ended July 31, amortization of intangibles increased to $713,000 in2004 compared to $618,000 in 2003.  Theincrease in amortization expenses is due to the acquisition of a TechnologyLicense Agreement under which the Company obtained a license related to the designand manufacture of talking heart rate monitors.

 

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**DiscontinuedOperations**

 

Duringthe nine months ended July 31, 2004, the Company recorded a $350,000 loss fromdiscontinued operations, which is related to formerly manufactured ICD’s.  This compares to a $50,000 loss fromdiscontinued operations recorded for the same period in 2003.  See Note 7, “Discontinued Operations andNotice for Indemnification,” Notes to Consolidated Financial Statements in thisForm 10-QSB for additional discussion of that matter.

 

**Liquidity and Capital Resources**

 

The Companyhas financed its liquidity needs over the past several years through revenuegenerated by the operations of its wholly owned subsidiary, Medical GraphicsCorporation, through revenue from license agreements for patented ICDtechnology and through the use of cash balances.

 

The Company had cash of $2.6million and working capital of $4.9 million as of July 31, 2004.  During the nine months ended July 31, 2004,the Company used $761,000 in cash for operating activities, partly as a resultof its $593,000 loss before depreciation and amortization and before the lossfrom discontinued operations.  TheCompany used $197,000 in cash to reduce accounts payable balances and to make$102,000 in payments for current liabilities of discontinued operations.  These uses of cash were partially offsetwith cash generated by changes in other current asset and liability balances.

 

During thenine months ended July 31, 2004, the Company used $204,000 in cash for investingactivities to purchase property and equipment. The Company has no material commitments for capital expenditures for theremainder of fiscal year 2004.

 

The Companybelieves that its liquidity and capital resource needs for the next twelvemonths will be met through its current cash and cash equivalents, cash flowsfrom operations and working capital.

 

**OtherCommitments**

The Companyhas made various financial commitments in the ordinary course of conducting itsbusiness operations.  The followingtable summarizes all significant commitments:

 
| **(Amounts in thousands)  Description**                   |   | **Three  months  ending  October 31,  2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   |
|-----------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Minimum lease payments                                    |   | $                                            | 75     |     | $      | 298      |   | $        | 303    |     | $      | 314      |   | $ | 312 |   | $ | 211 |   |
| Minimum royalty payments for sales of AeroSport  products |   | 25                                           |   | 100      |   | 100      |   | 25       |   | -        |   | -        |   |
|                                                      |   | $                                            | 100    |     | $      | 398      |   | $        | 403    |     | $      | 339      |   | $ | 312 |   | $ | 211 |   |

 

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

 

**(a)****           Evaluation ofDisclosure 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

 

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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 havebeen no significant changes in internal control over financial reporting thatoccurred during the fiscal quarter covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the registrant’sinternal control over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

**Item 1. Legal Proceedings.**

 

The Company issubject to certain claims and lawsuits that have been filed in the ordinarycourse of business.  Management is ofthe opinion that ultimate settlement of these matters will not have a materialimpact on its financial statements.  Inaddition, the Company received notice of a claim for reimbursement of costsassociated with the explantation of ICD products that were previouslymanufactured and sold to ELA Medical, Inc. See Note 7, “Discontinued Operations and Notice for Indemnification,”Notes to Consolidated Financial Statements in this Form 10-QSB for additionaldiscussion of that matter.

 

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

 

# **Recent Sales of UnregisteredSecurities**

# ** **

The Company had no unregistered sales ofequity securities during the three months ended July31, 2004.

 

**Small Business Issuer Purchases of EquitySecurities**

 

The Company did not purchase any equitysecurities during the three months ended July 31, 2004.

 

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

 

None

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

On June 9,2004, the Company held its Annual Meeting of Shareholders.  At the meeting, the following action wastaken:

 

# **Election of Directors**

# ** **

The followingpersons were elected to the Company’s Board of Directors, receiving the votesset forth opposite their names:

 

 
| **Name**           |   | **Votes For** |   | **Votes  Withheld** |   |
|--------------------|--------|---------------|--------|---------------------|--------|
| Arnold A. Angeloni |   | 2,858,330     |   | 8,037               |   |
| Richard E. Jahnke  |   | 2,864,611     |   | 1,756               |   |
| John C. Penn       |   | 2,858,331     |   | 8,036               |   |
| Jeffrey T. Schmitz |   | 2,864,837     |   | 1,530               |   |

 

**Item 5. Other Information.**

 

# **On June 9, 2004, Angeion announcedthat Richard E. Jahnke, President and CEO of Angeion and its Medical GraphicsCorporation subsidiary, would retire at the end of the fiscal year on October31, 2004.  Angeion also announced thatthe Board of Directors had selected Rodney A. Young to succeed Mr. Jahnke.  Mr. Young joined Angeion as Executive VicePresident in July 2004 and will assume the President and CEO role on November1, 2004.**

 

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** **

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

 

(a)           The following exhibitsare included herein:

 

10.1                           Employmentletter agreement dated June 8, 2004 between Angeion Corporation and Rodney A.Young.

10.2                           Changein control letter agreement dated July 6, 2004 between Angeion Corporation andRodney A. Young.

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

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

 

(b)           Reports on Form 8-K.

 

On June 17,2004, the Company filed a Current Report on Form 8-K dated June 14, 2004reporting under Items 7, 9 and 12 and attached as Exhibit 99.1 a press releasethat disclosed material non-public information regarding its results ofoperations for the three months ended April 30, 2004.

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   | Angeion  Corporation                   |   |
|--------|----------------------------------------|--------|
|   | (Registrant)                           |
|   |                                   |
|   |                                   |
| Date:  | September 7,  2004                     |   | /s/ Richard  E. Jahnke |   |
|   | Richard E.  Jahnke                     |
|   | President and  Chief Executive Officer |
|   | (Principal  Executive Officer)         |
|   |                                   |
|   |                                   |
| Date:  | September 7,  2004                     |   | /s/ Dale H.  Johnson |   |
|   | Dale H.  Johnson                       |
|   | Chief  Financial Officer               |
|   | (Chief  Accounting Officer)            |

 

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