###### ** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-QSB**

 

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

 

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

 

**OR**

 

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

 

**For the transition period from                  to                  .**

 

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

 

## **Angeion Corporation**

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

 

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

 

# **350 Oak GroveParkway, Saint Paul, Minnesota 55127-8599**

(Address of principal executive offices)

 

**(651) 484-4874**

(Issuer’s telephone number, including area code)

 

Check whether the registrantfiled all documents and reports required to be filed by Section 12, 13 or 15(d)of the Exchange Act of 1934 after distribution of securities under a planconfirmed 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 3,597,638shares of common stock, $0.10 par value, outstanding as of February 25, 2004.

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**January 31, 2004 and October 31, 2003**

(inthousands except share and per share data)

 
|                                                                                                                                       |   | **January 31,  2004** |       | **October 31,  2003** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|
|                                                                                                                                       |   | **(unaudited)**       |       |                  | ** ** |
| **Assets**                                                                                                                                 |   |                  |       |                  |       |
| **Current assets:**                                                                                                                        |   |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                  |   | $                     | 2,959      |                  | $          | 3,588 |   |
| Accounts receivable, net of allowance for doubtful accounts of $434  and $428, respectively                                                |   | 3,531                 |       | 3,429                 |       |
| Inventories                                                                                                                                |   | 3,163                 |       | 2,774                 |       |
| Current assets of discontinued operations                                                                                                  |   | 756                   |       | 756                   |       |
| Prepaid expenses and other current assets                                                                                                  |   | 231                   |       | 262                   |       |
| Total current assets                                                                                                                       |   | 10,640                |       | 10,809                |       |
|                                                                                                                                       |   |                  |       |                  |       |
| Property and equipment, net                                                                                                                |   | 1,491                 |       | 1,565                 |       |
| Intangible assets, net                                                                                                                     |   | 7,265                 |       | 7,503                 |       |
|                                                                                                                                       |   | **$**                 | **19,396** | ** **            | **$**      | **19,877** | ** ** |
|                                                                                                                                       |   |                  |       |                  |       |
| **Liabilities and Shareholders’ Equity**                                                                                              |   |                  |       |                  |       |
| **Current liabilities:**                                                                                                                   |   |                  |       |                  |       |
| Accounts payable                                                                                                                           |   | $                     | 1,253      |                  | $          | 1,027 |   |
| Employee compensation                                                                                                                      |   | 828                   |       | 1,037                 |       |
| Deferred income                                                                                                                            |   | 1,257                 |       | 1,096                 |       |
| Warranty reserve                                                                                                                           |   | 138                   |       | 133                   |       |
| Current liabilities of discontinued operations                                                                                             |   | 991                   |       | 991                   |       |
| Other liabilities and accrued expenses                                                                                                     |   | 533                   |       | 471                   |       |
| Total current liabilities                                                                                                                  |   | 5,000                 |       | 4,755                 |       |
|                                                                                                                                       |   |                  |       |                  |       |
| **Shareholders’ equity:**                                                                                                             |   |                  |       |                  |       |
| Common stock, $0.10 par value, authorized 25,000,000 shares, issued  and outstanding 3,597,638 shares in 2004 and 3,594,433 shares in 2003 |   | 360                   |       | 359                   |       |
| Additional paid-in capital                                                                                                                 |   | 17,550                |       | 17,547                |       |
| Accumulated deficit                                                                                                                        |   | (3,514                | )          | (2,784                | )          |
| Total shareholders’ equity                                                                                                            |   | 14,396                |       | 15,122                |       |
|                                                                                                                                       |   | **$**                 | **19,396** | ** **            | **$**      | **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  January 31,** |       |
|---------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                |   | **2004**                            |       | **2003** |   |
| **Revenues**                                                        |   |                                | ** ** |   | ** ** |
| Equipment and supply sales                                          |   | $                                   | 3,849      |   | $ | 3,941 |   |
| Service revenue                                                     |   | 706                                 |       | 729 |   |
|                                                                |   | 4,555                               |       | 4,670 |   |
| **Cost of goods sold**                                              |   |                                |       |   |   |
| Cost of equipment and supplies                                      |   | 2,363                               |       | 2,542 |   |
| Cost of service revenue                                             |   | 134                                 |       | 187 |   |
|                                                                |   | 2,497                               |       | 2,729 |   |
|                                                                |   |                                |       |   |   |
| **Gross margin**                                                    |   | 2,058                               |       | 1,941 |   |
|                                                                |   |                                |       |   |   |
| **Operating expenses:**                                             |   |                                |       |   |   |
| Selling and marketing                                               |   | 1,525                               |       | 1,490 |   |
| General and administrative                                          |   | 632                                 |       | 548 |   |
| Research and development                                            |   | 398                                 |       | 342 |   |
| Amortization of intangibles                                         |   | 238                                 |       | 195 |   |
|                                                                |   | 2,793                               |       | 2,575 |   |
|                                                                |   |                                |       |   |   |
| **Operating loss**                                                  |   | (735                                | )          | (634 | ) |
|                                                                |   |                                |       |   |   |
| Interest income                                                     |   | 5                                   |       | 10 |   |
|                                                                |   |                                |       |   |   |
| **Loss before taxes**                                               |   | (730                                | )          | (624 | ) |
|                                                                |   |                                |       |   |   |
| Tax benefit                                                         |   | —                              |       | — |   |
|                                                                |   |                                |       |   |   |
| **Net loss**                                                        |   | $                                   | (730       | ) | $ | (624 | ) |
|                                                                |   |                                |       |   |   |
| **Net loss per share - basic and diluted**                          |   | $                                   | (0.20      | ) | $ | (0.17 | ) |
|                                                                |   |                                |       |   |   |
| **Weighted average common shares outstanding - basic  and diluted** |   | 3,596                               |       | 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)**

 
|                                                                                             |   | **Three Months Ended  January 31,** |      |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                                             |   | **2004**                            |      | **2003** |   |
| **Cash Flows From Operating Activities:**                                                        |   |                                |      |   |   |
| Net loss                                                                                         |   | $                                   | (730      | ) | $ | (624 | ) |
| Adjustments to reconcile net loss to net cash flows provided by (used  in) operating activities: |   |                                |      |   |   |
| Depreciation and amortization                                                                    |   | 385                                 |      | 366 |   |
| Changes in operating assets and liabilities:                                                     |   |                                |      |   |   |
| Accounts receivable                                                                              |   | (102                                | )         | (298 | ) |
| Inventories                                                                                      |   | (389                                | )         | 264 |   |
| Prepaid expenses and other current assets                                                        |   | 31                                  |      | (103 | ) |
| Accounts payable                                                                                 |   | 226                                 |      | 28 |   |
| Employee compensation                                                                            |   | (209                                | )         | 201 |   |
| Deferred income                                                                                  |   | 161                                 |      | 108 |   |
| Warranty reserve                                                                                 |   | 5                                   |      | 8 |   |
| Other liabilities and accrued expenses                                                           |   | 62                                  |      | (240 | ) |
| Net cash used in operating activities                                                            |   | (560                                | )         | (290 | ) |
|                                                                                             |   |                                |      |   |   |
| **Cash Flows From Investing Activities:**                                                        |   |                                |      |   |   |
| Purchase of property and equipment                                                               |   | (73                                 | )         | (12 | ) |
| Net cash used in investing activities                                                            |   | (73                                 | )         | (12 | ) |
|                                                                                             |   |                                |      |   |   |
| **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**                                                    |   | (629                                | )         | (302 | ) |
|                                                                                             |   |                                |      |   |   |
| **Cash and cash equivalents at beginning of period**                                             |   | 3,588                               |      | 4,434 |   |
|                                                                                             |   |                                |      |   |   |
| **Cash and cash equivalents at end of period**                                                   |   | **$**                               | **2,959** | ** ** | **$** | **4,132** | ** ** |

 

See accompanying notes to consolidatedfinancial statements

 

4

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**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

January 31, 2004

(Unaudited)

 

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

 

Theconsolidated balance sheet as of January 31, 2004, the consolidated statementsof operations for the three months ended January 31, 2004 and 2003, theconsolidated statements of cash flows for the three months ended January 31,2004 and 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.  Theconsolidated balance sheet at October 31, 2003 was derived from the auditedconsolidated financial statements as of that date.  Operating results for the three months ended January 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 months ended January 31, 2004 and 2003, comprehensive loss for Angeion Corporationwas equivalent to net loss as reported.

 

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

 

The Companyapplies the intrinsic value method as prescribed under Accounting PrinciplesBoard 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 financial statements.  In accordance with the provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, the Company is required to present proforma information reflecting compensation cost for such issuances.  Had the Company determined 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.

 
|                                                                                                    |   | **Three  Months Ended January 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
| **(In thousands, except per share amounts)**                                                            |   | **2004**                            |   | **2003** |   |
| Net loss:                                                                                               |   |                                |   |   |   |
| As reported                                                                                             |   | $                                   | (730   | ) | $ | (624 | ) |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all awards |   | (57                                 | )      | — |   |
| Pro forma                                                                                               |   | (787                                | )      | (624 | ) |
| Net loss per share -  basic and diluted                                                                 |   |                                |   |   |   |
| As reported                                                                                             |   | (0.20                               | )      | (0.17 | ) |
| Pro forma                                                                                               |   | $                                   | (0.22  | ) | $ | (0.17 | ) |

 

5

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**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 fairvalue as of October 31, 2002.  Anindependent third-party appraiser determined the fair values of the Company’sintangible assets.  Accordingly,intangible assets have been valued at fair value as of October 31, 2002.  Intangible assets as of January 31, 2004consisted of the following:

 
| **(In thousands)**             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Intangible  Assets, net** |   |
|--------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                           |   |                        |   |                          |   |                        |   |
| Amortized developed technology |   | $                           | 7,350  |                          | $      | 1,085                       |   | $ | 6,265 |   |
|                           |   |                        |   |                          |   |                        |   |
| Unamortized trade name         |   | 1,000                       |   | —                        |   | 1,000                       |   |
|                           |   | $                           | 8,350  |                          | $      | 1,085                       |   | $ | 7,265 |   |

 

Amortizationexpense was $238,000 and $195,000 for the three months ended January 31, 2004and 2003, respectively.  Amortizationexpense was $847,000 for the year ended October 31, 2003.  Intangible assets are being amortized usingthe straight-line method over the estimated useful lives of the assets thatrange from three to ten years. Estimated amortization expense for the remainder of fiscal year 2004 andfor each of the succeeding years based on the intangible assets as of January31, 2004 is as follows:

 

| **(In thousands)**                  |   | **Amortization** |   |
|-------------------------------------|--------|------------------|--------|
| Nine months ending October 31, 2004 |   | $                | 713    |   |
| 2005                                |   | 950              |   |
| 2006                                |   | 916              |   |
| 2007                                |   | 779              |   |
| 2008                                |   | 778              |   |
| Thereafter                          |   | 2,129            |   |
|                                |   | $                | 6,265  |   |

 

**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 expenses are evaluated and adjustedperiodically.  Warranty provisions andexpenses for the three months ended January 31, 2004 and 2003 were as follows:

 

6

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|                         |   | **Three  Months Ended January 31,** |   |
|------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**           |   | **2004**                            |   | **2003** |   |
| Balance, beginning of period |   | $                                   | 133    |   | $ | 111 |   |
| Warranty provisions          |   | 61                                  |   | 66 |   |
| Warranty expenses            |   | (56                                 | )      | (58 | ) |
| Balance, end of period       |   | $                                   | 138    |   | $ | 119 |   |

 

**5.****             Reclassifications**

 

Certainamounts in Angeion’s consolidated financial statements for the three monthsended January 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 pershare 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 reportingperiod.  There were no dilutive commonshares outstanding for the three months ended January 31, 2004 and 2003.  The Company had warrants outstanding atJanuary 31, 2004 to purchase 179,537 shares of its common stock that wereconsidered antidilutive and therefore not considered to have beenexercised.  Moreover, the Company alsohad options outstanding at January 31, 2004 to purchase 373,800 shares of itscommon stock that were considered antidilutive and therefore not consideredexercised.

 

**7.****             N****otice forIndemnification**

 

In a previousagreement with ELA Medical, the Company retained potential product liabilityobligations from patients and agreed to maintain product liability insurancethrough May 10, 2004 with limits of liability at least as high as thosepreviously in place, subject to availability on commercially reasonableterms.  In addition, the Companytransferred operating responsibilities for its 2020 Series ICD’s to ELA Medicalon May 11, 1999.

 

ELA Medicaladvised Angeion in a letter dated June 6, 2002 that some of the ICD’s formerlymanufactured by Angeion were experiencing premature battery depletion.  Following the June 6, 2002 letter, Angeionadvised the attending physicians of the patients with these ICD’s of theproblems and provided a recommended procedure to determine what action isrequired.  The text of these letters wasreviewed and orally 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 the 14 explantations previouslyreported in the June 6, 2002 letter.  OnJuly 31, 2002, the FDA issued a Field Corrective Action Report providing thatthe Angeion Lyra Model 2020, 2021, and 2022 ICD’s be replaced (Field CorrectiveAction # Z-1152-2/Z-1154-2) because “the devices could stop providing therapydue to premature battery depletion.”

 

ELA Medicalsubsequently provided notice on June 18, 2003 for indemnification by Angeionfor replacement of the ICD’s pursuant to the 1997 Supply Agreements.  ELA Medical has advised Angeion that ELAMedical had been regularly monitoring explantations of the Products in patientsand compiling an assessment of the costs borne by ELA Medical, including,without limitation, the costs of (i) locating

 

7

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and contacting patients and customers,(ii) explantation of the recalled Products and implantation of replacementdevices, and (iii) replacement devices for all recalled Products through June 30,2003.  Moreover, ELA Medical (i)provided additional information regarding cost breakdown and (ii) includedcopies of analysis reports for initial explanted devices, and (iii) providednotice of a potential claim made by the family of a deceased patient who wasimplanted with the recalled ICD in question. ELA Medical advised the Company that between June 6, 2002 and June 30,2003, a total of 111 explantations have occurred (excluding the first 14explantations previously reported) and that all of the associated costs andexpenses were borne by ELA Medical.  ELAMedical estimated that ithad suffered costs in excess of 1,090,044 euros (approximately $1,276,000 atOctober 31, 2003) through June 30, 2003. ELA Medical indicated that it would compile information regardingany additional costs as they become available and would advise Angeion accordingly.  ELA Medical has advised Angeion that 226devices remain implanted in patients.

 

The Companyhas insurance policies aggregating $50 million of product liability insurancecoverage, subject to $50,000 self-insured retention per occurrence, $500,000 aggregate,which expire on May 11, 2004.  TheCompany has conducted a preliminary investigation into the cause of thepremature battery failure and has tentatively determined that an integratedcircuit chip is the single cause of the premature battery depletion in theunits.  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. There can be no assurance, however, that a more thorough investigationmight not result in additional facts that support other causes of the prematurebattery depletion.  In addition, therecan be no assurance that the insurance carrier will agree with the Company’sanalysis.

 

The Companybelieves that although it has some liability to ELA Medical, for severalreasons, it is not liable to ELA Medical for the entire amount alleged.  The Company further believes that a certainportion of the amount expended by ELA Medical may not be covered byinsurance.  The Company currentlybelieves that the amount of its potential liability to ELA Medical ranges from$991,000 to $1,276,000 and has recorded a liability of $991,000 at October 31,2003.  The Company also believes it isprobable that at least $756,000 of any claims ultimately paid to ELA Medicalare recoverable under existing insurance policies.  As a result, the Company recorded an expense of $235,000 duringfiscal year 2003 to reflect its liability associated with this claim.  This expense is net of probable insurancerecoveries and includes other expenses associated with the claim.

 

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 June 30, 2003 and other information related to the causeof the battery depletion.  Since 226devices remain implanted in patients at June 30, 2003, the amount of the claimmay increase.  While it is not possibleto predict the ultimate amount of the claim or the associated expenses, theCompany believes that if the amount of the claim increases, the amountrecoverable from the insurance company would also increase.  In addition, the Company’s liabilityinsurance coverage for claims associated with its ICD products expires on May11, 2004.  The Company may incuradditional expenses, which could be substantial, in connection with anypurchase of insurance allowing an additional claims reporting period.

 

 

8

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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 toidentify forward-looking statements. Forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially includingthe following: (i) the Company’s ability to successfully operate its MedicalGraphics business including its ability to develop, improve and update its cardiorespiratorydiagnostic products, (ii) the Company’s ability to successfully introduce itsNew Leaf products including its New Leaf Weight Loss Program, (iii) theCompany’s ability to successfully defend itself from product liability claimsrelated to its Medical Graphics and New Leaf products or claims associated withits prior cardiac stimulation products, (iv) the Company’s ability to protectits intellectual property, (v) the Company’s dependence on third party vendorsand (vi)  the Company’s ability tocomply with Nasdaq listing requirements, including maintenance of the $1.00 pershare bid price as well as other factors 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.

 

***ELA Medical Claimfor Indemnification. ***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 carries product liabilityinsurance that it believes covers substantially all of the expense for whichthe Company may be liable as a result of its manufacture of the ICD products.

 

The Companybelieves that although it has some liability to ELA Medical, for severalreasons, it is not liable to ELA Medical for the entire amount alleged.  The Company further believes that a certainportion of the amount expended by ELA Medical may not be covered byinsurance.  The Company currentlybelieves that the amount of its potential liability to ELA Medical ranges from$991,000 to $1,276,000 and has recorded a liability of $991,000 at October 31,2003.  The Company also believes it isprobable that at least $756,000 of any claims ultimately paid to ELA Medicalare recoverable under existing insurance policies.  As a result, the Company recorded an expense of $235,000 duringthe year ended October 31, 2003 to reflect its liability associated with thisclaim.  This expense is net of probableinsurance recoveries and includes other expenses associated with the claim.  See Note 7, “Notice for Indemnification,”Notes to Consolidated Financial Statements in this Form 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 $991,000recorded as a liability or that the Company will recover the entire $756,000recorded as recoverable under the insurance policies.

 

9

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***Intangible Assets***.  TheCompany assesses the impairment of identifiable intangible assets at leastannually 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 events orchanges in business circumstances will not change or that projected future cashflows will be sufficient to justify the carrying value of intangible assets, inwhich case the Company would be required to recognize an impairment of aportion or all of 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-invasivecardiorespiratory diagnostic equipment, sales of New Leaf health and fitnessproducts, and aftermarket sales of peripherals and supplies.  Service revenues reflect contract revenuesfrom extended service contracts, non-warranty service visits and training.

 

The Company iscurrently focused on bringing its new cardiorespiratory products to marketwhile continuing to refine its marketing efforts for expanding the distributionof New Leaf fitness products.  Inaddition to managing the Company’s principal business activities, the Companyis also working to resolve issues related to the indemnification claim for someof the ICD’s formerly manufactured by the Company that experienced prematurebattery depletion.  See Note 7, “Noticefor Indemnification,” Notes to Consolidated Financial Statements in this Form10-QSB for additional discussion of that matter.

 

The Company has released its newest generation cardiorespiratoryproduct for assessing exercise and metabolic function.  The product, named the CPX Ultima, will bemarketed through existing sales and distribution networks worldwide and isexpected to expand market share.  TheCPX Ultima incorporates an array of new technology and features resulting fromresearch and development efforts over the past year.  The CPX Ultima is the first of a series of new productintroductions planned to expand existing market share as well as to enter newmarkets.  Shipments of the CPX Ultima tocustomers will begin during the second quarter of 2004.

 

Progress onexpanding distribution for the Company’s New Leaf health and fitness productshas continued throughout the quarter.  The Company is working to refine its marketing efforts toestablish and expand distribution in personal training studios, club chains,independent fitness centers, weight loss centers and other retail outlets.

 

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**Results of Operations**

 

AngeionCorporation recorded a net loss of $730,000 for the three months ended January31, 2004 compared to a net loss of $624,000 for the same period in 2003.

 

**Revenues**

 

Total firstquarter revenue decreased by 2.5% to $4.6 million from $4.7 million for thethree months ended January 31, 2004 and 2003, respectively.  Domestic product revenue decreased by 4.8%to $3.1 million in 2004 compared to $3.2 million in 2003.  Internationally, product revenue increased8.9% to $768,000 in 2004 from $705,000 in 2003.  Service revenue decreased by 3.2% to $706,000 in 2004 from$729,000 in 2003.

 

The decreasein domestic product revenue for the quarter resulted from a delay in certainorders due to customer budget deferrals. While domestic customer interest in placing new equipment orders hasremained relatively steady, these same customers are continuing to exercisecaution in making capital expenditures due to the overall uncertainty of theUnited States economy.  The Company hasnot yet determined whether these budget deferrals represent early signs ofweakening demand for new cardiorespiratory equipment.

 

Internationalproduct revenue turned positive to the prior year during the second and thirdquarters of fiscal year 2003 and that trend has continued thorough the firstquarter of 2004.  The Company attributesthe increase in international product revenue to an increased focus on itsEuropean distributors as well as the weakened U.S. Dollar compared to the Euro,which has improved the business climate in Europe.  Latin America continues to suffer from weak economies anddevaluating currencies with recovery anticipated to be consistent butgradual.  Equipment orders fromcustomers throughout the rest of the world are increasingly difficult to placebecause of the competitive climate for those orders.  Moreover, the Company’s new products are subject to regulatoryapproval before they can be sold in certain countries.

 

The Companycontinues to develop its New Leaf Personal Exercise health and fitness productsthat are targeting weight-loss and fitness conscious consumers through personaltrainer studios, fitness clubs and other delivery sites.  Revenues from these products are not yetsignificant.

 

**Gross Margin**

 

Gross marginpercentage increased to 45.2% of revenue for the three months ended January 31,2004 compared to 41.6% for the same period in 2003.  The gross margin for the first quarter of 2003 includedfresh-start accounting adjustments that resulted in a $134,000 decrease ingross margin and caused a reduction of 2.8% in gross margin percentage.  Consequently, without those adjustments, theunderlying first quarter 2003 gross margin rate would have been 44.4%.  The quarter-to-quarter improvement in grossmargins, after excluding the prior year fresh-start adjustments, was due toproduct mix changes and improved manufacturing efficiencies.

 

**Selling and Marketing**

 

Selling andmarketing expenses remained relatively flat at $1.5 million for the threemonths ended January 31, 2004 compared to the same amount in 2003.  During the quarter, increased marketingexpenses associated with the Company’s New Leaf health and fitness productswere offset by lower commissions due to lower domestic revenue.

 

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**General and Administrative**

 

General andadministrative expenses increased by 15.3% to $632,000 for the three monthsended January 31, 2004 compared to $548,000 in 2003.  The increase in general and administrative expenses generallyreflects an increase in personnel expenses.

 

**Research and Development**

 

Research anddevelopment expenses increased 16.4% to $398,000 for the three months endedJanuary 31, 2004 compared to $342,000 in 2003. The Company’s research and development costs are focused on developingadditional cardiorespiratory diagnostic products.  The increase in research and development expenses for the firstquarter reflects the incremental costs of developing those new products.  The first of these products, the CPX Ultima,will be shipped to customers during the second quarter of 2004.  Research and development expenses for theremainder of 2004 are expected to exceed the expenses incurred during thecomparable period for 2003 by at least 10%.

 

**Amortization of Intangibles**

 

Amortizationof intangibles increased to $238,000 from $195,000 for the three months endedJanuary 31, 2004 and 2003, respectively. The increase in amortization expenses is due to the acquisition of aTechnology License Agreement under which the Company obtained a license relatedto the design and manufacture of talking heart rate monitors.

 

**Liquidity and Capital Resources**

 

The Companyhas financed its liquidity needs over the last 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 Companyhad cash of $3.0 million and working capital of $5.6 million as of January 31,2004.  During the three months endedJanuary 31, 2004, the Company used $560,000 in cash for operating activities,primarily as a result of its net loss of $730,000, which was offset by $385,000of depreciation and amortization.  Inaddition, the Company used cash for increases of $102,000 and $389,000 inaccounts receivable and inventories, respectively, as well as a decrease of$209,000 in employee compensation. These uses of cash were partially offset with cash generated byincreases of $226,000 and $161,000 in accounts payable and deferred income,respectively.

 

During thethree months ended January 31, 2004, the Company used $73,000 in cash forinvesting activities to purchase property and equipment.

 

The Companyhas no material commitments for capital expenditures for the remainder offiscal 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.

 

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**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**                   |   | **Nine  months  ending  October 31,  2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   |
|-----------------------------------------------------------|--------|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Minimum lease payments                                    |   | $                                           | 234    |     | $      | 298      |   | $        | 303    |     | $      | 314      |   | $ | 312 |   | $ | 211 |   |
| Minimum royalty payments for sales of  AeroSport products |   | 75                                          |   | 100      |   | 100      |   | 25       |   | —   |   | —   |   |
|                                                      |   | $                                           | 309    |     | $      | 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 are effective in ensuringthat material information related to the Company is made known to them by otherswithin 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.

 

**Item 2. Changes in Securities**

 

**RecentSales of Unregistered Securities**

 

The Companyhad no unregistered sales of equity securities during the three months endedJanuary 31, 2004.

 

**SmallBusiness Issuer Purchases of Equity Securities**

 

The Companydid not purchase any equity securities during the three months ended January31, 2004.

 

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

 

None

 

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

 

# **None**

 

**Item 5. Other Information**

 

# **None**

 

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

 

(a)           The following exhibitsare included herein:

 

31            Certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and15d-14 of the Exchange Act).

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

 

(b)           Reports on Form 8-K.

 

No Reports onForm 8-K were filed during the three months ended January 31, 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:  | March 11,  2004                        |   | /s/ Richard  E. Jahnke |   |
|   | Richard E.  Jahnke                     |
|   | President  and Chief Executive Officer |
|   | (Principal  Executive Officer)         |
|   |                                   |
|   |                                   |
| Date:  | March 11,  2004                        |   | /s/ Dale H.  Johnson |   |
|   | Dale H.  Johnson                       |
|   | Chief  Financial Officer               |
|   | (Chief  Accounting Officer)            |
|        |                                        |        |  |  |  |  |

 

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