**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-QSB**

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

 

**For the quarterly period endedApril 30, 2006**

** **

**OR**

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

 

 

**For thetransition period from           to           .**

 

 

**Commission** file number001-13543

 

 

**AngeionCorporation**

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

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

 

**350 OakGrove Parkway, Saint Paul, Minnesota 55127-8599**

(Addressof principal executive offices)

 

**(651)484-4874**

(Issuer’stelephone number, including area code)

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the issuer was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.
| Yes | x | No | o |
|-----|---|----|---|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | No | x |
|-----|---|----|---|

 

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 | x | No | o |
|-----|---|----|---|

 

The Company had 3,623,352 shares of commonstock, $0.10 par value, outstanding as of June 5, 2006.

 

 

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**PART I- FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements.**

 

**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**April30, 2006 and October 31, 2005**

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

 

 
| ** **                                                                                                                                             | ** ** | **April 30,** | ** ** | **October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                                                                                                                             | ** ** | **2006**      | ** ** | **2005**        | ** ** |
| **Assets**                                                                                                                                             | ** ** | ** **    | ** ** | ** **      | ** ** |
| **Current assets:**                                                                                                                                    | ** ** | ** **    | ** ** | ** **      | ** ** |
| Cash and cash equivalents                                                                                                                              |       | $             | 2,957      |            | $          | 1,072 |   |
| Cash restricted for discontinued operations                                                                                                            |       | 200           |       | 400             |       |
| Accounts receivable, net of allowance for doubtful accounts of $165  and $210, respectively                                                            |       | 4,319         |       | 4,100           |       |
| Inventories                                                                                                                                            |       | 4,840         |       | 3,455           |       |
| Prepaid expenses and other current assets                                                                                                              |       | 210           |       | 280             |       |
| Current assets of discontinued operations                                                                                                              |       | 1,500         |       | 700             |       |
| Total current assets                                                                                                                                   |       | 14,026        |       | 10,007          |       |
|                                                                                                                                                   |       |          |       |            |       |
| Property and equipment, net of accumulated depreciation of $1,724 and  $1,598, respectively                                                            |       | 1,105         |       | 1,035           |       |
| Intangible assets, net                                                                                                                                 |       | 5,092         |       | 5,498           |       |
| Goodwill                                                                                                                                               |       | 328           |       | 328             |       |
| **Total Assets**                                                                                                                                       | ** ** | **$**         | **20,551** | ** **      | **$**      | **16,868** | ** ** |
|                                                                                                                                                   |       |          |       |            |       |
| **Liabilities and Shareholders’  Equity**                                                                                                         | ** ** | ** **    | ** ** | ** **      | ** ** |
| **Current liabilities:**                                                                                                                               | ** ** | ** **    | ** ** | ** **      | ** ** |
| Accounts payable                                                                                                                                       |       | $             | 2,369      |            | $          | 1,184 |   |
| Employee compensation                                                                                                                                  |       | 1,232         |       | 1,166           |       |
| Advance payments from customers                                                                                                                        |       | 1,165         |       | —          |       |
| Deferred income                                                                                                                                        |       | 917           |       | 871             |       |
| Warranty reserve                                                                                                                                       |       | 213           |       | 175             |       |
| Other current liabilities and accrued expenses                                                                                                         |       | 418           |       | 366             |       |
| Current liabilities of discontinued operations                                                                                                         |       | 725           |       | 517             |       |
| Total current liabilities                                                                                                                              |       | 7,039         |       | 4,279           |       |
|                                                                                                                                                   |       |          |       |            |       |
| **Long-term liabilities:**                                                                                                                             | ** ** | ** **    | ** ** | ** **      | ** ** |
| Long-term deferred income                                                                                                                              |       | 509           |       | 319             |       |
| Deferred income taxes                                                                                                                                  |       | 339           |       | 337             |       |
| Total long-term liabilities                                                                                                                            |       | 848           |       | 656             |       |
| **Total liabilities**                                                                                                                                  |       | 7,887         |       | 4,935           |       |
|                                                                                                                                                   |       |          |       |            |       |
| **Shareholders’ equity:**                                                                                                                         | ** ** | ** **    | ** ** | ** **      | ** ** |
| Common stock, $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  3,623,352 shares in 2006 and  3,609,325 shares in 2005 |       | 362           |       | 361             |       |
| Additional paid-in capital                                                                                                                             |       | 17,824        |       | 17,589          |       |
| Deferred compensation                                                                                                                                  |       | (78           | )          | (14             | )          |
| Accumulated deficit                                                                                                                                    |       | (5,444        | )          | (6,003          | )          |
| Total shareholders’ equity                                                                                                                        |       | 12,664        |       | 11,933          |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                    | ** ** | **$**         | **20,551** | ** **      | **$**      | **16,868** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

 

2

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**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

(unaudited,in thousands except per share amounts)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **April 30,**          | ** ** | **April 30,**        | ** ** |
| ** **                                                         | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues**                                                       | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment and supply sales                                         |       | $                      | 6,564      |                 | $          | 5,367 |   | $ | 12,811 |   | $ | 9,652 |   |
| Service revenue                                                    |       | 648                    |       | 665                  |       | 1,334 |   | 1,410 |   |
|                                                               |       | 7,212                  |       | 6,032                |       | 14,145 |   | 11,062 |   |
| **Cost of goods sold**                                             | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of equipment and supplies                                     |       | 3,548                  |       | 2,918                |       | 6,810 |   | 5,514 |   |
| Cost of service revenue                                            |       | 99                     |       | 126                  |       | 222 |   | 227 |   |
|                                                               |       | 3,647                  |       | 3,044                |       | 7,032 |   | 5,741 |   |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| **Gross margin**                                                   |       | 3,565                  |       | 2,988                |       | 7,113 |   | 5,321 |   |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| **Operating expenses:**                                            | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling and marketing                                              |       | 1,774                  |       | 1,858                |       | 3,697 |   | 3,565 |   |
| General and administrative                                         |       | 942                    |       | 614                  |       | 1,715 |   | 1,278 |   |
| Research and development                                           |       | 549                    |       | 559                  |       | 1,021 |   | 1,037 |   |
| Amortization of intangibles                                        |       | 203                    |       | 203                  |       | 406 |   | 406 |   |
| ** **                                                         |       | 3,468                  |       | 3,234                |       | 6,839 |   | 6,286 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating income (loss)**                                        |       | 97                     |       | (246                 | )          | 274 |   | (965 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                    |       | 19                     |       | 8                    |       | 28 |   | 16 |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income (loss) before taxes**                                     |       | 116                    |       | (238                 | )          | 302 |   | (949 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for taxes                                                |       | 5                      |       | —               |       | 11 |   | — |   |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income (loss) from continuing operations**                       |       | 111                    |       | (238                 | )          | 291 |   | (949 | ) |
| **Gain from discontinued operations, net of $6 for  income taxes** |       | 272                    |       | —               |       | 268 |   | — |   |
| **Net income (loss)**                                              |       | $                      | 383        |                 | $          | (238 | ) | $ | 559 |   | $ | (949 | ) |
| ** **                                                         | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings (loss) per share - basic**                              | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                              |       | $                      | 0.03       |                 | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
| Discontinued operations                                            |       | 0.08                   |       | —               |       | 0.07 |   | — |   |
| Net income (loss)                                                  |       | $                      | 0.11       |                 | $          | (0.07 | ) | $ | 0.15 |   | $ | (0.26 | ) |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| **Earnings (loss) per share - diluted**                            | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                              |       | $                      | 0.03       |                 | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
| Discontinued operations                                            |       | 0.07                   |       | —               |       | 0.07 |   | — |   |
| Net income (loss)                                                  |       | $                      | 0.10       |                 | $          | (0.07 | ) | $ | 0.15 |   | $ | (0.26 | ) |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| **Weighted average common shares outstanding**                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                                          |       | 3,619                  |       | 3,606                |       | 3,615 |   | 3,605 |   |
| **Diluted**                                                        |       | 3,760                  |       | 3,606                |       | 3,714 |   | 3,605 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

3

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ANGEIONCORPORATION AND SUBSIDIARIES

ConsolidatedStatements of Cash Flows

(unaudited,in thousands)

 
| ** **                                                                                        | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                        | ** ** | **April 30,**        | ** ** |
| ** **                                                                                        | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **Cash Flows From Operating Activities:**                                                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                 |       | $                    | 559        |   | $ | (949 | ) |
| Gain from discontinued operations                                                                 |       | (268                 | )          | — |   |
| Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                                     |       | 532                  |       | 628 |   |
| Stock-based compensation                                                                          |       | 137                  |       | — |   |
| Deferred income taxes                                                                             |       | 2                    |       | — |   |
| Changes in operating assets and liabilities:                                                      |       |                 |       |   |   |
| Accounts receivable                                                                               |       | (219                 | )          | 195 |   |
| Inventories                                                                                       |       | (1,385               | )          | (209 | ) |
| Prepaid expenses and other current assets                                                         |       | 70                   |       | 89 |   |
| Accounts payable                                                                                  |       | 1,185                |       | 66 |   |
| Employee compensation                                                                             |       | 66                   |       | 53 |   |
| Advance payments from customers                                                                   |       | 1,165                |       | 0 |   |
| Deferred income                                                                                   |       | 236                  |       | 78 |   |
| Warranty reserve                                                                                  |       | 38                   |       | 10 |   |
| Other current liabilities and accrued expenses                                                    |       | 52                   |       | (32 | ) |
| Net cash provided by (used in) continuing operations                                              |       | 2,170                |       | (71 | ) |
| Restricted cash released for discontinued operations                                              |       | 200                  |       | — |   |
| Cash used in operating activities of discontinued operations                                      |       | (324                 | )          | (103 | ) |
| Net cash provided by (used in) operating activities                                               |       | 2,046                |       | (174 | ) |
|                                                                                              |       |                 |       |   |   |
| **Cash Flows From Investing Activities:**                                                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                |       | (196                 | )          | (163 | ) |
| Net cash used in investing activities                                                             |       | (196                 | )          | (163 | ) |
|                                                                                              |       |                 |       |   |   |
| **Cash Flows From Financing Activities:**                                                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                            |       | 35                   |       | 7 |   |
| Net cash provided by financing activities                                                         |       | 35                   |       | 7 |   |
|                                                                                              |       |                 |       |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                                         |       | 1,885                |       | (330 | ) |
|                                                                                              |       |                 |       |   |   |
| **Cash and cash equivalents at beginning of period**                                              |       | 1,072                |       | 2,390 |   |
|                                                                                              |       |                 |       |   |   |
| **Cash and cash equivalents at end of period**                                                    | ** ** | **$**                | **2,957**  | ** ** | **$** | **2,060** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

 

4

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

April30, 2006

(Unaudited)

 

**1.             Basis of Presentation**

 

The consolidated balancesheet as of April 30, 2006, the consolidated statements of operations for thethree and six months ended April 30, 2006 and 2005, and the consolidatedstatements of cash flows for the six months ended April 30, 2006 and 2005, andthe related information presented in these notes have been prepared bymanagement in accordance with U.S. generally accepted accounting principles forinterim financial information and with the instructions to Form 10-QSB and Rule10-01 of Regulation S-X, without audit. Accordingly, they do not include all of the information and notesrequired by U.S. generally accepted accounting principles 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, 2005 was derived from the auditedconsolidated financial statements as of that date.  Operating results for the three and sixmonths ended April 30, 2006 are not necessarily indicative of the results thatmay be expected for the year ending October 31, 2006.  For further information, refer to theconsolidated financial statements and notes thereto included in AngeionCorporation’s Annual Report on Form 10-KSB for the year ended October 31, 2005.

 

Comprehensiveincome is a measure of all non-owner changes in shareholders’ equity andincludes items such as net income (loss), certain foreign currency translationitems, minimum pension liability adjustments and changes in the value ofavailable-for-sale securities.  For thethree and six months ended April 30, 2006 and 2005, comprehensive income (loss) for Angeion Corporation was equivalentto net income (loss) as reported.

 

Preparationof the consolidated financial statements in conformity with U.S. generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities made in the consolidatedfinancial statements and accompanying notes. Actual results could differ from those estimates.  Estimates include accounts receivable,product warranty and inventory reserves, and depreciable lives of property,equipment and intangible assets.

 

Certain amounts in the Company’s consolidated financialstatements as of October 31, 2005have been reclassified to conform to the 2006 presentation.  These reclassifications had no effect on netincome (loss) or shareholders’ equity.

 

**2.             Revenue Recognition**

 

In accordance with the SEC’s Staff Accounting Bulletin No. 104, “*Revenue Recognition,*” the Company recognizes revenue whenpersuasive evidence of an arrangement exists, transfer of title has occurred orservices have been rendered, the selling price is fixed or determinable andcollectibility is reasonably assured. The Company’s products are sold for cash or on credit terms requiringpayment based on the shipment date. Credit terms can vary between customers due to many factors, but aregenerally 30-60 days.  Revenue, net ofdiscounts, is recognized upon shipment or delivery to customers in accordancewith written sales terms.  Standard salesterms do not include customer acceptance conditions, future credits, rebates,price protection or general rights of return. The terms of sales to both domestic customers and internationaldistributors are identical.  In instanceswhen a customer order specifies final acceptance of the system, revenue isdeferred until all customer acceptance criteria have been met.  Estimated warranty obligations are recordedupon shipment.

 

 

5

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Service contract revenue is based on a stated contractual rate and isdeferred and recognized ratably over the service period, which is typicallyfrom one to four years.  In accordancewith paragraph 4, of the Emerging Issues Task Force abstract 00-21, “*Revenue Arrangements with Multiple Deliverables,*” theCompany applies Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 90-1 to service contract revenue.  Revenue from installation and trainingservices provided to domestic customers is deferred until the service has beenperformed.  The total amount of deferredrevenue was $1,426,000 and $1,190,000 at April 30, 2006 and October 31, 2005,respectively.

 

Whena sale involves multiple deliverables, such as equipment, installation servicesand training, the amount of the consideration from an arrangement is allocatedto each respective element based on the residual method and recognized asrevenue when revenue recognition criteria for each element is met.  Consideration allocated to deliveredequipment is equal to the total arrangement consideration less the fair valueof installation and training.  The fairvalue of installation and training services is based on specific objectiveevidence, including third-party invoices.

 

**3.             New Accounting Pronouncements**

 

TheFASB issued SFAS No. 123 (Revised 2004), “*Share-Based Payment*,”(“SFAS No. 123R”) in December 2004.  SFASNo. 123R is a revision of FASB Statement 123, “*Accountingfor Stock-Based Compensation*” and supersedes Accounting PrinciplesBoard Opinion No. 25, *“Accounting for StockIssued to Employees,”* (“APB No. 25”) and its related implementationguidance.  The Statement focusesprimarily on accounting for transactions in which an entity obtains employeeservices through share-based payment transactions.  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions).  That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award.  TheCompany will adopt the standard for fiscal 2007 using the modified prospectivemethod.  While the Company cannotprecisely determine the impact on net earnings as a result of the adoption ofSFAS No. 123R, estimated compensation expense related to prior periods can befound in “Stock Based Compensation” below. The ultimate amount of increased compensation expense will depend on thenumber of option shares granted, their timing and vesting period and the methodused to calculate the fair value of the awards, among other factors.  We have yet to determine the impact of SFASNo. 123R on the Company’s consolidated financial statements.

 

InJune 2005, the FASB issued SFAS No. 154, “*Accounting Changes andError Corrections*,” (“SFAS No. 154”) a replacement of APB OpinionNo. 20 and FASB Statement No. 3.  Thestatement applies to all voluntary changes in accounting principle, and changesthe requirements of accounting for and reporting a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impractical.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors occurring in fiscalyears beginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of the statement.  Theadoption of SFAS No. 154 is not expected to have a material effect on theCompany’s consolidated financial statements.

 

**4.             Stock Based Compensation**

 

The Company applies theintrinsic-value method prescribed under APB No. 25 and related interpretationsto account for the issuance of stock incentives to employees anddirectors.  Accordingly, no compensationexpense related to employees’ and directors’ stock incentives has beenrecognized in the consolidated financial statements.  In accordance with the provisions of SFAS No.123, “*Accounting for*

 

 

6

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*Stock-BasedCompensation*,” the Company is required to present pro formainformation reflecting compensation cost for such issuances.  Had the Company determined compensation costsbased on the fair value at the date of grant for options granted, the Company’snet income (loss) would have been decreased or increased to the pro formaamounts indicated in the following table:

 
| ** **                                                                                                                                   | ** ** | **Three Months Ended   April 30** | ** ** | **Six Months Ended   April 30** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands, except for per share amounts)**                                                                                             | ** ** | **2006**                          | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income (loss)                                                                                                                            |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                 | 383        |                            | $          | (238 | ) | $ | 559 |   | $ | (949 | ) |
| Add: Stock-based employee compensation expense included in reported  net income (loss), net of related tax effects                           |       | 79                                |       | —                          |       | 134 |   | — |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects |       | (39                               | )          | (21                             | )          | (44 | ) | (42 | ) |
| Pro forma                                                                                                                                    |       | $                                 | 423        |                            | $          | (259 | ) | $ | 649 |   | $ | (991 | ) |
|                                                                                                                                         |       |                              |       |                            |       |   |   |   |   |
| Net income (loss) per share — basic                                                                                                     |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                 | 0.11       |                            | $          | (0.07 | ) | $ | 0.15 |   | $ | (0.26 | ) |
| Pro forma                                                                                                                                    |       | $                                 | 0.12       |                            | $          | (0.07 | ) | $ | 0.18 |   | $ | (0.27 | ) |
|                                                                                                                                         |       |                              |       |                            |       |   |   |   |   |
| Net income (loss) per share — diluted                                                                                                   |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                 | 0.10       |                            | $          | (0.07 | ) | $ | 0.15 |   | $ | (0.26 | ) |
| Pro forma                                                                                                                                    |       | $                                 | 0.11       |                            | $          | (0.07 | ) | $ | 0.17 |   | $ | (0.27 | ) |

 

The above table reflects the acceleration of vesting for31,200 options during the quarter ended April 30, 2006 due to the achievementof performance-based milestones.  Asfurther described below, this increased stock-based compensation expense duringthe three and six months ended April 30, 2006. The above pro forma net income for the three and six months ended April30, 2006 includes $37,000 of fair value based stock compensation expense thatwas accelerated due to meeting these performance milestones.

 

***Variable Stock Option Grants***

 

                The Company has granted to itsemployees 78,000 options with an exercise price of $2.00 that vest atincreasing rates as the Company’s common stock trades for increasing prices for20 of 30 consecutive days. Notwithstanding the performance vesting schedule, these options may beexercised in full beginning October 1, 2009. The options will become exercisable earlier if the Company’s stocktrades at the following prices for 20 of 30 consecutive trading days.

 

| **Closing Price** | ** ** | **Percent of   Options   Exercisable** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| $                 | 4.00       |                                   | 15         | % |
| 4.50              |       | 40                                     |       |
| 5.00              |       | 60                                     |       |
| 5.50              |       | 80                                     |       |
| 6.00              |       | 100                                    |       |
|                   |            |                                        |            |  |

 

 

7

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Because the vesting for these grants is dependent onachieving these common stock price milestones, the Company has accounted forunvested option grants using variable accounting in accordance with APB No.25.  Accordingly, the Company determinesthe intrinsic value of unvested variable option grants at each balance sheetdate and records the changes in intrinsic value as deferred compensation.  During the three months ended April 30, 2006,the Company’s stock traded at or above $4.50 per share for more than 20 of 30consecutive trading days and therefore 31,200, or 40% of these options havevested. Upon vesting, the options are considered fixed plan awards with nofurther adjustment to the aggregate intrinsic value.  In addition, all previously recorded deferredcompensation expense is charged to earnings upon vesting.  Although no options vest until October 1,2009 or until the Company’s stock trades at the prices listed in the abovetable for 20 of 30 consecutive days, these outstanding options are neverthelessdeemed to have intrinsic value because the closing price of the Company’s stockat April 30 and January 31, 2006 was$4.80 and $4.23 per share, respectively. Stock based compensation expense associated with these variable optionswas $81,000 and $137,000 for the three and six months ended April 30, 2006,respectively.  These amounts include the intrinsic valueof the unvested options for the three and six months ended at April 30, 2006,respectively, pro-rated from their grant date to the time-based vesting date ofOctober 1, 2009 and the intrinsic value of options that vested during thesecond quarter of 2006 based on achieving certain stock price levels describedabove. The compensation expense for the vested options was based on $4.87 per share, which was the closing price of the Company’sstock on the day these options vested. As of April 30, 2006, theCompany has recorded deferred compensation of $78,000 relating to theseunvested variable stock options.

 

**5.             Inventories**

 

                Inventories consisted of thefollowing at April 30, 2006 and October 31, 2005:

 
| **(In thousands)** | ** ** | **2006** | ** ** | **2005** |   |
|--------------------|------------|----------|------------|----------|--------|
| Raw materials      |       | $        | 1,744      |     | $      | 1,304 |   |
| Work-in-progress   |       | 604      |       | 186      |   |
| Finished goods     |       | 2,492    |       | 1,965    |   |
|               |       | $        | 4,840      |     | $      | 3,455 |   |

 

**6.             IntangibleAssets**

 

Intangible assets consistedof the following at April 30, 2006 and October 31, 2005:

 
| **(In thousands)**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Intangible assets:                   |       |     |       |     |       |
| Developed technology                 |       | $        | 6,900      |     | $          | 6,900 |   |
| Trade name (unamortized)             |       | 1,000    |       | 1,000    |       |
|                                 |       | 7,900    |       | 7,900    |       |
|                                 |       |     |       |     |       |
| Amortization - developed  technology |       | (2,808   | )          | (2,402   | )          |
|                                 |       | $        | 5,092      |     | $          | 5,498 |   |

 

Amortizationexpense was $406,000 for each of the six-month periods ended April 30, 2006 and2005.

 

 

8

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Intangibleassets are being amortized using the straight-line method over the estimateduseful lives of the assets that range from three to ten years.  Estimated amortization expense for theremainder of fiscal year 2006 and for each of the succeeding years based on theintangible assets as of April 30, 2006 is as follows:

 
| **(In thousands)**                  | ** ** | **Amortization** | ** ** |
|-------------------------------------|------------|------------------|------------|
| Six months ending October  31, 2006 |       | $                | 406        |   |
| 2007                                |       | 779              |       |
| 2008                                |       | 779              |       |
| 2009                                |       | 778              |       |
| 2010                                |       | 450              |       |
| Thereafter                          |       | 900              |       |
|                                |       | $                | 4,092      |   |

 

**7.             WarrantyReserve**

 

                Sales of the Company’s equipment are subject to awarranty obligation.  Equipmentwarranties typically extend for a period of twelve months from the date ofinstallation.  Standard warranty termsare included in customer contracts. Under the terms of these warranties, the Company is obligated to repairor replace any components or assemblies that it deems defective in workmanshipor materials.  The Company reserves theright to reject warranty claims where it determines that failure is due tonormal wear, customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve thatreflects the estimated expenses that it will incur to honor the warranties onits products.  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 activity for the six months ended April 30, 2006 and 2005 was as follows:

 
| **(In thousands)**            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of  period |       | $        | 175        |     | $          | 155 |   |
| Warranty provisions           |       | 198      |       | 141      |       |
| Warranty claims               |       | (160     | )          | (131     | )          |
| Balance, end of period        |       | $        | 213        |     | $          | 165 |   |

 

**8.             Net Income (Loss) per Share**

 

Basic income (loss) pershare is computed by dividing net income (loss) by the weighted average sharesoutstanding during the reporting period. Diluted income (loss) per share is computed similarly to basic loss pershare except that the weighted average shares outstanding are increased toinclude additional shares from the assumed exercise of stock options andwarrants, if dilutive, using the treasury stock method.  The number of additional shares is calculatedby assuming that outstanding stock options or warrants were exercised and thatthe proceeds from the exercise were used to acquire shares of common stock atthe average market price during the reporting period.

 

Shares used in the earningsper share computations for the three and six months ended April 30, 2006 and 2005are as follows:

 
| ** **                                             | ** ** | **Three Months Ended   April 30** | ** ** | **Six Months Ended   April 30** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands)**                                     | ** ** | **2006**                          | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average common shares   outstanding - basic   |       | 3,619                             |       | 3,606                           |       | 3,615 |   | 3,605 |   |
| Dilutive effect of stock options                       |       | 141                               |       | —                          |       | 99 |   | — |   |
| Weighted average common shares   outstanding - diluted |       | 3,760                             |       | 3,606                           |       | 3,714 |   | 3,605 |   |

 

 

9

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The dilutive effect of stockoptions in the above table excludes all options for which the exercise pricewas higher than the closing market price of $4.80 per share as of April 30, 2006.  The number of option shares excluded from thecalculation was 362,800 for the three and six months ended April 30, 2006.  As a result of the net loss, there were nodilutive common shares outstanding for the three and six months ended April 30, 2005 ,andaccordingly,  482,800 were excluded fromthe calculation.

 

The Company had warrantsoutstanding at April 30, 2006 and 2005 to purchase179,480, and 179,481 shares, respectively, of its common stock that wereconsidered antidilutive and therefore not considered to have been exercised.

 

**9.             Discontinued Operations and RelatedLitigation**

 

On April 12, 2006, AngeionCorporation and Medmarc Casualty Insurance Company (“Medmarc”) agreed to asettlement that resolved all matters with respect to the pending lawsuitbetween the parties related to the recovery of insurance proceeds for a claimassociated with the Company’s former ICD business.  Medmarc agreed to make a single payment tothe Company on or prior to June 11, 2006, and each party agreed to dismiss withprejudice all claims against the other in the pending lawsuit.  On June 9, 2006, the Company received thesettlement payment.

 

                The Company has recorded the total amount duefrom Medmarc as current assets of discontinued operations at April 30,2006.  The Company recorded an increaseto this receivable of $804,000 during the second quarter of 2006.

 

                The current liabilities of discontinuedoperations at April 30, 2006 include the following items:

 

1)              The legal feesdue under the contingency fee agreement with the Company’s counsel;

2)              The remaining$200,000 payment due under the June 30, 2005 ELA Medical settlement agreement;and

3)              All unpaidmiscellaneous expenses due as of April 30, 2006.

 

As a result of thesettlement with Medmarc, the Company recorded additional discontinued operatingexpenses of $526,000 for the quarter ended April 30, 2006, primarily reflectingcontingent legal fees related to the settlement.  The adjustments to both current assets andcurrent liabilities of discontinued operations resulted in a net gain of$272,000 from discontinued operations for the quarter ended April 30,2006.  The Company expects that theonly expense for discontinued operations in the future will be the purchase ofproduct liability insurance for as long as the Company believes it necessary tocover ICDs that remain implanted in patients. The current policy for product liability insurance covering ICDs expiresin July 2006.

 

**10.****                              ****IncomeTaxes**

 

The Company had a federal net operating loss carry forward at October31, 2005 of approximately $130.6 million, which is available to reduce incometaxes payable in future years.  If notused, this carry forward will expire in years 2006 through 2025.  Approximately $72.5 million of this carryforward will expire over the next five years. In addition, the Company has a general business tax credit carry forwardof approximately $989,000 that is available to reduce future federal incometaxes, if any.  If not used, thesegeneral business tax credits will expire in years 2006 through 2014.  Approximately $515,000 of the generalbusiness tax carry forward will expire over the next five years.  The Company also has $90,000 of alternativeminimum tax credit carry forwards that do not have expiration dates.  Under the Tax Reform Act of 1986, theutilization of these tax loss and tax credit carry 

 

 

10

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forwards may be limited as a result of significant changes inownership.  Even though the Company hassubstantial federal net operating loss carry forwards, any income isstill subject to U.S. and State Alternative Minimum Taxes and deferred taxes onnon-amortizable intangible assets other than goodwill.

 

 

11

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

 

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

 

Statements included in thisQuarterly Report on Form 10-QSB that are not historical or current facts are “forward-lookingstatements” made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. The words “believe,” “expect,” “will,” “can,” “estimate,” “anticipate,”and similar expressions are intended to identify forward-lookingstatements.  Forward-looking statementsare subject to certain risks and uncertainties that could cause actual resultsto differ materially including the following: (i) the Company’s ability tosuccessfully operate its Medical Graphics business including its ability todevelop, improve and update its cardiorespiratory diagnostic products, (ii) theCompany’s ability to successfully sell its New Leaf health & fitnessproducts, (iii) the Company’s ability to successfully defend itself fromproduct liability claims related to its Medical Graphics and New Leaf productsand claims associated with its prior cardiac stimulation products, (iv) theCompany’s ability to protect its intellectual property, and (v) the Company’sdependence on third-party vendors.

 

From time to time, theCompany through its management may make oral forward-looking statements.  The Company undertakes no obligation toupdate any forward-looking statement. Additional information with respect to the risks and uncertainties facedby the Company may be found in, and the prior discussion is qualified in itsentirety by, the other risk factors that are described from time to time in theCompany’s Securities and Exchange Commission reports, including but not limitedto the Annual Report on Form 10-KSB for the year ended October 31, 2005, andsubsequently filed reports.

 

# **Overview**

 

The Company is a medicalproducts manufacturer with reported revenues of $23.8 million for the yearended October 31, 2005.  Domestic productsales and service revenues accounted for 83.5% of revenue for the year endedOctober 31, 2005 while international product sales accounted for the remaining16.5%.

 

The Company, through itsMedical Graphics Corporation subsidiary, designs non-invasive diagnosticsystems under the MedGraphics trade name that assist health care professionalsin the prevention, early detection and cost-effective treatment of heart andlung disease.  It also sells a version ofsome of these products under the New Leaf brand to health and fitness clubs andpersonal trainers to assist them in developing exercise programs to help theirclients meet their personal goals. Revenues consist of equipment and supply sales and servicerevenues.  Equipment and supply salesreflect sales of Medical Graphics’ non-invasive cardiorespiratory diagnosticequipment, sales of New Leaf health and fitness products, and aftermarket salesof peripherals and supplies.  Servicerevenues reflect revenues from extended service contracts, non-warranty servicevisits and additional training.

 

Total revenue for the secondquarter of 2006 was $7.2 million, an increase of 19.6% from $6.0 million in2005.  Operating expenses for the secondquarter of 2006 were $3.5 million, an increase of 7.2% from $3.2 million in2005.  Income from continuing operationsfor the three months ended April 30, 2006 was $111,000, or $0.03 pershare, compared to a loss of $238,000, or $0.07 per share, for the same periodin 2005.  Net income for the three monthsended April 30, 2006 included a $272,000 gain from discontinuedoperations and, therefore, was $383,000, or $0.10 per diluted share.

 

For the six months ended April 30, 2006, total revenueincreased 27.9% to $14.1 million from $11.1 million for the same period in2005.  Operating expenses for the sixmonths ended April 30, 2006 increased 8.8% to $6.8million from $6.3 million for the same period in 2005.  Income from continuing operations for the sixmonths ended April 30, 2006 was $291,000, or $0.08 pershare, compared to a loss

 

 

12

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of $949,000, or $0.26 per share, for the sameperiod in 2005.  The net income for thesix months ended April 30, 2006 included a $268,000 gainfrom discontinued operations and, therefore, was $559,000, or $0.15 per share.

 

In its press release dated January9, 2006, the Company included the following as some of its objectives and goalsfor 2006:

 

•                  A drive toward achieving andsustaining profitability;

•                  A fourth consecutive year ofdouble-digit year-over-year revenue growth;

•                  The introduction of new cardiorespiratorydiagnostic products;

•                  Continuation of theexpansion of our domestic and international sites offering New Leaf activemetabolic assessments; and

•                  Further expansion of the NewLeaf products for weight management, exercise and athletic performance.

 

After six months, theCompany has made significant progress against these objectives and goals.

 

•                  The April 30, 2006 quartermarked the third consecutive profitable quarter;

•                  The Companyachieved double-digit year-over-year revenue growth for the eighth quarter in arow.  With year-over-year revenue growthfor the six months ended April 30, 2006 of 27.9%, the Company’s annual goal isclearly within reach.  Second quarterrevenue of $7.2 million is a record revenue quarter;

•                  The Company ismaking progress in the development of new cardiorespiratorydiagnostic products;

•                  The Company hasadded 64 new sites offering New Leaf active metabolic assessments sinceyear-end;

•                  The New Leafbranded *Energy*SmartTM personalized online mealplanning, tracking and calorie management system was launched in February2006.  This system is designed to helpconsumers from weight conscious adults and children to recreational and eliteathletes properly measure and “fuel” their metabolism.

 

**Revenue**

 

Total revenue increased by19.6% to $7.2 million from $6.0 million for the three months ended April 30,2006 and 2005, respectively.  Domesticproduct revenue increased by 18.8% to $5.2 million in 2006 compared to $4.4million in 2005.  International productrevenue increased 38.1% to $1.4 million in 2006 compared to $1.0 million in2005.  Service revenue decreased 2.6% to$648,000 in 2006 from $665,000 in 2005.

 

Duringthe second quarter of 2006, one customer accounted for 11.5% of revenue.  There were no significant customers for thesame period in 2005.  Due to firm ordersalready received, revenue from this customer is expected to exceed 10% of revenuesfor the third quarter of 2006.

 

For the six months endedApril 30, total revenue increased by 27.9% to $14.1 million from $11.1 millionfor 2006 and 2005, respectively. Domestic product revenue increased by 29.1% to $10.3 million in 2006compared to $7.9 million in 2005. International product revenue increased 49.5% to $2.6 million in 2006compared to $1.7 million in 2005. Service revenue decreased 5.4% to $1.3 million in 2006 from $1.4 millionin 2005.

 

 

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Sales of the new Ultima PFand Ultima PFX cardiorespiratory diagnostic systems are contributingsignificantly to both domestic and international revenue growth.  The Company continues to be pleased withcustomer acceptance of these new products that began shipping during April2005.  In addition, revenue from theCompany’s Elite Series systems has remained strong throughout the first sixmonths of 2006 compared to 2005 as customers continue to replace their older1085 Series equipment.

 

The Company was alsosuccessful in the second quarter generating more business from customersengaged in clinical research.  Underthese agreements, the Company sells its cardiorespiratory diagnosticsystems and services to third parties conducting clinical trials at multiplesites inside and outside the United States.

 

Revenue from sales of theCompany’s New Leaf personal assessment systems has continued to increase thebase from which New Leaf consumable products are made available at health andfitness clubs.  The increase in this baseis beginning to drive increased sales of personal metabolic assessments thatdrive revenue from the Company’s higher margin New Leaf consumableproducts.  For the six months ended April30, 2006, revenue from New Leaf consumable products has more than doubledcompared to the same period in 2005.  TheCompany’s New Leaf health and fitness products are continuing to contribute todomestic growth due to broadening consumer acceptance and expansion of thebase.

 

Service revenue decreased$17,000 or 2.6% during the second quarter of 2006 compared to the same quarterin 2005 due to the relatively aggressive pace that customers are replacingolder equipment with the Company’s new models, thereby reducing revenue fromextended service contracts and non-warranty service visits on olderequipment.  The second quarter decreaseis somewhat less than the 7.9% decrease experienced during the first quarter of2006.  The Company believes that thisnegative revenue trend will continue to decline and eventually turn positivewhen new equipment sold in the past 12 months becomes eligible for new extendedservice contracts.

 

**Gross Margin**

 

Gross margin percentage forthe three months ended April 30, 2006 of 49.4% of revenue was comparable to49.5% for the same period in 2005.  Forthe six months ended April 30, 2006, gross margin percentage increased to 50.3%from 48.1% for the same period in 2005. The overall gross margin percentage for the second quarter of 2006decreased due to product mix. The product mix in the third quarter of 2006 isexpected to be similar.

 

**Selling and Marketing**

 

Selling and marketingexpenses for the three months ended April 30, 2006 decreased by 4.5% to $1.8million compared to $1.9 million for the same period in 2005.  For the six months ended April 30, 2006,selling and marketing expenses increased by 3.7% to $3.7 million compared to$3.6 million for the same period in 2005.

 

Second quarter 2006 sellingand marketing expenses reflect a $62,000 or 19.3% decrease in commission costsdue to lower commissionable revenue and lower costs for related incentive programs.  In addition, trade show expenses for thesecond quarter of 2006 were $29,000 lower compared to the same period in2005.  Decreases in commission expensesand trade show costs were offset by a $29,000 increase in costs associated withequipment demonstrations to potential customers.

 

 

14

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For the six months endedApril 30, 2006, commission expenses were $75,000 or 13.3% higher compared tothe same period of 2006 primarily due to the 42% increase in domestic sales forthe first quarter of 2006.  In addition,increases in expenses for travel, trade shows and equipment demonstrationscontributed to the 3.7% overall increase in selling and marketing expenses forthe six months ended April 30, 2006.

 

**General and Administrative**

 

General and administrativeexpenses for the three months ended April 30, 2006 increased by $328,000 or53.4% to $942,000 compared to $614,000 for the same period in 2005.  For the six months ended April 30, 2006, generaland administrative expenses increased by $437,000 or 34.2% to $1.7 millioncompared to $1.3 million for the same period in 2005.

 

The increase in general andadministrative expenses for both the three and six months ended April 30, 2006reflects increased accruals for employee incentive plans due to the expectedachievement of defined incentive plan objectives for 2006.  Employee incentive expenses are $171,000 and$196,000 higher for the three and six months ended April 30, 2006 compared tothe same periods in 2005.

 

General and administrativeexpenses included $81,000 and $137,000 for the three and six months ended April30, 2006, respectively, for stock-based compensation associated with variableoptions compared to no expense in this area for 2005 for either period.  These stock-based compensation expenses werenon-cash expenses.  The Companymarks-to-market the intrinsic value of its unvested variable options on aquarterly basis.  In addition, theCompany was required to expense the full amount of intrinsic value for anaggregate of 40% of the outstanding options that vested during the secondquarter.  These vested options will nowbe excluded from future variable option accounting.  See Note 4 to the Consolidated FinancialStatements, “Stock-Based Compensation,” in this Form 10-QSB for additionaldiscussion of variable options.

 

In addition, there was a$61,000 increase in general and administrative expenses due to a $12,000decrease in the provision for doubtful accounts for the six months ended April30, 2006 compared to a $73,000 decrease in the provision for doubtful accountsfor the same period in 2005.  Legalexpense decreases of $35,000 and $40,000 for the three and six months of 2006compared to the same periods of 2005 somewhat offset these decreases.

 

General and administrativeexpenses also included $19,000 in consulting expenses associated withSarbanes-Oxley compliance costs for the second quarter of 2006 compared to$21,300 for the same period in 2005.  Forthe six months ended April 30, general and administrative expenses included$34,000 for Sarbanes-Oxley compliance costs in 2006 compared to $52,800 for thesame period in 2005.

 

**Research and Development**

 

Research and developmentexpenses for the three months ended April 30, 2006 decreased $10,000 or by 1.8%to $549,000 from $559,000 for the same period in 2005.  For the six months ended April 30, 2006,research and development expenses decreased $16,000 or 1.5% to $1.0 millioncompared to $1.0 million for the same period in 2005.

 

The Company is currently workingon new products intended for use by international markets and asthma, allergyand primary care physicians.  These newproducts are planned for release late in 2006 or early 2007.  In addition, the Company is also implementingnew designs and new components for use in its existing systems that have lowercosts and are more efficient in the manufacturing process.

 

 

15

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**Amortization of Intangibles**

 

Amortization of developedtechnology was $203,000 for each of the three month periods ended April 30,2006 and 2005 and $406,000 for each of the six-month periods ended April 30,2006 and 2005.

 

**Provision for Taxes**

 

TheCompany recorded a provision for income taxes to reflect U.S. and StateAlternative Minimum Taxes (“AMT”).  TheCompany is required to pay AMT even though it has substantial federal netoperating loss carry forwards.

 

**DiscontinuedOperations**

 

The net gain fromdiscontinued operations of $268,000 for the six months ended April 30, 2006reflects the net difference after recording the agreed upon insurance recoveryand the associated legal fees that were contingent upon the recovery togetherwith other additional consulting fees and miscellaneous litigation expenses.  See Note 9 to theConsolidated Financial Statements, “Discontinued Operations and RelatedLitigation,” in this Form 10-QSB for additional discussion of the litigationsettlement with Medmarc.

 

**Liquidity and Capital Resources**

 

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

 

The Company had cash andcash equivalents of $3.2 million, including $200,000 of cash restricted fordiscontinued operations, and working capital of $7.0 million as of April 30,2006.  During the six months ended April30, 2006, the Company generated $2.2 million in cash from continuing operationsin part because its net income of $559,000 included $532,000 of depreciationand amortization.  Equal increases of$1.2 million for advance payments from customers and accounts payable togetherwith an increase of $236,000 in deferred income all contributed to thegeneration of cash.  Advance paymentsfrom customers are associated with orders for equipment received from a newcustomer.  Cash was used for increases of$1.4 million and $219,000 in inventories and accounts receivable,respectively.  The increases in bothinventories and accounts payable are necessary to support the new customer’sorder for equipment intended for use in clinical research.

 

The Company used $324,000 incash for operating activities of discontinued operations, which included apayment of $200,000 made in connection with the settlement agreement betweenthe Company and ELA Medical related to expenses associated with previouslydiscontinued ICD products.  The cash usedfor discontinued operations also included legal fees and consulting expensesand other expenses related to the ELA Medical settlement and Medmarclitigation.  In connection with the $1.4million settlement agreement with ELA Medical, the Company executed a $400,000promissory note that required a payment of $200,000 that was made on December31, 2005 and another $200,000 payment due on June 30, 2006.  The promissory note is backed up with anirrevocable bank letter of credit.  TheCompany is required to collateralize the irrevocable bank letter of credit with$200,000 of cash that is classified as cash restricted for discontinuedoperations at April 30, 2006.  On June 9,2006, the Company received the settlement payment from Medmarc for the insurancerecoveryrelated to expenses associated with previously discontinued ICDproducts.  See Note 9 to the ConsolidatedFinancial Statements, “Discontinued Operations and Related Litigation,” in thisForm 10-QSB for additional discussion.

 

 

16

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During the six months endedApril 30, 2006, the Company used $196,000 in cash for the purchase of propertyand equipment.  The Company has nomaterial commitments for capital expenditures for fiscal year 2006.

 

The Company believes that its liquidity and capital resource needs forfiscal year 2006 will be met through its current cash and cash equivalents andcash flows from operations.

 

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

 

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

 

Management, with theparticipation of the Company’s chief executive officer, Rodney A. Young, andchief financial officer, Dale H. Johnson, has evaluated the effectiveness ofthe design and operation of the disclosure controls and procedures, as definedin Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end ofthe period covered by this report. Management has concluded that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed inthe reports that the Company files under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in therules and forms of the SEC and that the disclosure controls are also effectiveto ensure that information required to be disclosed in the Company’s ExchangeAct reports is accumulated and communicated to management, including the chiefexecutive officer and chief financial officer, to allow timely decisionsregarding required disclosure.

 

**(b)           Changesin Internal Controls**

 

There have been no significant changes ininternal control over financial reporting that occurred during the fiscalquarter covered by this report that have materially affected, or are reasonablylikely to materially affect, the registrant’s internal control over financialreporting.

 

 

17

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**PART II- OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

The Company is subject tocertain claims and lawsuits that have been filed in the ordinary course ofbusiness.  From time to time, the Companybrings suit against others to enforce patent rights or to collect debts in theordinary course of business.  Except forthe litigation discussed below, management believes that the settlement of alllitigation would not have a material effect on the results of operations or liquidityof the Company.

 

As disclosed in Item 3 ofthe Form 10-KSB for the year ended October 31, 2005, the Company is involved ina lawsuit brought by Medmarc Casualty Insurance Company in United StatesDistrict Court for the District of Minnesota involving a claim forindemnification by ELA Medical and the Company’s claim for insurance coveragefrom Medmarc in the matter Medmarc Casualty Insurance Company v. AngeionCorporation, ELA Medical, Inc. and ELA Medical SA.

 

The following materialdevelopments in that matter have occurred since the filing of the Form 10-KSB:

 

On January 20, 2006, theCompany and Medmarc argued summary judgment motions in United States DistrictCourt on issues of confirming Medmarc’s responsibility to reimburse the Companyfor its $1.4 million settlement with ELA and its legal fees paid in defendingthe lawsuit.  As reported by Angeion inits Form 10-QSB for the quarter ended January 31, 2006, the Court granted, inlarge part, Angeion’s motion for summary judgment in the pending lawsuit.

 

Subsequent to the Court’sruling, on April 12, 2006, Angeion and Medmarc agreed to a confidentialsettlement that resolves all matters with respect to the pending lawsuit.  Under the terms of the settlement, Medmarcagreed to make a single payment to Angeion on or prior to June 11, 2006, andeach party agreed to dismiss with prejudice all claims against the other in thepending lawsuit.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

***Recent Sales of Unregistered Securities***

 

The Company had no unregistered sales of equitysecurities during the three months ended April 30, 2006.

 

***Small Business Issuer Purchases of Equity Securities***

 

The Company did not purchase any equity securitiesduring the three months endedApril 30, 2006.

 

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

 

None

 

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

 

None

 

 

18

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**Item 5.  Other Information.**

# ** **

None

 

**Item 6.  Exhibits.**

 

(a)           Thefollowing exhibits are included herein:

 

31            Certifications pursuant to Section 302 of theSarbanes-Oxley Act of 2002 (Rules 13a-

14 and 15d-14 of theExchange Act).

32            Certificationspursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.

§1350).

99.1                           Press release datedJune 12, 2006 reporting Angeion Corporation’s results of operations for thethree and six months ended April 30, 2006.

 

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|   |                |   |   | Angeion Corporation                    |   |
|--------|---------------------|--------|--------|----------------------------------------|--------|
|   |                |   |   | (Registrant)                           |
|   |                |   |   |                                   |
|   |                |   |   |                                   |
| Date:  |  June 14, 2006 |   |   | /s/ Rodney A. Young                    |
|   |                |   |   | Rodney A. Young                        |
|   |                |   |   | President and Chief  Executive Officer |
|   |                |   |   | (Principal Executive  Officer)         |
|   |                |   |   |                                   |
|   |                |   |   |                                   |
| Date:  |  June 14, 2006 |   |   | /s/ Dale H. Johnson                    |
|   |                |   |   | Dale H. Johnson                        |
|   |                |   |   | Chief Financial Officer                |
|   |                |   |   | (Chief Accounting Officer)             |