**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

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

 

**For the quarterly period ended March 31, 2002**

 

**OR**

 

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

 

**For the transition periodfrom                  to                  .**

 

**Commission file number 001-13543**

 

**Angeion Corporation**

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

 

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

 

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 3,594,627shares of common stock, $0.01 par value, outstanding as of May 14, 2002.

 

Transitional Small BusinessDisclosure Format (Check one):

Yes   o   No   ý   

 

 

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**PART I — FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

(unaudited,in thousands except share data)

 
|                                                                                                                         |   | **March 31,  2002** |       | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                                                                         |   |                |       |
| **Assets**                                                                                                                   |   |                |       |                   |   |
| **Current assets:**                                                                                                          |   |                |       |                   |   |
| Cash and cash equivalents                                                                                                    |   | $                   | 1,771      |                   | $      | 1,361 |   |
| Accounts receivable, net of allowance for doubtful accounts of $271  and $244, respectively                                  |   | 3,880               |       | 4,268                  |   |
| Inventories                                                                                                                  |   | 3,628               |       | 4,145                  |   |
| Prepaid expenses and other current assets                                                                                    |   | 163                 |       | 196                    |   |
| Total current assets                                                                                                         |   | 9,442               |       | 9,970                  |   |
|                                                                                                                         |   |                |       |                   |   |
| Net non-current assets of discontinued operations                                                                            |   | 97                  |       | 100                    |   |
| Equipment and fixtures, net                                                                                                  |   | 1,199               |       | 1,338                  |   |
| Intangible assets, net                                                                                                       |   | 11,321              |       | 11,379                 |   |
| Other assets                                                                                                                 |   | 44                  |       | 176                    |   |
| Goodwill, net                                                                                                                |   | 1,935               |       | 1,935                  |   |
|                                                                                                                         |   | **$**               | **24,038** | ** **             | **$**  | **24,898** | ** ** |
|                                                                                                                         |   |                |       |                   |   |
| **Liabilities  and Shareholders’ Equity (Deficit)**                                                                     |   |                |       |                   |   |
| **Current liabilities:**                                                                                                     |   |                |       |                   |   |
| Accounts payable                                                                                                             |   | $                   | 955        |                   | $      | 942 |   |
| Employee compensation                                                                                                        |   | 653                 |       | 658                    |   |
| Deferred income                                                                                                              |   | 1,081               |       | 1,017                  |   |
| Warranty reserve                                                                                                             |   | 126                 |       | 141                    |   |
| Net current liabilities of discontinued operations                                                                           |   | 574                 |       | 718                    |   |
| Other liabilities and accrued expenses                                                                                       |   | 1,071               |       | 790                    |   |
| Total current liabilities                                                                                                    |   | 4,460               |       | 4,266                  |   |
|                                                                                                                         |   |                |       |                   |   |
| **Long-term debt**                                                                                                           |   | 20,198              |       | 20,198                 |   |
|                                                                                                                         |   |                |       |                   |   |
| **Shareholders’ equity (deficit):**                                                                                     |   |                |       |                   |   |
| Common stock, $.01 par value.   Authorized 10,000,000 shares; issued and outstanding 3,594,627 shares  in 2002 and 2001 |   | 36                  |       | 36                     |   |
| Additional paid-in capital                                                                                                   |   | 124,011             |       | 124,011                |   |
| Accumulated deficit                                                                                                          |   | (124,667            | )          | (123,613               | )      |
| Total shareholders’ equity (deficit)                                                                                    |   | (620                | )          | 434                    |   |
|                                                                                                                         |   | **$**               | **24,038** | ** **             | **$**  | **24,898** | ** ** |

 

See accompanying notes to financialstatements

 

2

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

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

 
|                                                     |   | **Three Months Ended  March 31,** |       |
|----------------------------------------------------------|--------|-----------------------------------|------------|
|                                                     |   |                              |
|                                                     |   | **2002**                          |       | **2001** |   |
| **Revenues**                                             |   |                              | ** ** |   | ** ** |
| Equipment and supply sales                               |   | $                                 | 3,242      |   | $ | 3,419 |   |
| Service revenue                                          |   | 792                               |       | 642 |   |
|                                                     |   | 4,034                             |       | 4,061 |   |
| **Cost of goods sold**                                   |   |                              |       |   |   |
| Cost of equipment and supplies                           |   | 2,315                             |       | 2,255 |   |
| Cost of service revenue                                  |   | 121                               |       | 129 |   |
|                                                     |   | 2,436                             |       | 2,384 |   |
|                                                     |   |                              |       |   |   |
| **Gross margin**                                         |   | 1,598                             |       | 1,677 |   |
|                                                     |   |                              |       |   |   |
| **Operating expenses:**                                  |   |                              |       |   |   |
| Selling and marketing                                    |   | 1,148                             |       | 1,150 |   |
| General and administrative                               |   | 578                               |       | 650 |   |
| Research and development                                 |   | 332                               |       | 420 |   |
| Amortization of intangibles                              |   | 180                               |       | 324 |   |
|                                                     |   | 2,238                             |       | 2,544 |   |
|                                                     |   |                              |       |   |   |
| **Operating loss**                                       |   | (640                              | )          | (867 | ) |
|                                                     |   |                              |       |   |   |
| **Other income (expense):**                              |   |                              |       |   |   |
| Interest income                                          |   | 4                                 |       | 83 |   |
| Interest expense                                         |   | (510                              | )          | (510 | ) |
|                                                     |   |                              |       |   |   |
| **Loss before taxes**                                    |   | (1,146                            | )          | (1,294 | ) |
|                                                     |   |                              |       |   |   |
| Provision (benefit) for taxes                            |   | (92                               | )          | — |   |
|                                                     |   |                              |       |   |   |
| **Loss from continuing operations**                      |   | (1,054                            | )          | (1,294 | ) |
|                                                     |   |                              |       |   |   |
| **Loss from discontinued operations**                    |   | —                            |       | (29 | ) |
|                                                     |   |                              |       |   |   |
| **Net loss**                                             |   | $                                 | (1,054     | ) | $ | (1,323 | ) |
|                                                     |   |                              |       |   |   |
| **Net income (loss) per share — basic and diluted** |   |                              |       |   |   |
| Continuing operations                                    |   | $                                 | (0.29      | ) | $ | (0.37 | ) |
| Discontinued operations                                  |   | —                            |       | (0.01 | ) |
| Net loss                                                 |   | $                                 | (0.29      | ) | $ | (0.38 | ) |
|                                                     |   |                              |       |   |   |
| **Weighted average common shares outstanding**           |   |                              |       |   |   |
| Basic and diluted                                        |   | 3,595                             |       | 3,482 |   |

 

See accompanying notes to financial statements

 

3

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(unaudited, in thousands)**

 
|                                                                                             |   | **Three Months Ended  March 31,** |       |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                             |   |                              |
|                                                                                             |   | **2002**                          |       | **2001** |   |
| **Cash Flows From Operating Activities:**                                                        |   |                              |       |   |   |
| Net loss                                                                                         |   | $                                 | (1,054     | ) | $ | (1,323 | ) |
| Adjustments to reconcile net loss to net cash flows provided by (used  in) operating activities: |   |                              |       |   |   |
| Loss from discontinued operations                                                                |   | —                            |       | 29 |   |
| Depreciation and amortization                                                                    |   | 336                               |       | 492 |   |
| Changes in operating assets and liabilities:                                                     |   |                              |       |   |   |
| Accounts receivable                                                                              |   | 388                               |       | 470 |   |
| Inventories                                                                                      |   | 517                               |       | (245 | ) |
| Prepaid expenses and other assets                                                                |   | 165                               |       | 143 |   |
| Accounts payable                                                                                 |   | 13                                |       | (142 | ) |
| Employee compensation                                                                            |   | (5                                | )          | 87 |   |
| Other liabilities and accrued expenses                                                           |   | 330                               |       | 459 |   |
| Net cash provided by (used in) continuing operations                                             |   | 690                               |       | (30 | ) |
| Net cash used in discontinued operations                                                         |   | (144                              | )          | (102 | ) |
| Net cash provided by (used in) operating activities                                              |   | 546                               |       | (132 | ) |
|                                                                                             |   |                              |       |   |   |
| **Cash Flows From Investing Activities:**                                                        |   |                              |       |   |   |
| Purchase of equipment and fixtures                                                               |   | (17                               | )          | (45 | ) |
| Investment in proprietary software                                                               |   | (97                               | )          | (142 | ) |
| Investment in perpetual license                                                                  |   | (25                               | )          | — |   |
| Net cash used in continuing operations                                                           |   | (139                              | )          | (187 | ) |
| Net cash provided by discontinued operations                                                     |   | 3                                 |       | 24 |   |
| Net cash used in investing activities                                                            |   | (136                              | )          | (163 | ) |
|                                                                                             |   |                              |       |   |   |
| **Net increase (decrease) in cash and cash equivalents**                                         |   | 410                               |       | (295 | ) |
|                                                                                             |   |                              |       |   |   |
| **Cash and cash equivalents at beginning of period**                                             |   | 1,361                             |       | 6,350 |   |
|                                                                                             |   |                              |       |   |   |
| **Cash and cash equivalents at end of period**                                                   |   | **$**                             | **1,771**  | ** ** | **$** | **6,055** | ** ** |
|                                                                                             |   |                              | ** ** |   | ** ** |
| **Cash paid for interest expense**                                                               |   | **$**                             | **—** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes to financialstatements

 

4

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**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

March 31, 2002

(Unaudited)

 

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

 

The consolidated balance sheet as of March 31, 2002, the consolidated statements of operations andcash flows for the three months ended March 31, 2002 and 2001, and the related information presentedin these notes have been prepared by management in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-QSB and Rule 10-01of Regulation S-X, without audit. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments considered necessary for afair presentation of results have been included.  The balance sheet at December 31, 2001 was derived from theaudited financial statements as of that date. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the resultsthat may be expected for the year ended December 31, 2002.  For further information, refer to thefinancial statements and notes thereto included in Angeion Corporation’s AnnualReport on Form 10-KSB for the year ended December 31, 2001.

 

During March 2000, Angeion Corporation discontinued its historicalbusiness, the research, development, manufacturing and marketing of implantablecardioverter defibrillators (“ICD”). Consequently, the accompanying consolidated statements of operationspresent all activities of the ICD business under discontinued operationsaccounting rules.  Although the lastsales of ICD products were made during the second quarter of 2000, the Companycontinues to pursue the license or transfer of its ICD technology.

 

Comprehensive income is a measure of all non-owner changes inshareholders’ equity and includes such items as net income, certain foreigncurrency translation items, minimum pension liability adjustments and changesin the value of available-for-sale securities. For the three months ended March 31, 2002 and 2001, comprehensive income (loss) forAngeion Corporation was equivalent to net income (loss) as reported.

 

**2.****                                      Liquidityand 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 fromlicense agreements for patented ICD technology and through the sale ofsecurities, including the issuance of Senior Convertible Notes due April 2003.

 

The Company’sSenior Convertible Notes (“Notes”) of $20,198,000 are due in April 2003.  The Company is presently negotiating withthe existing Note holders to restructure terms of the Notes.  The Company believes it will resolverepayment of the Notes in one or more of several ways, including therestructuring of the Note’s terms, conversion of the Notes to equity or raisingadditional funds to refinance the Notes. In the event that the Company is unable to successfully restructure theindebtedness, however, there can be no assurance that the Company will have theresources to repay the Notes when due or that it can resolve repayment in anyother manner.  In the event the Companyis unable to refinance the Notes or resolve payment in any other manner, itwould have a material adverse impact on the Company.  This could include the ability of the Note holders to obtain ajudgment against the Company and force the sale of some or all of its assets.

 

In a letterdated February 14, 2002, Nasdaq notified Angeion that its stock had closedbelow the minimum $1.00 per share requirement for continued listing on theSmallCap Market.  Accordingly,

 

5

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Angeion has been provided 180calendar days or until August 13, 2002 to regain compliance.  In order to achieve compliance, the bidprice of Angeion’s common stock must close at $1.00 per share or more for aminimum of ten consecutive trading days. There are a number of developments that Angeion believes will result inan improved stock price, including possible restructuring of the Note holderindebtedness and further licensing agreements for the Company’s patentedtechnology.  In addition, the Companyhas the ability under its Articles of Incorporation and Minnesota law, withoutshareholder approval, to affect a reverse stock split thereby reducing thenumber of shares outstanding and, in essence, increasing the price of thecommon stock.

 

In a letterdated April 19, 2002, Nasdaq advised the Company that Nasdaq believed that theCompany does not comply with Marketplace Rule 4310(c)(2)(B), which requires theCompany to meet one of the following three financial tests:

 

(i)                                     Stockholders’equity of $2.5 million;

(ii)                                  Marketcapitalization of $35 million; or

(iii)                               Netincome of $500,000, excluding extraordinary or non-recurring items, in the mostrecent completed fiscal year or in two of the three most recently completedfiscal years.

 

The Companybelieves it remains in compliance with the Nasdaq Small Cap market continuedlisting standard because it had net income, excluding extraordinary ornon-recurring items, of more than $500,000 in the years ended in December 31,2000 and 1999.  The Company had netincome of $4,403,000 in 2000 and net income of $1,566,000 in 1999.  The net income each of those years cameprimarily as a result of licensing revenues from its ICD technology.  The Company believes that the licensingrevenues from its ICD intellectual property, though included in income fromdiscontinued operations for accounting purposes for 2000 and 1999, was neitherextraordinary nor non-recurring because the revenues were derived from thelicensing of what has become a strategic asset of the ongoing business and theCompany expects to achieve future revenues from this asset.  If the Company’s stock were to be delisted,it would constitute an Event of Default under the Indenture governing the Notesand the Notes would become due and payable. The Company believes that the Nasdaq has misinterpreted its own Rulewith respect to “net income (excluding extraordinary or non-recurring items)”and has responded to the April 19, 2002 Nasdaq letter.  The Company intends to vigorously defend itsposition.

 

                Although the Company had cash and cash equivalents of $1,771,000 atMarch 31, 2002, the Company, after consultation with a Special Ad Hoc InformalCommittee (“Committee”) representing the majority in principal amount of theNoteholders, did not make the $757,425 interest payment on the indebtednessthat was due on April 15, 2002, pending continuing discussions and negotiationswith the Committee regarding restructuring of the indebtedness.  The Company settled a lawsuit with theTrustee for the Noteholders in November 2001, and has been has been negotiatingwith the Noteholders since January 2002 to restructure the Indebtedness.  The Company believes that it is in the bestinterest of the Company’s shareholders, Noteholders, customers and suppliersthat the Company find a way to restructure the Indebtedness at the current timerather than continuing the uncertainly as to the steps that would be needed tomake the $20,198,000 payment in April 2003.

 

                On May 15, 2002, the Companyentered into a Forbearance Agreement with the Trustee on behalf of theNoteholders.  Under the ForbearanceAgreement, the Trustee, upon direction of a majority in principal of theNoteholders, has agreed to forbear until June 17, 2002, from accelerating theIndebtedness or enforcing the other provisions of the Indenture with respect tothe Event of Default caused by the nonpayment of the interest due April 15,2002.  The Company expects to reach anagreement with respect to restructuring the debt during the forbearance period.

 

                The restructuring orrecapitalization could take one of several forms, including conversion of allor substantially all of the Notes to equity, refinancing the indebtedness usingnew funds from third party sources, extension of the maturity date of theindebtedness, voluntary or involuntary bankruptcy or recapitalization underChapter 11 of the United State Bankruptcy Code, or a tender offer or conversionoffer to the Noteholders.  In any formof restructuring or recapitalization involving conversion of the indebtednessto equity, the interests of existing shareholders could be substantiallydiluted.  The ultimate success of therestructuring will depend upon the Company’s ability to successfully negotiateand implement a restructuring plan with the Noteholders.

 

                The Company currently believes,however, that it will be able to successfully negotiate and complete therestructuring in a manner that will only affect its capitalization at theAngeion level.  The Company believesthat the restructuring will not have an adverse impact upon the day-to-dayoperations, or the customers, or the suppliers, of its Medical Graphics and NewLeaf business operations.

 

6

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**3.****                                      Reclassifications**

 

Certain amounts in Angeion’s financial statements for the three monthsended March 31, 2001 havebeen reclassified to conform to the 2002 presentation.  These reclassifications had no effect on netincome or shareholders’ equity as previously reported.

 

**4.****                                      NetIncome (Loss) Per Share**

 

Basic earningsper share are computed by dividing net earnings by the weighted average sharesoutstanding during the reporting period. Diluted earnings per share are computed similar to basic earnings pershare except that the weighted average shares outstanding are increased toinclude additional shares from the assumed exercise of stock options, warrantsor convertible debt, if dilutive.  Thenumber of additional shares is calculated by assuming that outstanding stockoptions or warrants were exercised and that the proceeds from such exercisewere used to acquire shares of common stock at the average market price duringthe reporting period.  If the Notes aredilutive, the associated interest expense and amortization of debt issuancecosts, net of taxes, are removed from operations and the shares issued areassumed to be outstanding for the dilutive period. All potentially dilutivecommon shares were excluded from the calculation because they wereanti-dilutive for all periods presented.

 

**5.****                                      OtherCommitments**

 

On March 4,2002, the Company completed a revision of its agreement with INTERXVENTUSA,a Georgia corporation engaged in the business of developing and delivering riskassessment and lifestyle management materials and services to patients forimproved cardio-vascular health.  TheCompany modified the agreement such that the previous payment of $1,340,000 togetherwith an additional $75,000 represents payment for a perpetual license to usecertain INTERXVENTUSA intellectual property as part of acustom developed private label product that is a web enabled self helplifestyle management program.  Inaddition, the Company has agreed to make royalty payments of 15% on all amountsreceived for the program with a $5.00 per participant minimum applicable toeach consumer.  This product is plannedto be a new product that will be marketed under the New Leaf brand and will bemade available to all New Leaf Personal Exercise System delivery sites.

 

**6.****                                      NewAccounting Pronouncements**

 

On January 1,2002, new accounting rules for business combinations and accounting forgoodwill and other intangibles (FAS 141 and 142) became effective for theCompany.  As a result and from that dateforward, goodwill is no longer being amortized against earnings and goodwillbalances are subject to impairment review on at least an annual basis.  Furthermore, classes of intangible assetshave been further defined under these rules, which caused the Company totransfer the $1,448,000 unamortized balance of an intangible asset,representing the estimated value of an assembled workforce, to goodwill as ofJanuary 1, 2002.  This intangible amountat December 31, 2001 was also reclassified in these financial statements forcomparative purposes.

 

Statement 141requires, upon adoption of Statement 142, that effective January 1, 2002 theCompany evaluate its existing intangible assets and goodwill that were acquiredin a prior purchase business combination, and to make any necessaryreclassifications in order to conform with the new criteria in Statement 141for recognition apart from goodwill. The Company is required to reassess the useful lives and residual valuesof all intangible assets acquired, and make any necessary amortization periodadjustments by the end of the first interim period after adoption.  In addition, to the extent an intangibleasset is identified as having an indefinite useful life, the Company isrequired to test the intangible asset for impairment in accordance with theprovisions of Statement 142 within the first half of

 

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2002.  Any impairment loss will be measured as of the date of adoptionand recognized as the cumulative effect of a change in accounting principle inthe first quarter of 2002.

 

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

 

Intangibleassets as of March 31, 2002 consisted of the following:

 
| **(In  thousands)**                                                    |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|------------------------------------------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
| Amortized intangible assets:                                           |   |                        |   |                          |   |
| Proprietary software                                                   |   | $                           | 3,388  |                          | $      | 872 |   |
| Patents                                                                |   | 2,342                       |   | 439                           |   |
| Purchased technology                                                   |   | 293                         |   | 58                            |   |
|                                                                   |   | 6,023                       |   |                          |   |
| Unamortized intangible assets:                                         |   |                        |   |                          |   |
| Trade name                                                             |   | 5,302                       |   |                          |   |
| Perpetual license                                                      |   | 1,365                       |   |                          |   |
|                                                                   |   | 6,667                       |   |                          |   |
|                                                                   |   |                        |   |                          |   |
| Amortization of intangibles for the three  months ended March 31, 2002 |   | $                           | 180    |                          |   |   |
|                                                                        |        |                             |        |                               |        |  |  |

 

The change in the carrying amount of goodwill for the three monthsended March 31, 2002 is as follows:

 
| **(In  thousands)**                                           |   | **Goodwill** |   |
|---------------------------------------------------------------|--------|--------------|--------|
| Balance as of December 31, 2001                               |   | $            | 487    |   |
| Reclassification of assembled workforce  pursuant to FASB 142 |   | 1,448        |   |
| Balance as of March 31, 2002                                  |   | $            | 1,935  |   |

 

8

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The followingtable discloses reported net loss and the adjusted net loss that would havebeen reported assuming that FASB 142 were to have been effective for allreported periods.

 
|                                              |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|
| **(In  thousands, except for per share amounts)** |   | **2002**                          |   | **2001** |   |
| Net loss, as reported                             |   | $                                 | (1,054 | ) | $ | (1,323 | ) |
| Add back amortization                             |   |                              |   |   |   |
| Goodwill                                          |   | —                            |   | 9 |   |
| Trade name                                        |   | —                            |   | 75 |   |
| Assembled workforce                               |   | —                            |   | 80 |   |
| Net loss, as adjusted                             |   | $                                 | (1,054 | ) | $ | (1,159 | ) |
|                                              |   |                              |   |   |   |
| Earnings per share, basic and diluted:            |   |                              |   |   |   |
| Net loss per share, as reported                   |   | $                                 | (0.29  | ) | $ | (0.38 | ) |
| Add back amortization                             |   |                              |   |   |   |
| Goodwill                                          |   | —                            |   | — |   |
| Trade name                                        |   | —                            |   | 0.02 |   |
| Assembled workforce                               |   | —                            |   | 0.03 |   |
| Net loss per share, as adjusted                   |   | $                                 | (0.29  | ) | $ | (0.33 | ) |

 

Because of theextensive effort needed to comply with adopting Statement 142, it is notpracticable to reasonably estimate the impact of adopting this Statement on theCompany’s financial statements at the date of this report, including whether itwill be required to recognize any transitional impairment losses as thecumulative effect of a change in accounting principle.

 

In August2001, the Financial Accounting Standards Board approved SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 addresses the financialaccounting and reporting for the impairment or disposal of long-lived assetsand supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of.”  However, this statement retains the fundamental provisions ofSFAS No. 121 for (a) recognition and measurement of the impairment oflong-lived assets to be held and used and (b) measurement of long-lived assetsto be disposed of by sale.

 

SFAS No. 144also supersedes the accounting and reporting provisions of APB Opinion No. 30,“Reporting the Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions,” for the disposal of a segment of a business.  However, this Statement retains therequirement of APB No. 30 to report discontinued operations separately fromcontinuing operations and extends that reporting to a component of an entitythat either has been disposed of or is classified as held for sale.  The Company adopted the provisions of SFASNo. 144 as of January 1, 2002.  Theadoption of SFAS No. 144 did not have a material effect on the Company’sfinancial statements.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Forward-LookingStatements**

 

Statementsincluded in this Quarterly Report on Form 10-QSB that are not historical orcurrent facts are “forward-looking statements” made pursuant to the safe harborprovision 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 complete itsnegotiations to restructure its $20,198,000 in Senior Convertible Note dueApril 2003, (ii) the Company’s ability to satisfy the criteria for continued inclusionon the Nasdaq Small Cap Market, (iii) the Company’s ability to successfullyintroduce the its Leaf Product line, (iv) the Company’s ability to develop andprotect its intellectual property, (v) potential product liability claimsrelated to the Company’s medical products, and (vi) dependence upon third partyvendors, as well as other factors not now anticipated.  Additional factors are set forth in theSection entitled “Certain Risk Factors” in Part I, Item 1, “Business” of theCompany’s Form 10-KSB for the year ended December 31, 2001.  Various forward-looking statements have beenmade in this Quarterly Report on Form 10-QSB and may also be made in otherAngeion reports filed under the Securities Exchange Act of 1934, in its pressreleases and in other documents.  Inaddition, from time to time, the Company through its management may make oralforward-looking statements.  The Companyundertakes no obligation to update any forward-looking statement.

 

**Overview**

 

Angeion,through its Medical Graphics Corporation subsidiary, develops, manufactures andmarkets non-invasive cardiorespiratory diagnostic systems and related softwarefor the management and improvement of cardiorespiratory health under theMedGraphics trade name.  The primaryMedGraphics products include pulmonary function and cardiopulmonary exercisetesting systems.  The Company alsodevelops, manufactures and markets health and fitness products and servicesdesigned to assist consumers with fitness improvement, weight management andcardiac rehabilitation.  These newproducts and services are sold under the New Leaf brand name to consumersthrough various delivery sites such as health and fitness clubs, weightmanagement and cardiac rehabilitation centers.

 

The year 2001was devoted to developing and implementing the growth strategy that the Companyannounced in December 2000.  The Companyhas focused a significant portion of its resources on new products that targetmiddle-aged adults that are concerned about their health or fitness.  These new products are a logical extensionof the Company’s core cardiorespiratory diagnostic systems business and willadd a much larger consumer focused market to the Company’s business.  Management is committed to this newstrategy, which builds upon our existing business and core competencies andexpands the business model from one based on one-time sales of capitalequipment to one that includes providing a product that ultimately gets sold toeach customer.

 

The Company’sfirst product that is being marketed under the New Leaf brand is called the NewLeaf Personal Exercise System.  Thesystem provides delivery sites, such as health clubs, wellness centers andcardiac rehabilitation facilities, with the tools to develop individualizedfitness, weight management and athletic training plans for their clients.  While still not significant, sales of thesenew products generated revenue of $31,000 for the three months ended March 31,2002.

 

The second NewLeaf health and fitness product that the Company will be offering is a resultof its joint marketing alliance with INTERXVENT during 2001.  INTERXVENT developed and marketsa comprehensive cardiovascular disease risk reduction lifestyle managementprogram that involves a

 

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combination of printedmaterials, audio CDs and one-on-one personal mentoring or counseling sessionsthat has been shown to be both clinically and economically effective on over20,000 participants.  The Company haspurchased a perpetual license agreement for the INTERXVENTtechnology in the form of a self-help program, with no mentoring required, thatcan be marketed to healthy consumers at fitness clubs and other retailoutlets.  The program can be purchasedas a multi-subject comprehensive program or the consumer can select individualmodules of interest such as nutrition or smoking cessation.  The InterVent product is planned to bemarketed under the New Leaf brand and will be made available to be marketed byall New Leaf Personal Exercise System sites. The Company expects to begin the introduction of this new product by theend of the second quarter of 2002.  SeeNote 5, “Other Commitments,” Notes to Consolidated Financial Statements in thisForm 10-QSB.

 

In addition tothe products discussed above, the Company remains the owner of several patentsrelated to its cardiac stimulation technology from which it has generatedsignificant licensing revenue in recent years. Despite the decision to exit the business of manufacturing ICDs in 2000,the Company is continuing to defend its patents and expects to generateadditional revenue through new license agreements for its patented cardiacstimulation technology.  During March2002, the Company commenced litigation against a medical device manufacturer underwhich the Company alleges that the defendant company infringed Angeion’scardiac stimulation technology.

 

In January2002, the Company signed a sublease for the remaining space that had beenleased for its discontinued ICD manufacturing business.  This completes management’s effort tominimize the on-going costs associated with a facility that is no longernecessary for the Company’s business. The sublessor is obligated to the Company for future rental paymentsaggregating $873,000 through February 28, 2008.  The Company remains liable, however, under the lease that hasremaining payments during the period April 1, 2002 through February 28, 2002.

 

The Companyhas financed its operations through the issuance of securities, including theissuance of Senior Convertible Notes due April 2003.  At March 31, 2002, the Company had $20,198,000 in principalamount of the Notes outstanding.  TheCompany believes it will resolve repayment of the Notes in one or more ofseveral ways, including the restructuring of the Notes’ terms, conversion ofthe Notes to equity or raising additional funds to refinance the Notes.  There can be no assurance, however, that theCompany will have the resources to repay the Notes when due or that it canresolve repayment in any other manner. In the event the Company is unable to refinance the Notes or resolvepayment in any other manner, it would have a material adverse impact on theCompany.  This could include the abilityof the Note holders to obtain a judgment against the Company and force the saleof some or all of its assets.  Asdiscussed below under "Liquidity and Capital Resources," the Companyis currently negotiating with the Note holders to restructure the debtrepresented by the Notes.

 

**Results of Operations**

 

Angeion Corporationrecorded a net loss of $1,054,000 for the three months ended March 31, 2002compared to a net loss of $1,323,000 for the same period in 2001.  The net loss for 2001 included a loss of$29,000 from discontinued operations.

 

**Revenues**

 

Revenuesconsist of product sales and service revenues. Product sales reflect sales of Medical Graphic’s non-invasivecardiorespiratory diagnostic systems and related software, sales of New Leafhealth and fitness products and services, and aftermarket sales of peripheralsand supplies.  Service revenues reflectcontract revenues from extended service contracts, non-warranty service visitsand training.

 

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Total revenuedecreased 0.7% to $4,034,000 from $4,061,000 for the three months ended March31, 2002 and 2001, respectively. Domestic revenue decreased by 7.2% to $2,296,000 in 2002 compared to$2,473,000 in 2001.  Internationalrevenue was $946,000 for both years, 2002 and 2001, respectively.  Service revenue increased by 23.4% to$792,000 in 2002 from $642,000 in 2001.

 

The Companybelieves that both domestic and international revenue continue to be influencedby customer caution in making capital expenditures that has resulted in thewake of the September 11, 2001, events as well as the overall sluggishness ofthe United States economy.  The servicerevenue increase is primarily due to an increase in non-warranty service callsassociated with expiring warranties. For a period of nine months from July 1996 to March 1997, the Companyhad provided 5-year warranties with the sale of its systems.  All of those 5-year warranties have nowexpired.  In addition, the servicerevenue increase also reflects the Company’s continued emphasis on the sale ofextended service contracts.

 

**Gross Margin**

 

Gross marginpercentage decreased to 39.6% of revenue for the three months ended March 31,2002, from 41.3% in 2001.  The margindecrease for the quarter reflects component price changes that caused thequarter gross margins to be lower as the Company sold higher priced inventory.

 

**Selling and Marketing**

 

Selling andmarketing expenses were $1,148,000 for the three months ended March 31, 2002compared to $1,150,000 in 2001. Increased expenses associated with the Company’s focus on selling andmarketing its New Leaf personal exercise system have been offset by lowercommissions, trade show expenses and other selling and marketing expensesassociated with core products.

 

**General and Administrative**

 

General andadministrative expenses decreased by 11.1% to $578,000 for the three monthsended March 31, 2002 from $650,000 in 2001. The decrease in general and administrative expenses is primarily due tolower legal expenses and reduced personnel costs.  The 2001 legal expenses were associated with the previouslysettled litigation with U.S. Bank National Association, as Trustee for holdersof the Company’s 7-1/2% Senior Convertible Notes.  Current legal expenses include the costs in support of theCompany’s negotiations with the Noteholders to restructure the debt representedby the Notes.  The Company has agreed topay the Noteholders’expenses in connection with the negotiations to restructurethe Notes.

 

**Research and Development**

 

Research anddevelopment expenses for the three months ended March 31 decreased by 21.0% to$332,000 in 2002 from $420,000 in 2001. The Company’s previous focus on the conversion and consolidation ofsoftware platforms is now complete, resulting in the decrease in research anddevelopment expenses for the quarter. Research and development expenses that have been capitalized as part ofthe Company’s proprietary software were $97,000 and $142,000 for the threemonths ended March 31, 2002 and 2001, respectively.

 

**Amortization of Intangibles**

 

Amortizationof intangibles for the three months ended March 31 decreased by 44.4% to$180,000 in 2002 from $324,000 in 2001. The decrease reflects the Company’s adoption of FASB

 

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Statement No. 142, *Goodwill andOther Intangible Assets*.  SeeItem 5, “New Accounting Pronouncements,” Notes to Consolidated FinancialStatements in this Form 10-QSB.

 

**Other Income (Expense)**

 

Interestincome for the three months ended March 31 decreased to $4,000 in 2002 from$83,000 in 2001.  The decrease in interestincome reflects lower excess cash balances available for short-term investmentas well as lower interest rates.

 

Interestexpense was $510,000 for the three months ended March 31, 2002 and 2001.  Interest expense includes amortization ofdebt issuance costs of $132,000 for each of the three-month periods ended March31, 2002 and 2001.  These debt issuancecosts become fully amortized in April 2002.

 

**Benefitfor income taxes**

 

The Companyrecorded a refund of $92,000 in the three months ended March 31, 2002 offederal income taxes for 1999.  Therefund became available due to a tax law revision enacted into law during thefirst quarter of 2002.

 

**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 sale of securities, including the issuance of SeniorConvertible Notes due April 2003.

 

The Company’sSenior Convertible Notes of $20,198,000 are due in April 2003.  The Company is presently negotiating withthe existing Note holders to restructure terms of the Notes.  The Company believes it will resolverepayment of the Notes in one or more of several ways, including therestructuring of the Note’s terms, conversion of the Notes to equity or raisingadditional funds to refinance the Notes. There can be no assurance, however, that the Company will have theresources to repay the Notes when due or that it can resolve repayment in anyother manner.  In the event the Companyis unable to refinance the Notes or resolve payment in any other manner, itwould have a material adverse impact on the Company.  This could include the ability of the Note holders to obtain ajudgment against the Company and force the sale of some or all of its assets.

 

In a letterdated February 14, 2002, Nasdaq notified Angeion that its stock had closedbelow the minimum $1.00 per share requirement for continued listing on theSmallCap Market.  Accordingly, Angeionhas been provided 180 calendar days or until August 13, 2002 to regaincompliance.  In order to achievecompliance, the bid price of Angeion’s common stock must close at $1.00 pershare or more for a minimum of ten consecutive trading days.  There are a number of developments thatAngeion believes will result in an improved stock price, including possiblerestructuring of the Note holder indebtedness and further licensing agreementsfor the Company’s patented technology. In addition, the Company has the ability under its Articles ofIncorporation and Minnesota law, without shareholder approval, to affect areverse stock split thereby reducing the number of shares outstanding and, inessence, increasing the price of the common stock.

 

In a letterdated April 19, 2002, Nasdaq alleges that the Company does not comply withMarketplace Rule 4310(c)(2)(B), which requires the Company to meet one of thefollowing three financial tests:

 

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(i)                                     Stockholders’equity of $2.5 million;

(ii)                                  Marketcapitalization of $35 million; or

(iii)                               Netincome of $500,000, excluding extraordinary or non-recurring items, in the mostrecent completed fiscal year or in two of the three most recently completedfiscal years.

 

The Companybelieves it remains in compliance with the Nasdaq Small Cap market continuedlisting standard because it had net income, excluding extraordinary ornon-recurring items, of more than $500,000 in the years ended in December 31,2000 and 1999.  The Company had netincome of $4,403,000 in 2000 and net income of $1,566,000 in 1999.  The net income each of those years came primarilyas a result of licensing revenues from its ICD technology.  The Company believes that the licensingrevenues from its ICD intellectual property, though included in income fromdiscontinued operations for accounting purposes for 2000 and 1999, is neitherextraordinary nor non-recurring because the revenues were derived from thelicensing of what has become a strategic asset of the ongoing business and theCompany expects to achieve future revenues from this asset.  If the Company’s stock were to be delisted,it would constitute an Event of Default and the Notes would become due andpayable.  The Company believes that theNasdaq has misinterpreted its own Rule as to what constitutes “net income” andhas responded to the allegation.  TheCompany intends to vigorously defend its position.

 

                Although the Company had cash and cash equivalents of $1,771,000 atMarch 31, 2002, the Company, after consultation with a Special Ad Hoc InformalCommittee (“Committee”) representing the majority in principal amount of theNoteholders, did not make the $757,425 interest payment on the indebtednessthat was due on April 15, 2002, pending continuing discussions and negotiationswith the Committee regarding restructuring of the indebtedness.  The Company settled a lawsuit with theTrustee for the Noteholders in November 2001, and has been has been negotiatingwith the Noteholders since January 2002 to restructure the Indebtedness.  The Company believes that it is in the bestinterest of the Company’s shareholders, Noteholders, customers and suppliersthat the Company find a way to restructure the Indebtedness at the current timerather than continuing the uncertainly as to the steps that would be needed tomake the $20,198,000 payment in April 2003.

 

                On May 15, 2002, the Companyentered into a Forbearance Agreement with the Trustee on behalf of the Noteholders.  Under the Forbearance Agreement, theTrustee, upon direction of a majority in principal of the Noteholders, hasagreed to forbear until June 17, 2002, from accelerating the Indebtedness orenforcing the other provisions of the Indenture with respect to the Event ofDefault caused by the nonpayment of the interest due April 15, 2002.  The Company expects to reach an agreementwith respect to restructuring the debt during the forbearance period.

 

                The restructuring orrecapitalization could take one of several forms, including conversion of allor substantially all of the Notes to equity, refinancing the indebtedness usingnew funds from third party sources, extension of the maturity date of theindebtedness, voluntary or involuntary bankruptcy or recapitalization underChapter 11 of the United State Bankruptcy Code, or a tender offer or conversionoffer to the Noteholders.  In any formof restructuring or recapitalization involving conversion of the indebtednessto equity, the interests of existing shareholders could be substantiallydiluted.  The ultimate success of therestructuring will depend upon the Company’s ability to successfully negotiateand implement a restructuring plan with the Noteholders.

 

                The Company currently believes,however, that it will be able to successfully negotiate and complete therestructuring in a manner that will only affect its capitalization at theAngeion level.  The Company believesthat the restructuring will not have an adverse impact upon the day-to-dayoperations, or the customers, or the suppliers, of its Medical Graphics and NewLeaf business operations.

 

The Companyhad cash of $1,771,000 and working capital of $4,982,000 as of March 31,2002.  During the three months endedMarch 31, 2002, the Company generated $690,000 in cash from continuingoperations.  Cash was generated bydecreases of $388,000, $517,000 and $165,000 in accounts receivable,inventories and prepaid expenses and other assets, respectively, as well as anincrease of $330,000 in other liabilities and accrued expenses.  The reduction in inventories included$335,000 for disposition of the remaining discontinued sleep diagnostic productinventories.  The principal use of cashincluded funding the $718,000 net loss before depreciation and amortization.  In addition, the Company used $144,000 incash for discontinued operations, which represented real estate commissions andrental of the facility formerly used for the Company’s ICD products.

 

During thethree months ended March 31, 2002, the Company used $136,000 in cash forinvesting activities.  Cash was used toincrease the Company’s investment in proprietary software by $97,000, to invest$25,000 in the INTERVENT perpetual license and to purchase $17,000 of equipmentand fixtures.

 

During the fourthquarter of 2001, the Company implemented cost reduction measures that resultedin a decrease of approximately 8% in annual operating expenses.  In addition, the Company’s operating plansallow for significant changes in commitments for operating expenses,particularly with respect to incremental expenses associated with theintroduction of the New Leaf personal exercise system to the market.  Moreover, the Company has no materialcommitments for capital expenditures for 2002. The Company believes that its liquidity and capital resource needs for2002 will be met through its current cash and cash equivalents, cash flows fromoperations and working capital.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

The Companyinvests its cash in money market instruments or short-term investment gradesecurities.  The Company believes that adecrease of 100 basis points in prevailing interest rates would not have asignificant adverse effect on its net income or financial position.

 

The Company’sproduct sales outside the United States are denominated in United Statesdollars.  Accordingly, the Companybelieves its exposure to foreign exchange rate fluctuation is minimal.

 

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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.  From time to time,the Company brings suit against others to enforce patent rights or to collectdebts in the ordinary course of business. It is management’s opinion that the settlement of all litigation wouldnot have a material effect on the financial position of the Company.

 

The Companycontinues to defend the patents associated with its cardiac stimulationtechnology.  The Company intends to takewhatever steps are necessary to exploit and defend the Company’s rights in itspatent technology, both ICD and non-ICD, including entering into license agreementswith third parties or if necessary, commencing litigation against infringingparties.  During March 2002, the Companycommenced litigation against a medical device manufacturer under which theCompany alleges that the defendant company infringed Angeion’s cardiacstimulation technology.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

Under theterms of the Indenture covering the Company’s Senior Convertible Notes, theCompany is required to make interest payments of $757,425 on April 15 andOctober 15 of each year.  See“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

**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)                                  ExhibitsList

 

None

 

(b)                                 Reportson Form 8-K

 

No reports onForm 8-K were filed during the three months ended March 31, 2002.

 

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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: May  20, 2002 | /s/ Richard  E. Jahnke                    |   |
|                |                                      |
|                | Richard E.  Jahnke, President and Chief   |
|                | Executive  Officer                        |
|                | (Principal  Executive Officer)            |
|                |                                      |
|                |                                      |
|                |                                      |
| Date: May  20, 2002 | /s/ Dale H.  Johnson                      |   |
|                |                                      |
|                | Dale H.  Johnson, Chief Financial Officer |
|                | (Chief  Accounting Officer)               |

 

 

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