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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

#### **Washington, D.C.  20549**

#### ** **

**FORM 10-Q**

 

**x        QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**for thequarterly period ended July 31, 2008.**

 

**OR**

 

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**for thetransition period from                       to                       ..**

 

**CommissionFile Number 001-13543**

 

**ANGEIONCORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**350Oak Grove Parkway, Saint Paul, Minnesota 55127-8599**

(Address ofprincipal executive offices)

 

Registrant’stelephone number, including area code: (**651)484-4874**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

**Yes**x                    No o

** **

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act:

Large AcceleratedFiler o  AcceleratedFiler o  Non-Accelerated Filer o  Smaller Reporting Company x

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

**Yes**o                    No x

** **

As of September 15,2008, the Company had outstanding 4,166,457 shares of Common Stock, $0.10 parvalue.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I  – FINANCIAL INFORMATION** |                                                                                        |
|-----------------------------------------------|---------------------------------------------------------------------------------------------|
|                                          |                                                                                        |   |
| Item 1.                                       | Financial Statements                                                                        |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
| Item 4.                                       | Controls and  Procedures                                                                    |   |
| Item 4T.                                      | Controls and  Procedures                                                                    |   |
|                                          |                                                                                        |   |
| **PART II - OTHER  INFORMATION**         |                                                                                        |
|                                          |                                                                                        |   |
| Item 1.                                       | Legal Proceedings                                                                           |   |
| Item 1A.                                      | Risk Factors                                                                                |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
| Item 3.                                       | Defaults  Upon Senior Securities                                                            |   |
| Item 4.                                       | Submission  of Matters to a Vote of Security Holders                                        |   |
| Item 5.                                       | Other Information                                                                           |   |
| Item 6.                                       | Exhibits                                                                                    |   |
|                                          |                                                                                        |   |
| **SIGNATURES**                                |                                                                                        |   |

 

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**PART I - FINANCIAL INFORMATION**

** **

**Item1.  Financial Statements.**

 

**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**July 31,2008 and October 31, 2007**

(in thousands exceptshare and per share data)

 
| ** **                                                                                                                                  | ** ** | **July 31,** | ** ** | **October 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2008**          | ** ** | **2007**             | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **           | ** ** |
| **Assets**                                                                                                                                  |       |              |       |                 |       |
| **Current assets:**                                                                                                                         |       |              |       |                 |       |
| Cash and cash equivalents                                                                                                                   |       | $                 | 7,464      |                 | $          | 6,908 |   |
| Accounts receivable, net of allowance for doubtful accounts of $140  and $85, respectively                                                  |       | 5,513             |       | 7,950                |       |
| Inventories                                                                                                                                 |       | 5,774             |       | 5,310                |       |
| Prepaid expenses and other current assets                                                                                                   |       | 320               |       | 347                  |       |
| Total current assets                                                                                                                        | ** ** | **19,071**        | ** ** | **20,515**           | ** ** |
|                                                                                                                                        |       |              |       |                 |       |
| Property and equipment, net of accumulated depreciation of $2,791 and  $2,453, respectively                                                 |       | 1,008             |       | 1,302                |       |
| Intangible assets, net                                                                                                                      |       | 2,282             |       | 2,716                |       |
| **Total Assets**                                                                                                                            | ** ** | **$**             | **22,361** | ** **           | **$**      | **24,533** | ** ** |
|                                                                                                                                        |       |              |       |                 |       |
| **Liabilities and Shareholders'  Equity**                                                                                                   |       |              |       |                 |       |
| **Current liabilities:**                                                                                                                    |       |              |       |                 |       |
| Accounts payable                                                                                                                            |       | $                 | 1,418      |                 | $          | 1,859 |   |
| Employee compensation                                                                                                                       |       | 1,049             |       | 2,041                |       |
| Deferred income                                                                                                                             |       | 1,599             |       | 1,839                |       |
| Warranty reserve                                                                                                                            |       | 172               |       | 253                  |       |
| Other current liabilities and accrued expenses                                                                                              |       | 335               |       | 369                  |       |
| Total current liabilities                                                                                                                   |       | 4,573             |       | 6,361                |       |
|                                                                                                                                        |       |              |       |                 |       |
| **Long-term liabilities:**                                                                                                                  |       |              |       |                 |       |
| Long-term deferred income                                                                                                                   |       | 781               |       | 743                  |       |
| **Total Liabilities**                                                                                                                       |       | 5,354             |       | 7,104                |       |
|                                                                                                                                        |       |              |       |                 |       |
| **Shareholders' equity:**                                                                                                                   |       |              |       |                 |       |
| Common stock, $0.10 par value, authorized 25,000,000 shares, issued  and outstanding, 4,091,790 shares in 2008 and 4,088,445 shares in 2007 |       | 409               |       | 409                  |       |
| Additional paid-in capital                                                                                                                  |       | 20,790            |       | 20,423               |       |
| Accumulated deficit                                                                                                                         |       | (4,192            | )          | (3,403               | )          |
| Total shareholders' equity                                                                                                                  |       | 17,007            |       | 17,429               |       |
| **Total Liabilities and Shareholders' Equity**                                                                                              | ** ** | **$**             | **22,361** | ** **           | **$**      | **24,533** | ** ** |

 

See accompanyingnotes to consolidated financial statements.

 

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** **

**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Statements of Operations**

(unaudited, in thousands except per share amounts)

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **July 31,**                | ** ** | **July 31,**               | ** ** |
| ** **                                     | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues**                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment and supply sales                     |       | $                                | 6,508      |                            | $          | 8,051 |   | $ | 19,545 |   | $ | 27,086 |   |
| Service revenue                                |       | 1,090                            |       | 819                             |       | 2,879 |   | 2,363 |   |
|                                           |       | 7,598                            |       | 8,870                           |       | 22,424 |   | 29,449 |   |
| **Cost of revenues**                           |       |                             |       |                            |       |   |   |   |   |
| Cost of equipment and supplies                 |       | 3,569                            |       | 4,342                           |       | 10,530 |   | 14,373 |   |
| Cost of service revenue                        |       | 112                              |       | 106                             |       | 363 |   | 341 |   |
|                                           |       | 3,681                            |       | 4,448                           |       | 10,893 |   | 14,714 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Gross margin**                               |       | 3,917                            |       | 4,422                           |       | 11,531 |   | 14,735 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Operating expenses:**                        |       |                             |       |                            |       |   |   |   |   |
| Selling and marketing                          |       | 1,977                            |       | 2,634                           |       | 6,660 |   | 7,645 |   |
| General and administrative                     |       | 945                              |       | 937                             |       | 3,312 |   | 2,984 |   |
| Research and development                       |       | 565                              |       | 707                             |       | 1,891 |   | 2,075 |   |
| Amortization of intangibles                    |       | 182                              |       | 172                             |       | 546 |   | 557 |   |
|                                           |       | 3,669                            |       | 4,450                           |       | 12,409 |   | 13,261 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Operating income / (loss)**                  |       | 248                              |       | (28                             | )          | (878 | ) | 1,474 |   |
| Interest income                                |       | 32                               |       | 48                              |       | 137 |   | 131 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Income / (loss) before taxes**               |       | 280                              |       | 20                              |       | (741 | ) | 1,605 |   |
| Provision for taxes                            |       | 21                               |       | 16                              |       | 48 |   | 659 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Net income / (loss)**                        |       | $                                | 259        |                            | $          | 4 |   | $ | (789 | ) | $ | 946 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Earnings / (loss) per share - basic**        |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per share                    |       | $                                | 0.06       |                            | $          | — |   | $ | (0.19 | ) | $ | 0.24 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Earnings / (loss) per share - diluted**      |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per share                    |       | $                                | 0.06       |                            | $          | — |   | $ | (0.19 | ) | $ | 0.22 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| **Weighted average common shares outstanding** |       |                             |       |                            |       |   |   |   |   |
| **Basic**                                      |       | 4,090                            |       | 4,077                           |       | 4,090 |   | 3,953 |   |
| **Diluted**                                    |       | 4,150                            |       | 4,262                           |       | 4,090 |   | 4,263 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **July 31,**               | ** ** |
| ** **                                                                                          | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Cash Flows From Operating Activities:**                                                           |       |                            |       |   |   |
| Net income / (loss)                                                                                 |       | $                               | (789       | ) | $ | 946 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                       |       | 896                             |       | 821 |   |
| Stock-based compensation                                                                            |       | 347                             |       | 10 |   |
| Increase in inventory obsolescence reserve                                                          |       | 333                             |       | — |   |
| Increase in allowance for doubtful accounts                                                         |       | 55                              |       | — |   |
| Deferred income taxes                                                                               |       | —                          |       | 404 |   |
| Changes in operating assets and  liabilities:                                                       |       |                            |       |   |   |
| Accounts receivable                                                                                 |       | 2,382                           |       | (1,859 | ) |
| Inventories                                                                                         |       | (797                            | )          | 404 |   |
| Prepaid expenses and other current assets                                                           |       | 27                              |       | (78 | ) |
| Accounts payable                                                                                    |       | (441                            | )          | (332 | ) |
| Employee compensation                                                                               |       | (992                            | )          | (26 | ) |
| Deferred income                                                                                     |       | (202                            | )          | (522 | ) |
| Warranty reserve                                                                                    |       | (81                             | )          | (64 | ) |
| Other current liabilities and accrued  expenses                                                     |       | (34                             | )          | (33 | ) |
| Net cash provided by (used in) operating  activities                                                |       | 704                             |       | (329 | ) |
|                                                                                                |       |                            |       |   |   |
| **Cash Flows From Investing Activities:**                                                           |       |                            |       |   |   |
| Purchase of property and equipment and  intangible assets                                           |       | (168                            | )          | (432 | ) |
| Net cash used in investing activities                                                               |       | (168                            | )          | (432 | ) |
|                                                                                                |       |                            |       |   |   |
| **Cash Flows From Financing Activities:**                                                           |       |                            |       |   |   |
| Proceeds from issuance of common stock under  employee stock purchase plan                          |       | 20                              |       | 33 |   |
| Proceeds from the exercise of stock options                                                         |       | —                          |       | 1,223 |   |
| Proceeds from the exercise of warrants                                                              |       | —                          |       | 258 |   |
| Tax benefit from stock options exercised                                                            |       | —                          |       | 236 |   |
| Net cash provided by financing activities                                                           |       | 20                              |       | 1,750 |   |
|                                                                                                |       |                            |       |   |   |
| **Net increase in cash and cash equivalents**                                                       |       | 556                             |       | 989 |   |
|                                                                                                |       |                            |       |   |   |
| **Cash and cash equivalents at beginning of  period**                                               |       | 6,908                           |       | 4,069 |   |
|                                                                                                |       |                            |       |   |   |
| **Cash and cash equivalents at end of period**                                                      | ** ** | **$**                           | **7,464**  | ** ** | **$** | **5,058** | ** ** |

 

**Supplemental disclosure of non-cash investingactivities:**

** **

During the nine months ended July 31, 2007, the Company decreasedintangible assets by $404,000 with an offsetting decrease to the deferred taxvaluation allowance of $404,000 for the usage of pre-emergence bankruptcy netoperating loss carry forwards.

 

See accompanying notes to consolidated financial statements.

 

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**ANGEION CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****             Basisof Presentation and Description of Business**

 

Angeion Corporation (the “Company”) through its Medical Graphics Corporationsubsidiary, designs and markets non-invasive cardiorespiratory diagnosticsystems that are sold under the MedGraphics and New Leaf brand and tradenames.  These cardiorespiratorydiagnostic systems have a wide range of applications in healthcare, wellnessand health and fitness.

 

The consolidated balance sheet as of July 31, 2008, theconsolidated statements of operations for the three and nine months ended July 31,2008 and 2007, and cash flows for the nine months ended July 31, 2008 and2007, and the related information presented in these notes have been preparedby management in accordance with U.S. generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X, without audit.  Accordingly, they do not include all of theinformation and notes required by U.S. generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation of results have been included. The consolidated balance sheet at October 31, 2007 was derived fromthe audited consolidated financial statements as of that date.  Operating results for the three and ninemonths ended July 31, 2008 are not necessarily indicative of the resultsthat may be expected for the year ending October 31, 2008.  For further information, refer to theconsolidated financial statements and notes thereto included in AngeionCorporation’s Annual Report on Form 10-K for the year ended October 31,2007.

 

Comprehensive income (loss) is a measure of all non-owner changes inshareholders’ equity and includes items such as net income, certain foreigncurrency translation items, minimum pension liability adjustments and changesin the value of available-for-sale securities. For the three and nine months ended July 31, 2008 and 2007,comprehensive income (loss) for Angeion Corporation was equivalent to netincome (loss) as reported.

 

Preparation of the consolidated financial statementsin conformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesmade in the consolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.  Estimates include accountsreceivable, product warranty and inventory reserves, and depreciable lives ofproperty, equipment and intangible assets.

 

**2.**             **Revenue Recognition**

 

In accordance with the SEC’sStaff Accounting Bulletin No. 104, “*Revenue Recognition*,”the Company recognizes revenue when persuasive evidence of an arrangementexists, transfer of title has occurred or services have been rendered, theselling price is fixed or determinable and collectability is reasonablyassured.  The Company’s products are soldfor cash or on credit terms requiring payment based on the shipment date.  Credit terms can vary between customers dueto many factors, but are generally 30-60 days. Revenue, net of discounts, is recognized upon shipment or delivery tocustomers in accordance with written sales terms.  Standard sales terms do not include customeracceptance conditions, future credits, rebates, price protection or generalrights of return.  The terms of sales toboth domestic customers and international distributors are identical.  In instances when a customer order specifiesfinal acceptance of the system, revenue is deferred until all customeracceptance criteria have been met. Estimated warranty obligations are recorded upon shipment.

 

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Service contract revenue is based on a statedcontractual rate and is deferred and recognized ratably over the serviceperiod, which is typically from one to four years.  In accordance with paragraph 4 of the EmergingIssues Task Force abstract 00-21, “*Revenue Arrangements withMultiple Deliverables*,” the Company applies Financial AccountingStandards Board (“FASB”) Technical BulletinNo. 90-1 to service contract revenue. Deferred incomeassociated with service contracts and supplies was $1,945,000 and $2,120,000 at July 31, 2008 and October 31,2007, respectively. Revenue from installation and training servicesprovided to customers is deferred until the service has been performed.  The amount of deferred installation andtraining revenue was $348,000 and $365,000 at July 31, 2008 and October 31,2007, respectively.

 

**When a saleinvolves multiple deliverables, such as equipment, installation services andtraining, the amount of the consideration from an arrangement is allocated toeach respective element based on the residual method and recognized as revenuewhen 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.**

** **

**The Company had onecustomer that accounted for 11.1% and 20.0% of revenues for the three and ninemonths ended July 31, 2007, respectively. No customer accounted for more than 10% of revenues for the three ornine months ended July 31, 2008.**

** **

***AdvancePayments from Customers***

 

The Company typically does not receive advancepayments from its customers in connection with the sale of its products.  The Company occasionally enters into anarrangement under which a customer agrees to purchase a large quantity ofproduct that is to be delivered over a period of time.  Depending on the size of these arrangements,the Company may negotiate an advance payment from these customers.  Advance payments from customers aggregating$87,000 and $97,000 as of July 31, 2008 and October 31, 2007,respectively, are included in deferred income on the consolidated balancesheets.  Revenue recognition for customerorders that include advance payments is consistent with the Company’s revenuerecognition policy described above.

 

**3.****             New Accounting Pronouncements**

 

In May 2008,the FASB issued FASB StaffPosition (FSP) Financial Accounting Standard (FAS) 142-3, *Determination of the Useful Life of Intangible Assets*, whichis effective for fiscal years beginning after December 15, 2008 and forinterim periods within those years.  FSPFAS 142-3 provides guidance on the renewal or extension assumptions used in thedetermination of the useful life of a recognized intangible asset.  The intent of FSP FAS 142-3 is to bettermatch the useful life of the recognized intangible asset to the period of theexpected cash flows used to measure its fair value.  The Company does not expect FSP FAS 142-3 tohave a material effect on its consolidated financial statements.

 

In May 2008, the FASB issued Statements of FinancialStandards No. 162 (SFAS 162), “The Hierarchy of Generally AcceptedAccounting Principles.” SFAS 162 is intended to improve financialreporting by identifying a consistent framework, or hierarchy, for selectingaccounting principles to be used in preparing financial statements that arepresented in conformity with U.S. generally accepted accounting principles(GAAP) for nongovernmental entities.

 

Prior to the issuance of SFAS162, GAAP hierarchy was defined in the American Institute of Certified PublicAccountants (AICPA) Statement on Auditing Standards No. 69 (SAS 69), “TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.” SAS 69 has been 

 

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criticized because it is directedto the auditor rather than the entity. SFAS 162 addresses these issues byestablishing that the GAAP hierarchy should be directed to entities because itis the entity (not its auditor) that is responsible for selecting accountingprinciples for financial statements that are presented in conformity with GAAP.

 

SFAS 162 is effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight BoardAuditing amendments to AU Section 411, “The Meaning of Present Fairlyin Conformity with Generally Accepted Accounting Principles.”  The Company does not expect SFAS 162 to havea material effect on its consolidated financial statements.

 

During May 2008, the FASBissued SFAS 163, “*Accounting for Financial Guarantee InsuranceContracts*.”  SFAS 163 providesenhanced guidance on the recognition and measurement to be used to account forpremium revenue and claim liabilities and related disclosures and is limited tofinancial guarantee insurance (and reinsurance) contracts, issued byenterprises included within the scope of FASB Statement No. 60, “*Accounting and Reporting by Insurance Enterprises*”.  SFAS 163 also requires that an insuranceenterprise recognize a claim liability prior to an event of default when there isevidence that credit deterioration has occurred in an insured financialobligation.  SFAS 163 is effective forfinancial statements issued for fiscal years and interim periods beginningafter December 15, 2008, with early application not permitted.  The Company does not expect SFAS 163 to havean impact on its consolidated financial statements.

 

In September 2006, the FASB issuedSFAS No. 157,*Fair ValueMeasurements* (“SFAS No. 157”), which is effective forfiscal years beginning after November 15, 2007 and for interim periodswithin those years.  This statementdefines fair value, establishes a framework for measuring fair value andexpands the related disclosure requirements. The Company is currently evaluating the impact of SFAS No. 157on its consolidated financial statements.

 

InFebruary 2008, the FASB issued FASB Staff Position (FSP) FinancialAccounting Standard (FAS) 157-1, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and Its RelatedInterpretive Accounting Pronouncements That Address Leasing Transactions*, and FSP FAS 157-2, *Effective Date of FASBStatement No. 157* . FSP FAS 157-1 removes leasing from thescope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays theeffective date of SFAS No. 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). See SFAS No. 157 discussion above.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007) *Business Combinations* (SFAS No. 141(R)).SFAS No. 141(R) retains the fundamental requirements of the originalpronouncement requiring that the purchase method be used for all businesscombinations. SFAS No. 141(R) defines the acquirer as the entity thatobtains control of one or more businesses in the business combination,establishes the acquisition date as the date that the acquirer achieves controland requires the acquirer to recognize the assets acquired, liabilities assumedand any noncontrolling interest at their fair values as of the acquisitiondate. SFAS No. 141(R) also requires that acquisition-related costs berecognized separately from the acquisition. SFAS No. 141(R) iseffective for fiscal years beginning on or after December 15, 2008. TheCompany is currently assessing the impact of SFAS No. 141(R) on itsconsolidated financial statements.

 

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In December 2007, the FASB issued Statement No. 160, *Noncontrolling Interests in Consolidated FinancialStatements*(SFAS No. 160).SFAS No. 160 clarifies that a noncontrolling interest in a subsidiaryshould be reported as equity in the consolidated financial statements.Consolidated net income should include the net income for both the parent andthe noncontrolling interest with disclosure of both amounts on the consolidatedstatement of income. The calculation of earnings per share will continue to bebased on income amounts attributable to the parent. SFAS No. 160 iseffective for fiscal years beginning on or after December 15, 2008. TheCompany currently has no noncontrolling interests in subsidiaries.

 

**4.****                                     ****Share-BasedCompensation and Stock Options**

 

Effective November 1, 2006,the Company adopted the provisions of FASB Statement No. 123 (revised2004), *Share-Based Payment* (“SFAS No. 123R”).  Under the fair value recognition provisionsof SFAS No. 123R, the Company measures stock-based compensation cost atthe grant date based on the fair value of the award and recognizes thecompensation expense over the requisite service period, which is generally thevesting period.  The Company elected themodified-prospective method of adopting SFAS No. 123R, under which priorperiods are not retroactively restated. The provisions of SFAS No. 123R apply to awards granted, modifiedor cancelled after the November 1, 2006 effective date.  There were no non-vested awards outstandingon the effective date for SFAS No. 123R. Total share-based compensation expense included in the Company’sstatements of operations for the three and nine months ended July 31, 2008was $130,000 and $347,000, respectively, compared to $3,000 and $10,000 for thethree and nine months ended July 31, 2007, respectively.

 

***Stock Options***

 

Under the AngeionCorporation 2002 Stock Option Plan (the “2002 Plan”), the Company had reserved800,000 shares of its common stock for issuance upon exercise of stockoptions.  As of July 31, 2008,options for 800,000 shares had been granted, 426,850 shares had been issuedupon exercise of options, 950 were forfeited and options to purchase 372,200shares remained outstanding.  Inconnection with the adoption of the 2007 Stock Incentive Plan described below,the 2002 Plan was amended to provide that no new options could be granted underthe 2002 Plan.

 

At a Special Meeting ofShareholders held on August 22, 2007, the shareholders approved theAngeion Corporation 2007 Stock Incentive Plan (the “2007 Plan”) and reserved250,000 shares of its common stock for issuance under the 2007 Plan.  At the 2008 Annual Meeting of Shareholdersheld on May 20, 2008, the shareholders approved an amendment to the 2007Plan that increased the authorized shares of common stock for issuance by300,000 to a total of 550,000 shares.  Asof July 31, 2008, stock options for 309,753 shares were outstanding and240,247 shares were available for future grant.

 

The 2007 Plan and 2002 Plan bothprovide that incentive stock options and nonqualified stock options to purchaseshares of common stock may be granted at prices determined by the CompensationCommittee, except that the purchase price of incentive stock options may not beless than the fair market value of the stock at date of grant.  Under the 2007 Plan, all options expire nolater than seven years from the grant date while under the 2002 Plan, alloptions expire no later than ten years from the grant date.  Options under both plans are subject tovarious vesting schedules.  In addition,the 2007 Plan allows the granting of restricted stock awards, stockappreciation rights and performance stock.

 

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| ** **                       | ** ** | **For the nine months ended** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **July 31, 2008**                       | ** ** | **July 31, 2007** | ** ** |
| ** **                       | ** ** | **Shares**                                        | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of year |       | 611,120                                           |       | $ | 6.12 |   | 624,187 |   | $ | 5.03 |   |
| Granted                          |       | 112,000                                           |       | 5.83 |   | 3,277 |   | 6.48 |   |
| Exercised                        |       | —                                            |       | — |   | (261,773 | ) | 4.81 |   |
| Expired or cancelled             |       | (41,167                                           | )          | 7.09 |   | — |   | — |   |
| Outstanding at end of period     |       | 681,953                                           |       | $ | 6.01 |   | 365,691 |   | $ | 5.20 |   |

 

The following table summarizes informationconcerning stock options outstanding as of July 31, 2008:

 
| **Exercise  Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Number  Subject to  Exercise** | ** ** |
|----------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|
| $                    | 2.00       |                    |       | 11,650                                              |       | 5.19                             |       | 11,650 |   |
| 2.53                 |       |                    | 97,000     |                                                | 7.13       |                             | 97,000     |   |
| 5.08                 |       |                    | 84,000     |                                                | 7.82       |                             | 84,000     |   |
| 5.66                 |       |                    | 90,000     |                                                | 6.80       |                             | —     |   |
| 6.23                 |       |                    | 84,500     |                                                | 5.19       |                             | 84,500     |   |
| 6.60                 |       |                    | 71,583     |                                                | 6.06       |                             | 23,331     |   |
| 7.08                 |       |                    | 10,000     |                                                | 6.67       |                             | —     |   |
| 7.79                 |       |                    | 86,800     |                                                | 5.19       |                             | 86,800     |   |
| 7.81                 |       |                    | 2,000      |                                                | 6.27       |                             | —     |   |
| 7.86                 |       |                    | 144,420    |                                                | 6.25       |                             | —     |   |
|                 |       |                    |       |                                                |       |                             |       |
| Total                |       | 681,953                 |       | 6.20                                                |       | 387,281                          |       |

 

The total intrinsic value ofoptions exercised during the three and nine months ended July 31, 2008 was$0.  The total intrinsic value of optionsoutstanding and exercisable at July 31, 2008 was $457,000 and $437,000,respectively, which was calculated using the closing stock price as of July 31,2008 less the exercise price of in-the-money options.  The Company issues new shares when stockoptions are exercised.  There was no cashreceived from the exercise of stock options or related tax benefits recognizedfor the three and nine month periods ended July 31, 2008.  Unrecognized compensation expense related tooutstanding stock option as of July 31, 2008 was $1,209,000 and isexpected to be recognized over a weighted average period of 2.30 years and willbe adjusted for any future changes in estimated forfeitures.

 

On August 28, 2008, the Boardof Directors authorized the issuance of 74,667 restricted shares of the Company’scommon stock.  The restricted shares willvest over a three-year period and are considered to be an increase inoutstanding shares as of the grant date. The Board also authorized the grant of 49,000 stock options under the2007 Plan that are exercisable over a three-year period and expire seven yearsfrom the grant date.

 

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The following table presents thestatements of operations classification of pre-tax share-based compensationexpense recognized for the three and nine months ended July 31, 2008:

 
| **(In thousands)**          | ** ** | **Three Months  Ended  July 31, 2008** | ** ** | **Nine Months  Ended  July 31, 2008** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| Cost of goods sold               |       | $                                                     | 7          |                                                 | $          | 25 |   |
| Selling and marketing            |       | 25                                                    |       | 80                                                   |       |
| General and administrative       |       | 92                                                    |       | 221                                                  |       |
| Research and development         |       | 6                                                     |       | 21                                                   |       |
| Share-based compensation expense |       | $                                                     | 130        |                                                 | $          | 347 |   |

 

***ValuationAssumptions***

 

The Company uses the Black-Scholesoption-pricing model (“Black-Scholes model”) to determine the fair value ofstock options as of the grant date.  Thefair value of stock options under the Black-Scholes model requires managementto make assumptions regarding projected employee stock option exercisebehaviors, risk-free interest rates, volatility of the Company’s stock priceand expected dividends.

 

The expense recognized for optionsgranted under the 2002 Plan and 2007 Plan are equal to the fair value of stockoptions as of the grant date.  Thefollowing table provides the weighted average fair value of options granted todirectors and employees and the related assumptions used in the Black-Scholesmodel for stock option grants made during third quarter 2008:

 
| ** **                                                       | ** ** | **Options  Granted  May 20, 2008** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------|------------|
| Weighted average fair value of options granted Assumptions used: |       | $                                            | 3.95       |   |
| Expected life (years) (a)                                        |       | 4.50                                         |       |
| Risk free interest rate (b)                                      |       | 3.02                                         | %          |
| Volatility (c)                                                   |       | 93.24                                        | %          |
| Dividend yield (d)                                               |       | 0.00                                         | %          |
|                                                                  |            |                                              |            |  |

 

----

(a)          *Expectedlife*: For employee grants, the expected term of options granted isdetermined using the “shortcut” method allowed by SAB 107.  Under this approach, the expected term ispresumed to be the mid-point between the vesting date and the end of thecontractual term.  For director grants,the Company’s estimate is based upon historical data, the contractual terms ofthe options granted and other factors.

 

(b)         *Risk-freeinterest rate*: The rate is based on the U.S. Treasury zero-couponyield curve on the grant date for a maturity similar to the expected life ofthe options.

 

(c)          *Volatility:* The expected volatility of the Company’s common stock is calculated byusing the historical daily volatility of the Company’s stock price calculatedover a period of time representative of the expected life of the options.

 

(d)         *Dividendyield*: The dividend yield rate is not considered in the model, as the Companyhas not established a dividend policy for the stock.

 

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***Employee Stock Purchase Plan***

 

The Angeion Corporation 2003Employee Stock Purchase Plan (“Stock Plan”) allows participating employees topurchase shares of the Company’s common stock at a discount through payrolldeductions.  The Stock Plan is availableto all employees subject to certain eligibility requirements.  Terms of the Stock Plan provide thatparticipating employees may purchase the Company’s common stock on a voluntaryafter tax basis.  Historically, employeescould purchase the Company’s common stock at a price that is no less than thelower of 85% of the fair market value of one share of common stock at thebeginning or end of each stock purchase period or phase.  The Company increased the price at whichcommon stock may be purchased to 95% of the market value effective January 1,2007.  The Stock Plan is carried out insix-month phases, with phases beginning on January 1 and July 1 ofeach calendar year.  For the phase thatended on July 31, 2008, employees purchased 1,987 shares at a price of$4.95 per share.  As of July 31,2008, the Company has withheld approximately $1,953 from employeesparticipating in the phase that began on July 1, 2008.  At July 31, 2008, approximately 67,098shares of common stock were available for future purchase under the Stock Plan.

 

**5.****                                      Inventories**

 

**Inventories consisted of the following at July 31, 2008 and October 31,2007:**

 
| **(In thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Raw materials           |       | $        | 2,193      |     | $          | 2,380 |   |
| Work-in-Process         |       | 421      |       | 177      |       |
| Finished goods          |       | 3,160    |       | 2,753    |       |
|                    |       | $        | 5,774      |     | $          | 5,310 |   |

 

In the current period, the Company changedits estimates for the reserve for obsolescence related to inventory used insales and customer demonstrations. The Company changed its estimate ofinventory obsolescence due to changing economic conditions and aging related tothese inventory items.  In addition, theCompany wrote off $149,000 of obsolete inventory related to computers andperipherals.  The following tableillustrates the effect on net income and earnings per share for the three andnine month periods:

 
| **(In thousands, except per share data)**               | ** ** | **Net Income  Effect** | ** ** | **EPS  Effect** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|
| Write off of obsolete computers and  peripherals                                 |       | $                           | 149        |            | $          | 0.04 |   |
| Increase in obsolescence reserve for sales  and customer demonstration inventory |       | 184                         |       | 0.04            |       |
| Total Effect                                                                     |       | $                           | 333        |            | $          | 0.08 |   |

 

**6.****                                      IntangibleAssets and Goodwill**

 

**Intangible assets consisted of the following at July 31, 2008 and October 31,2007:**

 
| **(In thousands)**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Intangible assets:           |       |     |       |     |       |
| Developed technology         |       | $        | 6,722      |     | $          | 6,663 |   |
| Amortization                 |       | (4,493   | )          | (3,947   | )          |
| Trademarks (non-amortizable) |       | 53       |       | —   |       |
|                         |       | $        | 2,282      |     | $          | 2,716 |   |

 

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The intangible assets are being amortizedusing the straight-line method over the estimated useful lives of the assetsthat range from three to ten years. Amortization expense was $182,000 and $546,000  for the three and nine–month periods ended July 31,2008, respectively, compared to $172,000 and $557,000 for the comparableperiods in 2007.  If the Companycontinues to utilize pre-emergence bankruptcy net operating loss carry forwards,the Company will further reduce the carrying cost of its developed technologyuntil the net carrying cost of these assets is zero.  To the extent that utilization of these NOLsreduces the cost of developed technology, future amortization expense will bereduced.

 

Estimated amortization expense for each ofthe succeeding fiscal years based on the intangible assets as of July 31,2008, which does not reflect the possible reduction discussed above, is asfollows:

 
| **(In thousands)**                   | ** ** | **Amortization** | ** ** |
|-------------------------------------------|------------|------------------|------------|
| Three months ending October 31, 2008 |       | $                | 182        |   |
| 2009                                      |       | 727              |       |
| 2010                                      |       | 421              |       |
| 2011                                      |       | 420              |       |
| 2012                                      |       | 420              |       |
|                                      |       | $                | 2,170      |   |

 

The above table does not includeestimated amortization expense for patents, included in developed technology,that are not yet placed in service.

 

The Company did not realize anypre-bankruptcy tax benefits for the nine months ended July 31, 2008.   Therefore, there were no non-amortizationchanges in the cost of intangible assets from October 31, 2007.

 

**7.****                                      WarrantyReserve**

 

Sales of the Company’s equipment are subjectto a warranty 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 to normalwear, 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 provisions and claims for the ninemonths ended July 31, 2008 and 2007 were as follows:

 
| **(In thousands)**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period |       | $        | 253        |     | $          | 335 |   |
| Warranty provisions          |       | 205      |       | 414      |       |
| Warranty claims              |       | (286     | )          | (478     | )          |
| Balance, end of period       |       | $        | 172        |     | $          | 271 |   |

 

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**8.****                                     ****Earnings (Loss) per Share**

 

**Basic earnings(loss) per share is computed by dividing net earnings (loss) by the weightedaverage shares outstanding during the reporting period.  Diluted earnings (loss) per share is computedsimilarly to basic earnings (loss) per share except that in computing incomeper share the weighted average shares outstanding are increased to includeadditional shares from the assumed exercise of stock options or warrants, ifdilutive.  The number of additionalshares is calculated by assuming that outstanding stock options or warrantswere exercised and that the proceeds from the exercise were used to acquireshares of common stock at the average market price during the reporting period.**

** **

**The Company had142,689 warrants outstanding at July 31, 2007 to purchase shares of itscommon stock.  There were no warrantsthat remained outstanding at July 31, 2008 as all unexercised warrantsexpired by their terms on October 31, 2007.  The Company also had options outstanding at July 31,2008 and 2007 to purchase 681,953 and 365,691 shares, respectively, of itscommon stock.**

** **

Shares used in the earnings(loss) per share computations are as follows:

 
| ** **                                            | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                        | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average common shares outstanding  - basic   |       | 4,090                                           |       | 4,077                                          |       | 4,090 |   | 3,953 |   |
| Dilutive effect of stock options                      |       | 60                                              |       | 185                                            |       | — |   | 310 |   |
| Weighted average common shares outstanding  - diluted |       | 4,150                                           |       | 4,262                                          |       | 4,090 |   | 4,263 |   |

 

**The dilutiveeffect of stock options in the above table excludes all options for which theexercise price was higher than the average market price for the period.  For the three-month period ending on July 31,2008, a total of 399,303 stock options were excluded from the calculation. **As a result of the net loss position for thenine-month period ended on July 31, 2008, all outstanding stock optionswere considered antidilutive and, therefore, were excluded from dilutedearnings (loss) per share.  All stock optionsoutstanding at July 31, 2007 were considered dilutive and, therefore, wereincluded in the above calculation.

** **

**9.**             Income Taxes

** **

The Company has recorded a provision for taxesfrom operations of $21,000 and $16,000 for the three months ended July 31,2008 and 2007, respectively.  The Companyhas not recognized the tax benefit generated by the year-to-date loss in lightof the uncertainty surrounding the Company’s level of profitability for thebalance of fiscal 2008 given, among other things, the lower expectations ofclinical research revenues and the timing and success of new productintroductions.  This assessment was madein a manner consistent with FASB Statement No. 109, *Accountingfor Income Taxes*.  For thequarter ended July 31, 2007, the provision for taxes was calculated andpresented in the statement of earnings as if the Company’s earnings were fullytaxable.  The amount of income taxes payable, if any,is determined after utilizing the Company’s NOLs, including its pre-emergencebankruptcy NOLs.  Under American Institute of Certified PublicAccountants Statement of Position 90-7, *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code* (“SOP90-7”), the tax benefit for the utilization of these pre-emergence bankruptcy NOL carry forwards must berecognized as a reduction of intangibles rather than a reduction of theprovision for taxes in the statement of earnings.

 

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The Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes-an interpretation of FASBStatement 109* (“FIN 48”) on November 1, 2007.  There was no additional reserve for uncertaintax positions recognized as a result of adoption of FIN 48.  During the three and nine months ended July 31,2008, the Company recognized $0 and $27,000, respectively, of income taxexpense related to the increase in reserves for uncertain tax positions.  The total reserve as of July 31, 2008was $27,000.  The entire amount of thereserve is related to uncertainties regarding income tax nexus with variousstates in which the Company operates. Included in the reserve is $8,000 of estimated interest andpenalties.  The total amount of thereserve has increased the Company’s effective tax rate, and would thereforedecrease the effective tax rate if removed.

 

Estimated interest and penaltiesrelated to potential underpayment of income taxes are classified as a componentof tax expense in the consolidated statement of operations.  The Company does not anticipate that thetotal reserve for uncertain tax positions will significantly change due to thesettlement of audits and the expiration of statutes of limitations within thenext twelve months.

 

The Company files a consolidatedfederal income tax return in the United States Federal jurisdiction and filesvarious combined and separate tax returns in several state and localjurisdictions. With limited exceptions, the Company is no longer subject toU.S. Federal, state and local tax examinations by tax authorities for fiscalyears ending prior to November 1, 2004. There is no statute of limitations for assessments related tojurisdictions where the Company may have nexus but has chosen not to file anincome tax return.

 

The Company had a federal net operating loss carry forward at October 31,2007 of approximately $20.9 million. This amount is the remaining utilizable carry forward following theapplication of a limit due to an ownership change under Internal Revenue Code Section 382that occurred during the fourth quarter of fiscal year 2006.  This carry forward is available to offset aportion of taxes payable in future years. If not used, this carry forward will expire in the years 2009 through2025.  Approximately $7.6 million of thiscarry forward will expire, if unused, during the next five years ending October 31,2012.  The Company also has $115,000 ofalternative minimum tax credit carry forwards that do not have expirationdates.  Even though the Company hassubstantial federal net operating loss carry forwards, any incomemay still be subject to U.S. and State alternative minimum taxes.

 

The Company has recorded a full valuation allowance against its netdeferred tax asset based on its belief that it was more likely than not thatthe asset would not be realized in the future. Although this determination was made in a prior fiscal year, it is stillapplicable as of July 31, 2008, and the Company will continue to assessthe need for a full valuation allowance in future quarters.  Under SOP 90-7, a substantial portion of anyfuture reversal of the valuation allowance will first reduce any intangibleassets and then be credited directly to additional paid-in capital.  Approximately $2.3 million of the NOLscovered by the valuation allowance is related to post-bankruptcy NOLs.  After the exhaustion of pre- emergencebankruptcy NOLs, this amount would be available to reduce the provision fortaxes in the statement of operations.  Thereafter, $778,000 related to excess stock option tax deductions wouldbe recognized as additional paid-in capital when realized in the Company’sincome tax return.

 

**10.          Litigation**

 

 The Company isalso subject to certain claims and lawsuits that have been filed in theordinary course of business.  From timeto time, the Company initiates lawsuits against others to enforce patents or toseek collection of debts in the ordinary course of business.  It is management’s opinion that thesettlement of all litigation arising in the ordinary course of business wouldnot have a material effect on the financial position, results of operations orliquidity of the Company.

 

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**11.          SeveranceCosts**

 

**On January 31, 2008, the Company implemented aReduction-In-Force that terminated the employment of eight employees to allowbetter management of operating expenses. On the same date, the Company’s then Chief Financial Officerretired.  As a result of these actions,the Company accrued a total of $194,000 in severance costs.**

** **

**On April 30, 2008, the Company implemented asecond Reduction-In-Force that terminated the employment of nineemployees.  In the second quarter 2008,the Company also terminated a relationship with a foreign distributor.  As a result of these actions, the Companyaccrued a total of $172,000 in severance costs.**

** **

**No severance costs were incurred in the thirdquarter.  For the nine months ended July 31,2008, total severance costs of $366,000 were incurred.**

** **

**The following table reconciles three months ended July 31,2008 activity for accrued severance expenses:**

** **
| **(In thousands)**               | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Balance, beginning of period     |       | $          | 254        |   |
| Severance payments               |       | (197       | )          |
| Severance incurred during period |       | 0          |       |
| Balance, end of period           |       | $          | 57         |   |

** **

**The following table reconciles nine months ended July 31,2008 activity for accrued severance expenses:**

** **
| **(In thousands)**               | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Balance, beginning of year       |       | $          | 0          |   |
| Severance payments               |       | (309       | )          |
| Severance incurred during period |       | 366        |       |
| Balance, end of period           |       | $          | 57         |   |

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

### **Overview**

### ** **

The Company, through its Medical GraphicsCorporation subsidiary, designs and markets non-invasive cardiorespiratorydiagnostic systems that are sold under the MedGraphics and New Leaf brand andtrade names.  These cardiorespiratorydiagnostic systems have a wide range of applications in healthcare, wellnessand health and fitness.  Revenues consistof equipment and supply sales as well as service revenues.  Equipment and supply sales reflect sales ofnon-invasive cardiorespiratory diagnostic equipment and aftermarket sales ofperipherals and supplies.  Servicerevenues consist of revenues from extended service contracts, non-warrantyservice visits and additional training.

 

The Company launched the next generation Platinum Elitecardiorespiratory diagnostic system in its hospital and physician officeproduct line during the latter half of the second quarter of fiscal 2008.  This new system, the first significantintroduction since 1998, has several new features and technologicaladvancements, and will enable Angeion to achieve new manufacturing synergies.

 

Total revenue for the third quarter of 2008 was $7.6 million, adecrease of 14.3% from $8.9 million in 2007. Operating expenses for the third quarter of 2008 were $3.7 million, adecrease of 17.6% from the same period in 2007. Net profit for the three months ended July 31, 2008 was $259,000,or $0.06 per share, compared to net income of $4,000, or $0.00 per dilutedshare, for the same period in 2007.

 

Total revenue for the nine months ended July 31, 2008 was $22.4million, a decrease of 23.9% from $29.4 million in 2007.  Operating expenses for the period were $12.4million, a decrease of 6.4% from the same period in 2007.  Net loss for the nine months ended July 31,2008 was $789,000, or $0.19 per share, compared to net income of $946,000, or$0.22 per diluted share, for the same period in 2007.

 

**Resultsof Operations**

 

The following table contains selected informationfrom the Company’s consolidated statements of earnings, expressed as apercentage of revenues:

 
| ** **                  | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2008**                              | ** ** | **2007**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                    |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
| Cost of sales               |       | 48.4                                  |       | 50.1                                 |       | 48.6 |   | 50.0 |   |
| Gross margin                |       | 51.6                                  |       | 49.9                                 |       | 51.4 |   | 50.0 |   |
| Operating expenses:         |       |                                  |       |                                 |       |   |   |   |   |
| Selling and marketing       |       | 26.0                                  |       | 29.7                                 |       | 29.7 |   | 26.0 |   |
| General and administrative  |       | 12.5                                  |       | 10.6                                 |       | 14.8 |   | 10.1 |   |
| Research and development    |       | 7.4                                   |       | 8.0                                  |       | 8.4 |   | 7.0 |   |
| Amortization of intangibles |       | 2.4                                   |       | 1.9                                  |       | 2.4 |   | 1.9 |   |
|                        |       | 48.3                                  |       | 50.2                                 |       | 55.3 |   | 45.0 |   |
| Operating income (loss)     |       | 3.3                                   |       | (0.3                                 | )          | (3.9 | ) | 5.0 |   |
| Interest income             |       | 0.4                                   |       | 0.5                                  |       | 0.6 |   | 0.4 |   |
| Income (loss) before taxes  |       | 3.7                                   |       | 0.2                                  |       | (3.3 | ) | 5.4 |   |
| Provision for taxes         |       | 0.3                                   |       | 0.2                                  |       | 0.2 |   | 2.2 |   |
| Net income (loss)           |       | 3.4                                   | %          | 0.0                                  | %          | (3.5 | )% | 3.2 | % |

 

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The following paragraphs discuss the Company’sperformance for the three and nine month periods ending July 31, 2008 and2007.

 

**Revenue**

 

**Total revenue for the three and nine monthsended July 31, 2008, decreased by 14.3% and 23.9%, respectively, comparedto the same period in 2007.  The decreasein revenue of $1.3 million for the three month period ended July 31, 2008was caused in part by a $607,000 decrease in revenues from clinical researchcustomers due to the early conclusion of our large clinical research customer’strials as well as a general softening of orders in the Company’s domesticcapital equipment business.  Sales to thelarge clinical research customer accounted for only 5.0% of revenue in thethree months ending July 31, 2008 compared to 11.1% of revenue for thesame period in 2007.**

** **

**The decrease in revenue of $7.0 million forthe nine-month period ended July 31, 2008 was caused in part by a $4.8 milliondecrease in revenues due to the early conclusion of our large clinical researchcustomer’s trials.  For the nine monthsending July 31, 2008, sales to this customer accounted for 4.8% of revenuecompared to 20.0% of revenue for the same period in 2007.**

** **

Excluding sales to this customer, revenue forthe three and nine months ended July 31, 2008 decreased by 8.4% and 9.4%,respectively, compared to the same period in 2007.  The decrease in revenue, exclusive of theclinical research project, is attributable to the delay in the launch of thenew Platinum Elite cardiorespiratory product until the latter half of the 2008second quarter.

 

The Company continues to actively pursueperspective accounts in the clinical research field.  In the third quarter, the Company signed anew multi-year program with a pharmaceutical customer.

 

**Gross Margin**

 

**Gross margin percentage for the three andnine-month period ended July 31, 2008 increased to 51.6% and 51.4% ofrevenue, respectively, compared to 49.9% and 50.0%, respectively, for the sameperiod in 2007.  Gross margin percentagefor the three and nine month periods increased slightly as a result of costreductions implemented in the first and second quarters of 2008, higher marginservice revenues as an increased percentage of total revenue and less productsold to our large clinical research customer, which carried a lower productmargin.**

** **

**Selling and Marketing**

 

Selling and marketing expenses decreased to$2.0 million and $6.7 million, respectively, for the three and nine monthperiods ended July 31, 2008 from $2.6 million and $7.6 million for thesame periods in 2007.

 

The $657,000, or 25.0%, decrease for thethree month period ended July 31, 2008 is primarily due to a drop inpayroll, benefit and travel expenses.  Inthe first half of 2008, the Company twice implemented a Reduction-In-Force(RIF) that terminated the employment of a total of 17 employees, mostly insales and marketing, to allow better management of operating expenses.  Savings related to the RIF were $226,000 forthe third quarter with no related severance charges recorded.  In addition, travel and customer supportexpenses decreased by $131,000 and commissions decreased by $140,000 as aresult of the challenging sales environment.

 

The $985,000, or 12.9%, decrease for the ninemonth period is primarily due to a drop in payroll, benefit and travelexpenses.  In addition to the RIF savingsof $359,000 for the period, travel and 

 

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customer support expenses also decreased by$266,000 and, as a result of lower than expected sales, commissions dropped$361,000 for the nine months ended July 31, 2008 compared to the sameperiod in 2007.  These expense savingswere partially offset by additional stock-based compensation of $80,000incurred in 2008 compared to an immaterial expense in 2007.  In addition, severance expense for marketingpersonnel incurred during fiscal 2008 totaled $180,000.

 

**General and Administrative**

 

**For the three months ended July 31,2008, general and administrative expenses increased by $8,000, or 0.7%,compared to the same period in 2007.  Forthe nine months ended July 31, 2008, general and administrative expensesincreased by $328,000, or 11.0%, compared to the same period in 2007.**

** **

For the three months ended July 31,2008, non-cashstock-based compensation expense of $92,000 was incurred versus an immaterialexpense for the same period in 2007.  Thiswas partially offset by savings in personnel costs of $78,000.

 

For the nine months ended July 31, 2008,non-cashstock-based compensation expense of $221,000 was incurred versus an immaterialexpense for the same period in 2007. Personnel and recruiting expenses increased by $43,000 versus 2007.  In addition, directors’ fees as well ashigher depreciation expense from purchases of information technology equipmentcaused an increase of $84,000 in general and administrative costs compared tothe prior year.

 

**Research and Development**

 

**Research and development expenses for thethree and nine months ended July 31, 2008 were $565,000 and $1.9 million,respectively, compared to $707,000 and $2.1 million, respectively, for the sameperiods in 2007.**

** **

**Personnel, travel and consulting costsdecreased $126,000 and $183,000, respectively, for the three and nine monthperiods ended July 31, 2008.  Inaddition, for the nine month period, project expenses associated with newproducts decreased by $57,000, or 15.3%, compared to the same period in 2007due to early completion of certain new project testing.**

** **

**Amortization of Intangibles**

 

Amortization of developed technology was$182,000 and $546,000, respectively, for the three and nine months ended July 31,2008 compared to $172,000 and $557,000, respectively, for the same period in2007.  For the nine month period, thedecrease is attributable to reductions in the valuation of developed technologyas the Company utilized its pre-emergence bankruptcy net operating loss (“NOL”)carry forwards in 2007, which lowered the 2008 carrying values.

 

**Interest Income**

 

Interestincome for the three months ended July 31, 2008 decreased $16,000 from $48,000 to $32,000versus 2007 as a drop in market interest rates during the third quarter morethan offset higher cash balances.

 

For the nine months ended July 31,2008, interest income increased $6,000 to $137,000 compared to the same periodin 2007 due to higher cash balances held during the first three quarters of2008.

 

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**Provision for Income Taxes**

 

Under Generally Accepted Accounting Principles, theCompany is required to present the provision for taxes as if it were fullytaxable in accordance with SOP 90-7. With respect to the actual payment of taxes, however, the Company hasutilized its pre-emergence bankruptcy NOLs in the calculation of its incometaxes payable but is still required to pay U.S. and State alternative minimumtaxes (“AMT”) in certain jurisdictions, even though it has substantial federaland state NOL carry forwards.  During thequarter ended July 31, 2008, the Company did not use any tax benefitsrelated to pre-emergence bankruptcy NOLs. During 2007, the Company used tax benefits of $404,000 related topre-emergence bankruptcy NOLs.  Thesebenefits have been recorded as a reduction of intangible assets.    See note 9 to the consolidated financialstatements, “Income Taxes,” in this Form 10-Q for additional discussion ofthe accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

 

**Liquidityand Capital Resources**

 

The Company has financed its liquidity needs overthe last several years through revenue generated by the operations of itswholly owned subsidiary, Medical Graphics Corporation.

 

The Company had cash and cash equivalents of $7.5million and working capital of $14.5 million as of July 31, 2008.  During the first three quarters of fiscal2008, the Company reported a net loss of $789,000; however, cash flow fromoperating activities improved by $1.0 million, primarily due to the collectionsof accounts receivable for $2.4 million on the large sales volumes thatoccurred in the fourth quarter of fiscal 2007. In addition, the add-back of non-cash expenses totaling $1.2 million fordepreciation, amortization and stock-based compensation improved the Company’scash flow.

 

Partially offsetting these cash inflows were anincrease in inventory levels of $797,000, a decrease in accounts payablebalances of $441,000 and a decrease in employee compensation payables of$992,000.  Inventory levels have steadilyincreased as the Company prepares for new product launches during fiscal2008.  Employee compensation accrualsdecreased due to a lower bonus accrual for 2008 year to date performancecompared to 2007 and because employee bonuses are paid out during the firstquarter of the fiscal year.

 

For the nine months ended July 31, 2008, theCompany used $168,000 in cash for the purchase of property, equipment andintangible assets.  The Company has nomaterial commitments for capital expenditures for the remainder of fiscal year2008.

 

The Company believes that its liquidity and capitalresource needs for the next twelve months will be met through its current cashand cash equivalents as well as cash flows resulting from operations.  The Company has no debt.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

None.

 

**Item4.  Controls and Procedures.**

 

*(a) Evaluation of Disclosure Controlsand Procedures*

 

Management, with the participation of the Company’s chief executiveofficer, Rodney A. Young, and chief financial officer, William J. Kullback, hasevaluated the effectiveness of the design and operation of the disclosurecontrols and procedures, as defined in Rules 13a-15(e) under theSecurities 

 

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Exchange Act of 1934, as of the end of the period covered by thisreport.  Management has concluded thatthe Company’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in the reports that the Company filesunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC and that thedisclosure controls are also effective to ensure that information required tobe disclosed in the Company’s Exchange Act reports is accumulated andcommunicated to management, including the chief executive officer and principalaccounting officer, to allow timely decisions regarding required disclosure.

 

(b) Changes in InternalControls.

 

There have been no significant changes in internal control overfinancial reporting that occurred during the third fiscal quarter of 2008 thathave materially affected, or are reasonably likely to materially affect, theregistrant’s internal control over financial reporting.

 

**Item4T.  Controls and Procedures.**

 

None.

 

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**PART II – OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

** **

**The Company is subject to certain claims andlawsuits that have been filed in the ordinary course of business.  From time to time, the Company brings suitagainst others to enforce patent rights or to collect debts in the ordinarycourse of business.  Management believesthat the settlement of all litigation would not have a material effect on theresults of operations or liquidity of the Company.**

** **

**Item 1A. Risk Factors**

** **

**The most significant risk factors applicableto the Company are described in Part I, Item 1A “Risk Factors” of ourAnnual Report on Form 10-K for the year ended October 31, 2007.  There have been no material changes from therisk factors previously disclosed in our Annual Report on Form 10-K.**

** **

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds.**

** **

**None.**

** **

**Item 3.  Defaults Upon SeniorSecurities.**

** **

**None.**

** **

**Item 4.  Submission of Matters toa Vote of Security Holders.**

** **

**The Company reported the results of its 2008Annual Meeting of Shareholders in its Form 10-Q for the quarter ended April 30,2008.**

** **

**Item 5.  Other Information.**

** **

**None.**

** **

**Item6.  Exhibits.**

 

31.           Certifications pursuantto Rules 13a-14 and 15d-14 of the Exchange Act.

 

32.           Certifications pursuantto 18 U.S.C. § 1350.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                    |   | ANGEION CORPORATION                   |
|-------------------------|--------|---------------------------------------|
|                    |   | (Registrant)                          |
|                    |   |                                  |
|                    |   |                                  |
| September 15, 2008 |   | By:                                   | /s/ Rodney A. Young |
|                    |   | Rodney A. Young                       |
|                    |   | President and Chief Executive Officer |
|                    |   |                                  |
|                    |   |                                  |
| September 15, 2008 |   | By:                                   | /s/ William J. Kullback |
|                    |   | William J. Kullback                   |
|                    |   | Chief Financial Officer               |

 

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