**UNITED STATES**

**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 July 31, 2005**

** **

**OR**

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

 

**For thetransition period from                    to                   .**

 

## **Commissionfile number 001-13543**

## ** **

## **AngeionCorporation**

(Exact name of small businessissuer 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 registrantfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Exchange Act of 1934 after distribution of securities under aplan confirmed by a court:
| Yes | ý |   | No | o |   |
|-----|--------|--------|----|---|--------|

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepast 12 months (or for such shorter period that the issuer was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.
| Yes | ý |   | No | o |   |
|-----|--------|--------|----|---|--------|

 

The Company had 3,609,325 shares of common stock, $0.10 par value,outstanding as of September 9, 2005.

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.
| Yes | o |   | No | ý |   |
|-----|---|--------|----|--------|--------|

 

 

----

 

**PART I - FINANCIAL INFORMATION**

**Item1.  Financial Statements.**

 

**ANGEION CORPORATION ANDSUBSIDIARIES**

 

**Consolidated Balance Sheets**

**July 31, 2005 and October 31,2004**

(unaudited, in thousands except share and per sharedata)

 
| ** **                                                                                                                                   | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                   |       |                    |       |                       |       |
| **Current assets:**                                                                                                                          |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                                    |       | $                       | 904        |                       | $          | 2,390 |   |
| Cash restricted for discontinued operations                                                                                                  |       | 400                     |       | —                     |       |
| Accounts receivable, net of allowance for  doubtful accounts of $309 and $376, respectively                                                  |       | 3,977                   |       | 4,157                      |       |
| Inventories                                                                                                                                  |       | 3,449                   |       | 2,947                      |       |
| Prepaid expenses and other current assets                                                                                                    |       | 181                     |       | 294                        |       |
| Current assets of discontinued operations                                                                                                    |       | 700                     |       | 700                        |       |
| Total current assets                                                                                                                         |       | 9,611                   |       | 10,488                     |       |
|                                                                                                                                         |       |                    |       |                       |       |
| Property and equipment, net of accumulated depreciation  of $1,494 and $1,183, respectively                                                  |       | 1,111                   |       | 1,233                      |       |
| Intangible assets, net                                                                                                                       |       | 5,700                   |       | 6,309                      |       |
| ** **                                                                                                                                   | ** ** | **$**                   | **16,422** | ** **                 | **$**      | **18,030** |   |
|                                                                                                                                         |       |                    |       |                       |       |
| **Liabilities  and Shareholders’ Equity**                                                                                               |       |                    |       |                       |       |
| **Current liabilities:**                                                                                                                     |       |                    |       |                       |       |
| Accounts payable                                                                                                                             |       | $                       | 1,097      |                       | $          | 1,526 |   |
| Employee compensation                                                                                                                        |       | 1,248                   |       | 932                        |       |
| Deferred income                                                                                                                              |       | 1,178                   |       | 1,099                      |       |
| Warranty reserve                                                                                                                             |       | 155                     |       | 155                        |       |
| Other current liabilities and accrued  expenses                                                                                              |       | 467                     |       | 394                        |       |
| Current liabilities of discontinued  operations                                                                                              |       | 623                     |       | 1,092                      |       |
| Total current liabilities                                                                                                                    |       | 4,768                   |       | 5,198                      |       |
|                                                                                                                                         |       |                    |       |                       |       |
| **Shareholders’ equity:**                                                                                                               |       |                    |       |                       |       |
| Common stock, $0.10 par value, authorized  25,000,000 shares, issued and outstanding, 3,609,325 shares in 2005 and  3,601,517 shares in 2004 |       | 361                     |       | 360                        |       |
| Additional paid-in capital                                                                                                                   |       | 17,646                  |       | 17,556                     |       |
| Deferred compensation                                                                                                                        |       | (52                     | )          | —                     |       |
| Accumulated deficit                                                                                                                          |       | (6,301                  | )          | (5,084                     | )          |
| Total shareholders’ equity                                                                                                              |       | 11,654                  |       | 12,832                     |       |
| ** **                                                                                                                                   | ** ** | **$**                   | **16,422** | ** **                 | **$**      | **18,030** |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**ANGEION CORPORATION ANDSUBSIDIARIES**

** **

**Consolidated Statements ofOperations**

(unaudited, in thousands except per share amounts)

 
| ** **                                                          | ** ** | **Three Months Ended  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                        | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment and supply sales                                          |       | $                                     | 5,363      |                                 | $          | 4,389 |   | $ | 15,015 |   | $ | 12,345 |   |
| Service revenue                                                     |       | 695                                   |       | 776                                  |       | 2,105 |   | 2,331 |   |
|                                                                |       | 6,058                                 |       | 5,165                                |       | 17,120 |   | 14,676 |   |
| **Cost of goods sold**                                              |       |                                  |       |                                 |       |   |   |   |   |
| Cost of equipment and supplies                                      |       | 2,968                                 |       | 2,753                                |       | 8,482 |   | 7,643 |   |
| Cost of service revenue                                             |       | 89                                    |       | 118                                  |       | 316 |   | 378 |   |
|                                                                |       | 3,057                                 |       | 2,871                                |       | 8,798 |   | 8,021 |   |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Gross margin**                                                    |       | 3,001                                 |       | 2,294                                |       | 8,322 |   | 6,655 |   |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Operating expenses:**                                             |       |                                  |       |                                 |       |   |   |   |   |
| Selling and marketing                                               |       | 1,744                                 |       | 1,543                                |       | 5,309 |   | 4,612 |   |
| General and administrative                                          |       | 659                                   |       | 586                                  |       | 1,937 |   | 1,829 |   |
| Research and development                                            |       | 482                                   |       | 420                                  |       | 1,519 |   | 1,260 |   |
| Amortization of intangibles                                         |       | 203                                   |       | 237                                  |       | 609 |   | 713 |   |
|                                                                |       | 3,088                                 |       | 2,786                                |       | 9,374 |   | 8,414 |   |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Operating loss**                                                  |       | (87                                   | )          | (492                                 | )          | (1,052 | ) | (1,759 | ) |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Interest income                                                     |       | 10                                    |       | 4                                    |       | 26 |   | 12 |   |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Loss before income taxes**                                        |       | (77                                   | )          | (488                                 | )          | (1,026 | ) | (1,747 | ) |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Income tax benefit                                                  |       | —                                |       | —                               |       | — |   | — |   |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Loss from continuing operations**                                 |       | (77                                   | )          | (488                                 | )          | (1,026 | ) | (1,747 | ) |
| **Loss from discontinued operations, net of  $0 taxes**             |       | (191                                  | )          | —                               |       | (191 | ) | (350 | ) |
| **Net loss**                                                        |       | $                                     | (268       | )                                    | $          | (488 | ) | $ | (1,217 | ) | $ | (2,097 | ) |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Loss per share - basic and diluted**                              |       |                                  |       |                                 |       |   |   |   |   |
| Continuing operations                                               |       | $                                     | (0.02      | )                                    | $          | (0.14 | ) | $ | (0.29 | ) | $ | (0.48 | ) |
| Discontinued operations                                             |       | (0.05                                 | )          | —                               |       | (0.05 | ) | (0.10 | ) |
| Net loss                                                            |       | $                                     | (0.07      | )                                    | $          | (0.14 | ) | $ | (0.34 | ) | $ | (0.58 | ) |
|                                                                |       |                                  |       |                                 |       |   |   |   |   |
| **Weighted average common shares outstanding -  basic and diluted** |       | 3,607                                 |       | 3,599                                |       | 3,605 |   | 3,597 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                   | ** ** | **Nine Months Ended  July 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| **Cash Flows From Operating Activities:**                                    |       |                                 |       |   |   |
| Net loss                                                                     |       | $                                    | (1,217     | ) | $ | (2,097 | ) |
| Loss from discontinued operations                                            |       | 191                                  |       | 350 |   |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                |       | 919                                  |       | 1,154 |   |
| Stock based compensation                                                     |       | 25                                   |       | — |   |
| Changes in operating assets and  liabilities:                                |       |                                 |       |   |   |
| Accounts receivable                                                          |       | 180                                  |       | (33 | ) |
| Inventories                                                                  |       | (502                                 | )          | 47 |   |
| Prepaid expenses and other current assets                                    |       | 113                                  |       | 25 |   |
| Accounts payable                                                             |       | (429                                 | )          | (197 | ) |
| Employee compensation                                                        |       | 316                                  |       | (26 | ) |
| Deferred income                                                              |       | 79                                   |       | 86 |   |
| Warranty reserve                                                             |       | —                               |       | (3 | ) |
| Other current liabilities and accrued  expenses                              |       | 73                                   |       | 35 |   |
| Net cash used in continuing operations                                       |       | (252                                 | )          | (659 | ) |
| Cash restricted for discontinued operations                                  |       | (400                                 | )          | — |   |
| Net cash used in discontinued operations                                     |       | (660                                 | )          | (102 | ) |
| Net cash used in operating activities                                        |       | (1,312                               | )          | (761 | ) |
|                                                                         |       |                                 |       |   |   |
| **Cash Flows From Investing Activities:**                                    |       |                                 |       |   |   |
| Purchase of property and equipment                                           |       | (188                                 | )          | (204 | ) |
| Net cash used in investing activities                                        |       | (188                                 | )          | (204 | ) |
|                                                                         |       |                                 |       |   |   |
| **Cash Flows From Financing Activities:**                                    |       |                                 |       |   |   |
| Proceeds from issuance of common stock                                       |       | 14                                   |       | 10 |   |
| Net cash provided by financing activities                                    |       | 14                                   |       | 10 |   |
|                                                                         |       |                                 |       |   |   |
| **Net decrease in cash and cash equivalents**                                |       | (1,486                               | )          | (955 | ) |
|                                                                         |       |                                 |       |   |   |
| **Cash and cash equivalents at beginning of  period**                        |       | 2,390                                |       | 3,588 |   |
|                                                                         |       |                                 |       |   |   |
| **Cash and cash equivalents at end of period**                               | ** ** | **$**                                | **904**    | ** ** | **$** | **2,633** | ** ** |

 

See accompanying notes to consolidated financialstatements.

 

4

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

July 31, 2005

(Unaudited)

 

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

** **

The consolidated balance sheet as of July 31,2005, the consolidated statements of operations for the three and nine monthsended July 31, 2005 and 2004, the consolidated statements of cash flowsfor the nine months ended July 31, 2005 and 2004, and the relatedinformation presented in these notes have been prepared by management inaccordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation ofresults have been included.  Theconsolidated balance sheet at October 31, 2004 was derived from theaudited consolidated financial statements as of that date.  Operating results for the three and ninemonths ended July 31, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending October 31, 2005.  For further information, refer to theconsolidated financial statements and notes thereto included in AngeionCorporation’s Annual Report on Form 10-KSB for the year ended October 31,2004.

 

Comprehensive income is a measure of allnon-owner changes in shareholders’ equity and includes such items as net income(loss), certain foreign currency translation items, minimum pension liabilityadjustments and changes in the value of available-for-sale securities.  For the three and nine months ended July 31,2005 and 2004, comprehensive loss for Angeion Corporation was equivalent to netloss as reported.

 

**2.****                                      RevenueRecognition**

** **

In accordance with the SEC’sStaff Accounting Bulletin No. 104, “Revenue Recognition,” the Companyrecognizes revenue when persuasive evidence of an arrangement exists, transferof title has occurred or services have been rendered, the selling price isfixed or determinable and collectibility is reasonably assured.  The Company’s products are sold for cash oron 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.

 

Service contract revenue isbased on a stated contractual rate and is deferred and recognized ratably overthe service period, which is typically from one to four years.  In accordance with paragraph 4, of theEmerging Issues Task Force abstract 00-21, “Revenue Arrangements with MultipleDeliverables,” the Company applies Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 90-1 forservice contract revenue.  Revenuefrom installation and training services provided to domestic customers isdeferred until the service has been performed. The amount of deferred installation and training revenue was $233,000and $206,000 at July 31, 2005 and October 31, 2004, respectively.

 

When a sale involves multiple deliverables, such asequipment, installation services and training, the amount of theconsideration from an arrangement is allocated to each respective element basedon the residual method and recognized as revenue when revenue recognitioncriteria for each element is met. Consideration allocated to delivered equipment is equal to the totalarrangement consideration less the fair

 

5

----

 

value ofinstallation and training.  The fairvalue of installation and training services is based on specific objectiveevidence, including third-party invoices.

 

**3.****                                      NewAccounting Pronouncements**

** **

In November 2004, the FASB issuedStatement of Financial Accounting Standards No. 151 (“SFAS No. 151”),“Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which clarifiesthe types of costs that should be expensed rather than capitalized asinventory.  This statement also clarifiesthe circumstances under which fixed overhead costs associated with operatingfacilities involved in inventory processing should be capitalized.  The provisions of SFAS No. 151 areeffective for fiscal years beginning after June 15, 2005 and the Companywill adopt this standard in its fiscal 2006. The Company believes the adoption of this statement will not have amaterial impact on its consolidated financial position or results ofoperations.

 

The FASB issued SFAS No. 123 (Revised 2004) (“SFAS No. 123R”),“Share-Based Payment,” in December 2004. SFAS No. 123R is a revision of FASB Statement 123, “Accounting forStock-Based Compensation” and supersedes Accounting Principles Board Opinion (“APB”)No. 25, “Accounting for Stock Issued to Employees,” and its relatedimplementation guidance.  The Statementfocuses primarily on accounting for transactions in which an entity obtainsemployee services through share-based payment transactions.  SFAS No. 123R requires a public entityto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions).  That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award.  TheCompany will adopt the standard for fiscal 2007.  While the Company cannot precisely determinethe impact on net earnings as a result of the adoption of SFAS No. 123R ,estimated compensation expense related to prior periods can be found below in “StockBased Compensation.”  The ultimate amountof increased compensation expense will depend on the number of option sharesgranted during the year, their timing and vesting period and the method used tocalculate the fair value of the awards, among other factors.

 

**4.****                                      StockBased Compensation**

 

The Company applies the intrinsic-valuemethod as prescribed under APB No. 25 and related interpretations toaccount for the issuance of stock incentives to employees and directors.  Accordingly, no compensation expense relatedto employees’ and directors’ stock incentives has been recognized in theconsolidated financial statements.  Inaccordance with the provisions of SFAS No. 123, the Company is required topresent pro forma information reflecting compensation cost for suchissuances.  Had the Company determinedcompensation costs based on the fair value at the date of grant for optionsgranted, the Company’s net loss would have been increased to the pro formaamounts indicated in the following table:

 

6

----

 
| **(In thousands, except for per**                                                                                | ** ** | **Three Months Ended July 31,** | ** ** | **Nine Months Ended July 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **share amounts)**                                                                                               | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss:                                                                                                        |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                      |       | $                                    | (268       | )                                   | $          | (488 | ) | $ | (1,217 | ) | $ | (2,097 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss                                    |       | 25                                   |       | -                                   |       | 25 |   | - |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (21                                  | )          | (57                                 | )          | (63 | ) | (171 | ) |
| Pro forma                                                                                                        |       | $                                    | (264       | )                                   | $          | (545 | ) | $ | (1,255 | ) | $ | (2,268 | ) |
| Net loss per share – basic and diluted                                                                      |       |                                 |       |                                |       |   |   |   |   |
| As reported                                                                                                      |       | $                                    | (0.07      | )                                   | $          | (0.14 | ) | $ | (0.34 | ) | $ | (0.58 | ) |
| Pro forma                                                                                                        |       | $                                    | (0.07      | )                                   | $          | (0.15 | ) | $ | (0.35 | ) | $ | (0.63 | ) |

 

***Variable Stock Option Grants***

 

The Companyhas granted to its employees 78,000 options with an exercise price of $2.00that vest at increasing rates as the Company’s common stock trades forincreasing prices for 20 of 30 consecutive days.  Notwithstanding the performance vestingschedule, these options may be exercised in full beginning October 1,2009.  The options will become exercisableearlier if the Company’s stock trades at the following price for 20 of 30consecutive trading days.

 

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

 

Because thevesting for these grants is dependent on achieving these common stock pricemilestones, the Company has accounted for these option grants using variableaccounting in accordance with APB No. 25. Accordingly, the Company estimates the value of variable option grantsat each balance sheet date and records the changes in intrinsic value asdeferred compensation.  Although nooptions vest until October 1, 2009 or if the Company’s stock trades at$4.00 per share for 20 of 30 consecutive days, and then only 15% would vest, theseoutstanding options are nevertheless deemed to have intrinsic value because theclosing price of the Company’s stock at July 29, 2005 was $2.99 per share.  Stock based compensation associated withthese variable options for the three and nine months ended July 31, 2005was $25,000.  This amount is equal to theintrinsic value of the options at July 31, 2005 pro-rated from their grantdate and the time-based vesting date of October 1, 2009.  As of July 31, 2005, the Company hasrecorded deferred compensation of $52,000 relating to these variable stock options.

 

7

----

 

**5.****                                      Inventories**

 
| **(In thousands)** | ** ** | **July 31,  2005** | ** ** | **October 31,  2004** | ** ** |
|--------------------|------------|-------------------------|------------|----------------------------|------------|
| Raw materials      |       | $                       | 1,347      |                       | $          | 875 |   |
| Work-in-progress   |       | 183                     |       | 164                        |       |
| Finished goods     |       | 1,919                   |       | 1,908                      |       |
|               |       | $                       | 3,449      |                       | $          | 2,947 |   |

 

**6.****                                      IntangibleAssets**

 

As of July 31, 2005, intangible assetsconsisted of the following:

 
| **(In thousands)**             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Depreciation** | ** ** | **Intangible  Assets, net** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
|                           |       |                        |       |                          |       |                        |       |
| Amortized developed technology |       | $                           | 6,900      |                          | $          | 2,200                       |       | $ | 4,700 |   |
| Unamortized trade name         |       | 1,000                       |       | —                        |       | 1,000                       |       |
|                           |       | $                           | 7,900      |                          | $          | 2,200                       |       | $ | 5,700 |   |

 

Amortization expense was $609,000 and $713,000for the nine months ended July 31, 2005 and 2004, respectively.  Developed technology is being amortized usingthe straight-line method over the estimated useful lives of the assets thatrange from three to ten years.  Estimatedamortization expense for the remainder of fiscal year 2005 and for each of thesucceeding years based on the intangible assets as of July 31, 2005 is asfollows:

 
| **(In thousands)**                        | ** ** | **Amortization** | ** ** |
|-------------------------------------------|------------|------------------|------------|
| Three months ending October 31, 2005 |       | $                | 203        |   |
| 2006                                      |       | 812              |       |
| 2007                                      |       | 779              |       |
| 2008                                      |       | 778              |       |
| 2009                                      |       | 778              |       |
| Thereafter                                |       | 1,350            |       |
|                                      |       | $                | 4,700      |   |

 

**7.****                                      WarrantyReserve**

** **

Sales of the Company’s equipment are subjectto a warranty.  Equipment warrantiestypically extend for a period of twelve months from the date ofinstallation.  The Company includesstandard warranty terms in customer contracts. Under the terms of these warranties, the Company is obligated to repairor replace any components or assemblies that it deems defective in workmanshipor materials.  The Company reserves theright to reject warranty claims where it determines that failure is due tonormal wear, customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve thatreflects the estimated expenses that it will incur to honor the warranties onits products.  The Company adjusts thewarranty reserve based on the number and type of equipment that is subject towarranty, adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects theCompany’s historical warranty experience based on type of equipment.  Warranty provisions for the nine months ended July 31,2005 and 2004 were as follows:

 

8

----

 
| ** **                   | ** ** | **Nine Months Ended July 31,** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| **(In thousands)**           | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Balance, beginning of period |       | $                                   | 155        |   | $ | 133 |   |
| Warranty provisions          |       | 210                                 |       | 183 |   |
| Warranty claims              |       | (210                                | )          | (186 | ) |
| Balance, end of period       |       | $                                   | 155        |   | $ | 130 |   |

 

**8.****                                      NetLoss per Share**

** **

Basic loss per share is computed by dividingnet loss by the weighted average shares outstanding during the reportingperiod.  Diluted loss per share iscomputed similarly to basic loss per share except that the weighted averageshares outstanding are increased to include additional shares from the assumedexercise of stock options and warrants, if dilutive.  The number of additional shares is calculatedby assuming that outstanding stock options or warrants were exercised and thatthe proceeds from the exercise were used to acquire shares of common stock atthe average market price during the reporting period.  As a result of the net losses, there were nodilutive common shares outstanding for the three and nine months ended July 31,2005 and 2004.

 

The Company had warrants outstanding at July 31,2005 and 2004 to purchase 179,481 and 179,537 shares, respectively, of itscommon stock that were considered antidilutive and therefore not considered tohave been exercised.  The Company alsohad options outstanding at July 31, 2005 and 2004 to purchase 482,800 and373,800 shares, respectively, of its common stock that were consideredantidilutive and therefore not considered exercised.

 

**9.****                                      DiscontinuedOperations and Litigation**

** **

***Background***

 

During the period from October 1990through March 2000, the Company was engaged in the development, design,manufacture and sale of implantable cardioverter defibrillator (“ICD”)systems.  ICDs are electronic devicesthat are implanted within the body and are connected to the heart withdefibrillator leads.  They are designedto treat abnormally rapid heartbeats or tachycardia in the ventricular (orlower) chambers of the heart by monitoring the patient’s heartbeat and, in theevent of tachycardia, delivering an electrical shock to return the heartbeat tonormal rhythm.

 

During March 2000, the Company announcedits decision to discontinue the development, manufacture and distribution ofICDs.  Accordingly, the Company accountsfor the ICD business as a discontinued operation and amounts in the financialstatements and related notes for all periods shown reflect discontinuedoperations accounting.

 

In June 2002,ELA Medical, a former partner of the Company in a joint venture thatmanufactured and distributed ICDs, advised the Company that some of the ICDsformerly manufactured by the Company were experiencing premature batterydepletion and that 14 had been explanted. In accordance with FDA procedures, the Company instituted a fieldcorrective action and recall on certain of the ICDs.

 

In June 2003,ELA Medical sought reimbursement from the Company for the cost of explantingand replacing the ICDs.  The Companyadvised its insurance carrier of the ELA Medical claim and sought coverage ofthe claim.

 

9

----

 

***Medmarc Insurance Recovery***

 

The Companyevaluated its claim for potential recovery from product liability insuranceseparately from its evaluation of the liability for possible losses associated with theclaim.  As a result of that evaluation,the Company has recorded a receivable for an estimated amount recoverable fromproduct liability insurance, including insurance coverage for recalls that theCompany carried for the ICD products.

 

On September 13, 2004, the basicinsurer, Medmarc Casualty Insurance Company, advised the Company that Medmarcwas denying insurance coverage to the Company for the claim by ELA Medical.  In addition, on September 13, 2004,Medmarc commenced a declaratory judgment action against the Company and ELA Medicalin United States District Court for the District of Minnesota seeking adeclaratory judgment that Medmarc’s interpretation of the policy iscorrect.  In the lawsuit, ELA Medical fileda cross-claim against the Company for the costs and expenses it incurred inconnection with the recall in the equivalent amount of $1,665,068.  By June 30, 2005, the amount claimed byELA Medical had increased to over $2.0 million.

 

The Company subsequently denied liability toELA Medical and counterclaimed against Medmarc and is seeking a declaratoryjudgment that Medmarc is liable (i) to the Company for any amount that itis required to pay to ELA Medical, and (ii) for any fees and expenses thatthe Company has incurred in connection with defense of the cross-claim by ELAMedical and the declaratory action by Medmarc.

 

The Company considered anumber of relevant facts in determining that it had a valid claim for aninsurance recovery and that realization of that claim for recovery wasprobable.  The following facts wereanalyzed and considered in this evaluation of the claim for recovery:

 

1.               In a letter dated September 2, 2003,Medmarc Insurance Company initially advised the Company that there wascoverage, at least in part, and ultimately established a reserve for thatcoverage.

2.               TheCompany received written claims loss reports from Medmarc stating that theinsurer had established a total reserve of $425,000 as of September 30,2003 and that Medmarc had increased the reserve to $1,025,000 as of March 31,2004.

3.               Whenthe insurance policy was originally purchased and in response to the Company’sspecific request for product recall expense coverage, Medmarc amended itsstandard insurance policy by adding unique endorsements that were drafted byMedmarc to provide “Coverage for Product Recall-Related Medical Expenses.”  This was done primarily through twoendorsements that together greatly expanded the ordinary definition of “bodilyinjury” to include, among other things, “the cost of reasonable and necessary medical expenses attributable to the withdrawal of the ICDs,including any physical examinations and surgical expenses.”

4.               Mostof Medmarc’s arguments simply ignore the recall-related expense coverageendorsements that were drafted by Medmarc.

5.               TheAugust 25, 2005 Order of the Court finding that Medmarc had a duty todefend the Company and that Medmarc had breached that duty.

 

As stated above, in September 2004, overone year after being served notice with the claim, Medmarc advised the Companythat it was denying coverage and commenced a court action against the Companyseeking a declaratory judgment that Medmarc’s interpretation of the policy wascorrect.  Subsequent to this action, theCompany worked closely with outside legal counsel to determine the probabilityand estimated amount of recoverability of insurance from Medmarc now that therecovery was subject to litigation.  Thisincluded consultation with attorneys that practice in the areas of insurance

 

10

----

 

contractual matters and relatedlitigation.  Based on these consultationsand the analysis described above, the Company continues to believe that it isprobable that a recovery will occur against the insurer.

 

The Companydetermined the amount to recognize as recoverable by analyzing the range ofprobable recoveries that included (i) the claim, (ii) theself-insured retention obligation under the policy and (iii) legalfees.  The Company considered eachelement separately and based on the information provided by outside counsel,determined and recorded the minimum amount of the range for each element.  As of July 31, 2005, the entire$700,000 balance of current assets of discontinued operations representselements related to the claim for recovery from product liability insurance.

 

On June 24, 2005, the Company andMedmarc presented summary judgment arguments on cross motions by the Companyand Medmarc over whether or not Medmarc has a “duty to defend” the Company inthe claim brought by ELA Medical.  In an order dated August 25, 2005, theCourt granted the Company’s motion for partial summary judgment and denyingMedmarc’s motion for summary judgment. The Court also decreed that:

 

1.               Medmarc had a duty to defend the Companyagainst ELA Medical’s cross-claim,

2.               Medmarc breached its duty to so defend; and

3.               Medmarc has a duty to pay on a prompt andmonthly basis Angeion’s reasonable fees and costs, including those incurred andthose that will be incurred in the future, that relate to ELA Medical’scross-claim.

 

The Company intends to vigorously pursue itsavailable defenses against Medmarc and asserts that Medmarc is required toprovide the Company insurance coverage with respect to these matters. Theultimate amount of the amount recoverable from the insurer is subject to futuredevelopment and, including negotiations between the parties and other legalproceedings.

 

During thethird quarter of 2005, the Company determined that there were no changes infacts or circumstances that would require adjustment to the current assets ofdiscontinued operations as of July 31, 2005.

 

***ELA Medical Settlements and DiscontinuedOperations Charges***

 

On June 30, 2005, the Company entered intosettlement agreements with ELA Medical, Inc. and ELA Medical S.A.S.(together “ELA”) that ended the legal dispute and lawsuit by ELA against theCompany and resolved all the issues between the Company and ELA related torecall of the ICDs and reimbursement of expenses incurred by ELA.  Under the terms of a settlement agreement andrelease regarding LYRA ICDs, ELA agreed to settle its $2,047,000 Crossclaimagainst the Company in return for an Offer of Judgment on the Crossclaim infavor of ELA and against the Company in the amount of $1,400,000.  In full satisfaction of the Judgment, theCompany agreed to pay ELA the $1,400,000 Judgment amount as follows:

 

1.               The Company paid ELA $400,000 on June 30,2005.

2.               The Company executed a $400,000 promissorynote in favor of ELA that is secured by an irrevocable letter of credit.  Terms of the promissory note include equalpayments of $200,000 due on December 31, 2005 and June 30, 2006.

3.               The Company assigned to ELA certain of theCompany’s ICD patents that ELA and the Company agreed have a fair market valueof at least $600,000.  The Company agreedto transfer to ELA intellectual property exclusively related to the Company’sdiscontinued ICD products, including patents and related technology.

 

11

----

 

The Company entered into a second agreement on June 30,2005 under which it paid an additional $40,000 for resolution of ICD issues not related to thelawsuit.  The second settlement agreementresolved a matter with respect to Sentinel ICDs formerly manufactured by theCompany and amended a 1999 withdrawal agreement under which the Companywithdrew from a joint venture with ELA. In connection with the Sentinel settlement agreement, ELA agreed that itwould be responsible for any warranty coverage, technical service andregulatory compliance service with respect to any “recalled” ICDs in thefuture.  Prior to entering thissettlement agreement, ELA already was responsible for warranty coverage,technical service and regulatory compliance service for all ICDs except for allcosts and expenses that were “recall costs.”

 

With the execution of these two agreements with ELA,the Company has satisfied all of its obligations to ELA regarding the previouslymanufactured ICDs sold to ELA.  The costof these settlements was included in current liabilities of discontinuedoperations as of October 31, 2004.  Theonly remaining obligation relates to patient claims associated with ICDs.

 

Since some devices remain implanted inpatients, the Company remains obligated for patient claims associated withICDs.  As of March 29, 2005, 35 ofthe original 122 ICDs remained implanted in patients in the United States.  As of August 31, 2004, the most recentdate for which data is available, 110 of the original 261 ICDs remainedimplanted in patients outside of the United States.  Although current data regarding ICDsremaining implanted in patients is currently not available to the Company, thenumber of ICDs remaining implanted in patients continues to decline, therebyreducing the need for on-going insurance. Moreover, the ICD products are also approaching the end of theiranticipated life.  The Company has notreceived any additional patient claims related to the ICDs sold to ELA.  The Company will continue to purchaseinsurance covering ICD claims as long as the need for such insurance is warranted.  In July 2005, the Company extended itsinsurance coverage to July 11, 2006 for these potential claims.  In the meantime, should there be a patientclaim, the cost of purchasing additional insurance beyond July 11, 2006could be substantial.  The Companycurrently believes that it will be able to purchase additional insurancecoverage beyond July 11, 2006 with commercially reasonable premiums andfinance the purchase with existing cash.

 

The Company was required to collateralize theirrevocable bank letter of credit with $400,000 of cash that is classified ascash restricted for discontinued operations at July 31, 2005.  Expenses associated with both the $1.4million settlement agreement and the $40,000 settlement agreement with ELAMedical were previously recognized by the Company within discontinuedoperations.  The Company’s assignment ofthe ICD patents under the $1.4 million agreement had no current impact ondiscontinued operations because these patents had been previously written offduring the quarter ended October 31, 2004.

 

During thequarter ended July 31, 2005, the Company increased the current liabilities of discontinuedoperations by $191,000.  The increase wasnecessary to record additional legal fees, consulting fees, expert testimony feesand to reflect the cost of extending insurance coverage on ICD claims to July 11,2006.  The current liability ofdiscontinued operations is $623,000 at July 31, 2005 and now includes theaforementioned expenses as well as the remaining $400,000 due to ELA under thepromissory note.

 

12

----

 

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

 

# **Forward-LookingStatements and Risk Factors**

# ** **

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

 

From time to time, the Company through itsmanagement may make oral forward-looking statements.  The Company undertakes no obligation toupdate any forward-looking statement. Additional information with respect to the risks and uncertainties facedby the Company may be found in, and the prior discussion is qualified in itsentirety by, the other risk factors that are described from time to time in theCompany’s Securities and Exchange Commission reports, including but not limitedto the Annual Report on Form 10-KSB for the year ended October 31,2004, and subsequently filed reports.

 

In addition to the risk factors anduncertainties set forth above and in our Annual Report on Form 10-KSB, theCompany believes that the following factor is relevant.

 

***Intangible Assets.***  TheCompany assesses the impairment of identifiable intangible assets at leastannually or whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. The Company initially evaluates the recoverability of intangible assetsbased on fair value techniques, mainly undiscounted cash flows.  If the Company determines that the carryingvalue of intangible assets may not be recoverable, it measures any impairmentbased on a projected discounted cash flow method using a discount ratedetermined by management to be commensurate with the risk inherent in thecurrent business model or another valuation technique.  There can be no assurance that businesscircumstances will not change or that projected future cash flows will besufficient to justify the carrying value of intangible assets, in which casethe Company would be required to recognize an impairment charge for a portionor all of the intangible assets.  SeeNote 6, “Intangible Assets,” in Notes to Consolidated Financial Statements inthis Form 10-QSB.

 

# **Overview**

# ** **

The Company is a medical products companywith reported revenue of $20.7 million for the year ended October 31,2004.  Domestic product sales and servicerevenues accounted for 82.8% of revenue for the year ended October 31,2004 while international product sales accounted for the remaining 17.2%.

 

The Company, through its Medical GraphicsCorporation subsidiary, designs non-invasive diagnostic systems under the “MedGraphics”trade name that assist health care professionals in the prevention, earlydetection and cost-effective treatment of heart and lung disease.  It also markets a version of some of theseproducts under the New Leaf brand to health and fitness clubs and personaltrainers to assist them in developing exercise programs to help their clientsmeet their personal goals.  Revenuesconsist of equipment and supply sales and service revenues.  Equipment and supply sales

 

13

----

 

reflect sales of MedicalGraphics’ non-invasive cardiorespiratory diagnostic equipment, sales of NewLeaf health and fitness products, and aftermarket sales of peripherals andsupplies.  Service revenues reflectrevenues from extended service contracts, non-warranty service visits andtraining.

 

Total revenue for the third quarter of 2005 was$6.1 million, an increase of 17.3% from $5.2 million in 2004.  For the first nine months of 2005, totalrevenue was $17.1 million, which is 16.7% higher than the same period in 2004.  The third quarter loss from continuingoperations of $77,000 narrowed significantly from the $488,000 loss fromcontinuing operations for the same period in 2004.  The loss from continuing operations for thenine months ended July 31, 2005 of $1.0 million is over 41% lower than the$1.7 million loss from continuing operations for the same period in 2004.  Overall operating expenses for both the threeand nine months ended July 31, 2005 exceed comparable amounts for 2004 dueto planned increases in sales and marketing expenses to support the growth inall of the Company’s products and the launch of its new cardiorespiratorydiagnostic products.

 

The increase in third quarter revenue reflectsthe same trends that have been present for all of 2005.  Domestic customers are continuing theirstrong pace of replacing older cardiorespiratory systems with new models thathave improved technology.  In addition, thetwo new Ultima Series products, the Ultima PF and Ultima PFX, which beganshipping in the second quarter, have both contributed to third quarter revenuegrowth.  These two new products updatetwo existing products and are designed to expand the target market.  The Ultima Series of products featurenew technology to improve performance and reliability.  Customer response to these new productscontinues to be very positive.  Anothernew product that began shipping during the second quarter of 2005, theCPFS/D-USB spirometer, is also selling well, both domestically andinternationally.  The Company expectsthis demand for new equipment to continue for the balance of 2005 and intofiscal 2006.

 

The Company’s New Leaf products are becomingmore of a factor in overall revenue growth. Consumers are becoming more aware of the metabolic testing programs andtheir capabilities.  This growingawareness and interest is contributing to a steady increase in new sites.  In addition, the sale of New Leaf consumablesupplies is contributing to the growth of New Leaf revenue.  Moreover, the Company continues to evaluateits marketing efforts for expanding the distribution of New Leaf fitnessproducts.

 

Importantly, on June 30, 2005, theCompany enteredinto a settlement agreement with ELA Medical, Inc. that ended the legaldispute and lawsuit and resolved all the issues related to recall of the ICDsand reimbursement of expenses incurred by ELA. In addition, the Company entered into a second agreement with ELA underwhich ELA agreed that it would be responsible for any warranty coverage,technical service and regulatory compliance service with respect to any “recalled”ICDs in the future.  The Company’s onlyremaining obligation is with respect to patient claims regarding ICDs for whichthe Company has purchased product liability insurance.

 

Also important, on August 25, 2005, theCompany received a favorable Court Order finding that Medmarc had a duty todefend the Company against ELA’s cross-claim and that Medmarc breached thatduty.  The Court also ruled that Medmarcis obligated to pay the Company’s reasonable defense fees and costs related toELA Medical’s cross-claim.  Since Medmarcbreached its duty to defend, the Company also believes that Medmarc isresponsible to reimburse Angeion for payment of the $1.4 million settlementrecently entered into with ELA.

 

14

----

 

See Note 9, “Discontinued Operations andLitigation,” Notes to Consolidated Financial Statements in this Form 10-QSBfor additional discussion of the settlement with ELA and Medmarc litigation.

 

# **Results of Operations**

# ** **

The Company recorded a net loss of $268,000for the three months ended July 31, 2005 compared to a net loss of $488,000for the same period in 2004.  For thenine months ended July 31, the Company recorded net losses of $1.2 millionand $2.1 million for 2005 and 2004, respectively.  The net losses for the three and nine monthsended July 31, 2005 included a loss from discontinued operations of $191,000.  The loss for the nine months ended July 31,2004 included a loss from discontinuedoperations of $350,000.

 

**Revenue**

 

Total revenue increased by 17.3% to $6.1million from $5.2 million for the three months ended July 31, 2005 and2004, respectively.  Domestic productrevenue increased by 12.2% to $4.2 million in 2005 compared to $3.8 million in2004.  Internationally, product revenueincreased 83.3% to $1.1 million in 2005 from $616,000 in 2004.  Service revenue decreased 10.4% to $695,000in 2005 from $776,000 in 2004.

 

For the nine months ended July 31, 2005,total revenue increased 16.7% to $17.1 million compared to $14.7 million forthe same period in 2004.  Domesticproduct revenue increased by 23.2% to $12.2 million in 2005 compared to $9.9million in 2004.  Internationally,product revenue increased 15.4% to $2.8 million in 2005 from $2.5 million in2004.  Service revenue decreased 9.7% to$2.1 million in 2005 from $2.3 million in 2004.

 

Demand for both cardiorespiratory productsystems and New Leaf products have remained strong throughout the first ninemonths of 2005.  Sales of new equipmentwith improved technology have remained strong as customers continue to replaceolder equipment.  Moreover, sales of thenew Ultima PF and Ultima PFX cardiorespiratory systems during the third quarteralso contributed to domestic growth.  Weare pleased with the customer acceptance of these new products that beganshipping during April 2005.  TheCompany’s New Leaf health and fitness products have also had three strongquarters due to broadening consumer acceptance. The addition of sites from both chain and independent health clubscontributed to growth during the third quarter.

 

Third quarter 2005 international productrevenue overcame two quarters of negative growth to post a year-to-date increaseof 15.4% for the nine months ended July 31, 2005 compared to 2004.  Distributor acceptance of the Company’s newUltima products together with sales to customers performing clinical trialshave contributed to international revenue growth for the third quarter of2005.  Regional performance continues tobe mixed.  Latin America continues tosuffer from weak economies and devaluated currencies with recovery stillanticipated to be consistent but gradual. Competitive pressures remain strong in Europe and throughout the rest ofthe world.  In addition, the Company’snew products are subject to regulatory approval before they can be sold incertain countries.

 

Service revenue decreased during the second andthird quarters of 2005 compared to 2004 due to the relatively aggressive pacethat customers are replacing older equipment with the Company’s new models,thereby reducing revenue from extended service contracts and non-warrantyservice visits.

 

15

----

 

**Gross Margin**

 

Gross margin percentage for the three monthsended July 31, 2005 increased to 49.5% of revenue compared to 44.4% forthe same period in 2004.  For the ninemonths ended July 31, 2005, gross margin percentage increased to 48.6%from 45.3% for the same period in 2004. The overall improvement in gross margin percentages is due to improvedmanufacturing efficiencies associated with increased volume together withimproved gross margins on the Company’s new products.

 

**Selling and Marketing**

** **

Selling and marketing expenses for the threemonths ended July 31, 2005 increased by 13.0% to $1.7 million compared to$1.5 million for the same period in 2004. For the nine months ended July 31, 2005, selling and marketingexpenses increased by 15.1% to $5.3 million compared to $4.6 million for thesame period in 2004.

 

The increase in selling and marketingexpenses was planned as we increased personnel in support of selling andmarketing all of the Company’s products. As a result, personnel costs have increased over the same period in 2004by $173,000 and $510,000 for the three and nine months ended July 31,2005.  The 23% increase in domestic salesfor the first nine months of 2005 resulted in a $177,000 or a 27% increase incommission expenses.

** **

**General and Administrative**

 

General and administrative expenses for thethree months ended July 31, 2005 increased by 12.5% to $659,000 comparedto $586,000 for the same period in 2004. For the nine months ended July 31, 2005, general and administrativeexpenses increased by 5.9% to $1.9 million compared to $1.8 million for thesame period in 2004.

 

General and administrative expenses for thethird quarter of 2005 included increases of $40,000 and $21,000 for legal feesand Sarbanes-Oxley compliance costs, respectively.  For the nine months ended July 31, 2005,increases of $74,000 for Sarbanes-Oxley compliance costs, $70,000 for legalfees and $25,000 for auditing expenses were somewhat offset by a $91,000reduction in the provision for doubtful accounts.

 

**Research and Development**

 

Research and development expenses for thethree months ended July 31, 2005 increased by 14.8% to $482,000 from$420,000 for the same period in 2004. For the nine months ended July 31, 2005, research and developmentexpenses increased by 20.6% to $1.5 million compared to $1.3 million for thesame period in 2004.

 

The increase in research and developmentexpenses is due to increased personnel expenses together with project costsassociated with developing additional cardiorespiratory diagnostic products.  The CPFS/D-USB spirometer was released forsale at the end of the first quarter of 2005. In addition, the new Ultima PF and Ultima PFX products were sold for thefirst time during the second quarter of 2005. Moreover, the Company is currently working on new products intended foruse by asthma and allergy physicians while also identifying and testing newcomponents for use in its systems that have lower costs and are more efficientin the manufacturing process.

 

16

----

 

**Amortization of Intangibles**

 

Amortization of intangibles, consistingprimarily of developed technology, for the three months ended July 31, 2005decreased to $203,000 compared to $237,000 for the same period in 2004.  For the nine months ended July 31, 2005,amortization expense decreased to $609,000 compared to $713,000 for the sameperiod in 2004.  The decrease inamortization expense resulted from the fact that the Company incurred animpairment charge of $243,000 for its ICD patents during the fourth quarter of2004.

 

**DiscontinuedOperations**

 

Expenses associated with both the $1.4million settlement agreement and the $40,000 settlement agreement with ELAMedical were previously recognized by the Company within discontinuedoperations.  The Company’s assignment ofthe ICD patents under the $1.4 million agreement had no current impact ondiscontinued operations because these patents had been previously written offduring the quarter ended October 31, 2004.

 

The $191,000 loss from discontinuedoperations, net of income taxes, for the three and nine months ended July 31,2005 primarily consisted of legal expenses and the purchase of liabilityinsurance coverage for claims associated with the Company’s discontinued ICDproducts.  The $350,000 loss fromdiscontinued operations, net of income taxes, for the three and nine monthsended July 31, 2004 represented adjustments associated with the ELAMedical claim and the purchase of liability insurance coverage for claimsassociated with the Company’s discontinued ICD products.  For additional details, see Note 9, “DiscontinuedOperations and Litigation,” Notes to Consolidated Financial Statements in this Form 10-QSB.

 

**Liquidity and Capital Resources**

 

The Company has financed its liquidity needsover the past several years through revenue generated by the operations of itswholly owned subsidiary, Medical Graphics Corporation, through revenue fromlicense agreements for patented ICD technology and through the use of cashbalances.

 

The Company had cash and cash equivalents of$1.3 million, including $400,000 of cash restricted for discontinued operations,and working capital of $4.8 million as of July 31, 2005.  During the nine months ended July 31,2005, the Company used $252,000 in cash for continuing operations, partly as aresult of its net loss of $1.2 million, which was partially offset by $919,000of depreciation and amortization.  Cashwas generated by decreases of $180,000 and $113,000 in accounts receivable andprepaid expenses and other current assets, respectively; and an increase of$316,000 in accrued employee compensation. Cash was used for an increase of $502,000 in inventory and a decrease of$429,000 in accounts payable.  Theincrease in inventory was necessary to support the Company’s 17 % revenue increasefor the nine months ended July 31, 2005 and the conversion from older tonew products.

 

The Company used $660,000 in cash fordiscontinued operations, which included payments of $400,000 and $40,000 madein connection with two settlement agreements that resolved all the issues,including litigation between the Company and ELA Medical related to expensesassociated with previously discontinued ICD products.  The cash used for discontinued operationsalso included legal fees and other related expenses.  In connection with the $1.4 millionsettlement agreement, the Company executed a $400,000 promissory note thatprovides for equal payments of $200,000 due on December 31, 2005 and on June 30,2006.  The promissory note is backed upwith an irrevocable bank letter of credit. The Company was required to collateralize the irrevocable bank letter ofcredit with $400,000 of cash that is classified as cash restricted fordiscontinued operations at July 31, 2005.

 

17

----

 

During the nine months ended July 31,2005, the Company used $188,000 in cash for investing activities to purchaseproperty and equipment.  The Company hasno material commitments for capital expenditures for the remainder of fiscalyear 2005 or for fiscal 2006.

 

Now that the ELA Medical claim associatedwith the discontinued ICD products has been settled for $1.4 million, theCompany intends to vigorously pursue its claim against Medmarc InsuranceCompany to provide insurance coverage with respect to these matters.  The lawsuit is in the discovery stage.  The Company expects that any trial in thismatter will not occur until the spring of 2006. The ultimate amount recoverable from the insurer is subject to futuredevelopment and additional information. It is possible that the Company will not prevail in this effort.  Furthermore, the Company’s liabilityinsurance coverage for claims associated with its ICD products has beenextended for another year to now expire on July 11, 2006.  The Company may incur additional expenses,which could be substantial, in connection with any purchase of insurancecoverage beyond July 11, 2006.  Foradditional details, see Note 9, “Discontinued Operations and Litigation,” Notesto Consolidated Financial Statements in this Form 10-QSB.

 

The Company expects that itscontinuing operating results will be cash flow positive for the remainder of fiscal2005.  Moreover, the Company believesthat its liquidity and capital resource needs for fiscal year 2005 will be metthrough its current cash and cash equivalents and cash flows from operations.  In addition, the Company also believes thatadditional insurance coverage beyond July 11, 2006 can be purchased andfinanced with existing cash.

 

If the cash flows from continuingoperating results prove insufficient to satisfy payment of additional insurancecoverage, the Company would adjust its investment spending in support of newproducts.

 

**OtherCommitments**

 

The Company has made various financialcommitments in the ordinary course of conducting its business operations.  The following table summarizes allsignificant commitments as of July 31, 2005:

 
| ** **                                                | ** ** | **Payments due by period (in thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                               | ** ** | **Total**                                 | ** ** | **Due  within  one year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                               |       | $                                         | 1,483      |   | $ | 365 |   | $ | 752 |   | $ | 366 |   | — |   |
| ELA Medical Promissory Note                               |       | 400                                       |       | 400 |   | — |   | — |   | — |   |
| Minimum royalty payments for sales of  AeroSport products |       | 142                                       |       | 100 |   | 42 |   | — |   | — |   |
|                                                      |       | $                                         | 2,025      |   | $ | 865 |   | $ | 794 |   | $ | 366 |   | — |   |

 

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

 

**(a)****                                  Evaluation ofDisclosure Controls and Procedures**

 

Management, with the participation of theCompany’s chief executive officer, Rodney A. Young, and chief financialofficer, Dale H. Johnson, has evaluated the effectiveness of the design andoperation of the disclosure controls and procedures, as defined in Rules 13a-15(e) underthe Securities Exchange Act of 1934, as of the end of the period covered bythis report.  Management has concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be

 

18

----

 

disclosed in the reports thatthe Company files under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSEC and that the disclosure controls are also effective to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isaccumulated and communicated to management, including the chief executiveofficer and chief financial officer, to allow timely decisions regardingrequired disclosure.

 

**(b)****                                 ****Changes in Internal Controls**

** **

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

 

19

----

 

**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.  Except as notedbelow, the ultimate settlement of any pending legal matter will not have amaterial impact on the Company or its financial statements.

 

As disclosed in Item 3 of the Form 10-KSB forthe year ended October 31, 2004, the Company is involved in a lawsuitbrought by Medmarc Insurance Company in United States District Court for theDistrict of Minnesota involving a claim for indemnification by ELA Medical andthe Company’s claim for insurance coverage from Medmarc.

 

On June 24, 2005, the Company and Medmarcpresented summary judgment arguments on cross motions by the Company andMedmarc over whether or not Medmarc has a “duty to defend” the Company in theclaim brought by ELA Medical.  In anorder dated August 25, 2005, the Court granted the Company’s motion forpartial summary judgment and denying Medmarc’s motion for summary judgment.

 

In addition, on June 30, 2005, the Companyentered into settlement agreements with ELA Medical that ended the legaldispute and lawsuit by ELA Medical against the Company and resolved all theissues between the Company and ELA Medical related to recall of the ICDs andreimbursement of expenses incurred by ELA Medical.  Under the terms of a settlement agreement andrelease regarding LYRA ICDs, ELA Medical agreed to settle its Crossclaimagainst the Company in return for an Offer of Judgment on the Crossclaim infavor of ELA and against the Company in the amount of $1,400,000.

 

See Note 9, “Discontinued Operations and Litigation,”Notes to Consolidated Financial Statements in this Form 10-QSB for adetailed discussion of these developments.

 

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

 

***Recent Sales of UnregisteredSecurities***

 

The Company had no unregistered sales of equity securities during thethree months ended July 31, 2005.

 

***Small******Business Issuer Purchases ofEquity Securities***

 

The Companydid not purchase any equity securities during the three months ended July 31, 2005.

 

### **Item 3.  Defaults Upon SeniorSecurities.**

 

None

 

20

----

 

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

 

On July 21, 2005, the Company held itsAnnual Meeting of Shareholders.  At themeeting, the following action was taken:

 

# ***Election of Directors***

# *** ***

The following persons were elected to theCompany’s Board of Directors, receiving the votes set forth opposite theirnames:

 
| **Name**           | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------|------------|---------------|------------|--------------------|------------|
| Arnold A. Angeloni |       | 3,136,678     |       | 14,417             |       |
| John C. Penn       |       | 3,123,941     |       | 27,154             |       |
| Jeffrey T. Schmitz |       | 3,115,306     |       | 35,789             |       |
| Rodney A. Young    |       | 3,115,356     |       | 35,739             |       |

 

# ***Approval of an Amendment to the AngeionCorporation 2002 Stock Option Plan***

 

The shareholders approved an amendment to theAngeion Corporation 2002 Stock Option Plan to increase the number of sharesavailable for issuance from 600,000 to 800,000. The amendment was approved by the following vote:

 
| For            |   | 1,020,356 |   |
|----------------|--------|-----------|--------|
| Against        |   | 66,626    |   |
| Abstain        |   | 406       |   |
| Broker Nonvote |   | 2,063,807 |   |

 

**Item 5. Other Information.**

 

# **None**

#  

**Item 6. Exhibits.**

 

(a)                                  Thefollowing exhibits are included herein:

 
| 31   |   | Certifications pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and  15d-14 of the Exchange Act).                             |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32   |   | Certifications pursuant  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                             |
| 99.1 |   | Press release dated  September 7, 2005 reporting that Angeion Corporation regained compliance  with Nasdaq listing standards.                              |
| 99.2 |   | Press release dated  September 9, 2005 reporting Angeion Corporation’s results of operations  for the three and nine months ended July 31, 2005. |

 

21

----

 

**SIGNATURES**

** **

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

 
|   | Angeion  Corporation                  |   |
|--------|---------------------------------------|--------|
|   | (Registrant)                          |
|   |                                  |
|   |                                  |
| Date:  | September 14, 2005               |   | /s/ Rodney A. Young |   |
|   | Rodney A. Young                       |
|   | President and Chief Executive Officer |
|   | (Principal Executive Officer)         |
|   |                                  |
|   |                                  |
| Date:  | September 14, 2005               |   | /s/ Dale H. Johnson |   |
|   | Dale H. Johnson                       |
|   | Chief Financial Officer               |
|   | (Chief Accounting Officer)            |
|        |                                       |        |  |  |  |

 

22

----