###### ** **

**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 January 31,  2003** |
|                                                 |                                                                                    |
| **OR**                                               |
|                                                 |                                                                                    |
| **o**                                                | **Transition  report under Section 13 or 15(d) of the Exchange Act.**                   |

** **

**For the transition period from              to              .**

** **

## **Commissionfile number 001-13543**

## ** **

**Angeion Corporation**

(Exact name of small business issuer asspecified 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 registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 afterdistribution of securities under a plan confirmed by a court:

Yes     ý     No     o

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (orfor such shorter period that the issuer was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes     ý     No     o

 

The Company had 3,594,433 shares of common stock, $0.10 par value,outstanding as of March 11, 2003.

 

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**January 31, 2003 and October 31, 2002**

(inthousands except share and per share data)

 
|                                                                                                  |   | **Successor Company** |       |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                                  |   | **January 31,  2003** |       | **October 31,  2002** |   |
| **Assets**                                                                                            |   |                  |       |   |   |
| **Current assets:**                                                                                   |   |                  |       |   |   |
| Cash and cash equivalents                                                                             |   | $                     | 4,132      |   | $ | 4,434 |   |
| Accounts receivable, net of allowance for doubtful accounts of $342  and $312, respectively           |   | 2,985                 |       | 2,687 |   |
| Inventories                                                                                           |   | 3,206                 |       | 3,470 |   |
| Prepaid expenses and other current assets                                                             |   | 226                   |       | 123 |   |
| Total current assets                                                                                  |   | 10,549                |       | 10,714 |   |
|                                                                                                  |   |                  |       |   |   |
| Property and equipment, net                                                                           |   | 2,005                 |       | 2,164 |   |
| Intangible assets, net                                                                                |   | 8,055                 |       | 8,250 |   |
|                                                                                                  |   | **$**                 | **20,609** |   | **$** | **21,128** | ** ** |
|                                                                                                  |   |                  |       |   |   |
| **Liabilities and Shareholders’ Equity**                                                         |   |                  |       |   |   |
| **Current liabilities:**                                                                              |   |                  |       |   |   |
| Accounts payable                                                                                      |   | $                     | 992        |   | $ | 964 |   |
| Employee compensation                                                                                 |   | 640                   |       | 439 |   |
| Deferred income                                                                                       |   | 919                   |       | 811 |   |
| Warranty reserve                                                                                      |   | 119                   |       | 111 |   |
| Other liabilities and accrued expenses                                                                |   | 657                   |       | 897 |   |
| Total current liabilities                                                                             |   | 3,327                 |       | 3,222 |   |
|                                                                                                  |   |                  |       |   |   |
| **Shareholders’ equity:**                                                                        |   |                  |       |   |   |
| Common stock, $0.10 par value, authorized 25,000,000 shares, issued  and outstanding 3,594,627 shares |   | 359                   |       | 359 |   |
| Additional paid-in capital                                                                            |   | 17,547                |       | 17,547 |   |
| Accumulated deficit                                                                                   |   | (624                  | )          | — |   |
| Total shareholders’ equity                                                                       |   | 17,282                |       | 17,906 |   |
|                                                                                                  |   | **$**                 | **20,609** |   | **$** | **21,128** | ** ** |

 

See accompanying notes to consolidatedfinancial statements

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

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

 
|                                            |   | **Successor  Company**              |       | **Predecessor  Company** |     |
|-------------------------------------------------|--------|-------------------------------------|------------|--------------------------|----------|
|                                            |   | **Three Months Ended  January 31,** |       |
|                                            |   | **2003**                            |       |                     | **2002** |   |
| **Revenues**                                    |   |                                | ** ** |                     |     | ** ** |
| Equipment and supply sales                      |   | $                                   | 3,941      |                     |     | $ | 3,723 |   |
| Service revenue                                 |   | 729                                 |       |                     | 700      |   |
|                                            |   | 4,670                               |       |                     | 4,423    |   |
| **Cost of goods sold**                          |   |                                |       |                     |     |   |
| Cost of equipment and supplies                  |   | 2,542                               |       |                     | 2,402    |   |
| Cost of service revenue                         |   | 187                                 |       |                     | 104      |   |
|                                            |   | 2,729                               |       |                     | 2,506    |   |
|                                            |   |                                |       |                     |     |   |
| **Gross margin**                                |   | 1,941                               |       |                     | 1,917    |   |
|                                            |   |                                |       |                     |     |   |
| **Operating expenses:**                         |   |                                |       |                     |     |   |
| Selling and marketing                           |   | 1,490                               |       |                     | 1,472    |   |
| General and administrative                      |   | 548                                 |       |                     | 659      |   |
| Research and development                        |   | 342                                 |       |                     | 392      |   |
| Amortization of intangibles                     |   | 195                                 |       |                     | 235      |   |
|                                            |   | 2,575                               |       |                     | 2,758    |   |
|                                            |   |                                |       |                     |     |   |
| **Operating loss**                              |   | (634                                | )          |                     | (841     | ) |
|                                            |   |                                |       |                     |     |   |
| **Other income (expense):**                     |   |                                |       |                     |     |   |
| Interest income                                 |   | 10                                  |       |                     | 6        |   |
| Interest expense                                |   | —                              |       |                     | (510     | ) |
|                                            |   |                                |       |                     |     |   |
| **Loss before taxes**                           |   | (624                                | )          |                     | (1,345   | ) |
|                                            |   |                                |       |                     |     |   |
| Provision (benefit) for taxes                   |   | —                              |       |                     | —   |   |
|                                            |   |                                |       |                     |     |   |
| **Loss from continuing operations**             |   | (624                                | )          |                     | (1,345   | ) |
|                                            |   |                                |       |                     |     |   |
| **Loss from discontinued operations**           |   | —                              |       |                     | (678     | ) |
|                                            |   |                                |       |                     |     |   |
| **Net loss**                                    |   | $                                   | (624       | )                        |     | $ | (2,023 | ) |
|                                            |   |                                |       |                     |     |   |
| **Net loss per share — basic and diluted** |   |                                |       |                     |     |   |
| Continuing operations                           |   | $                                   | (0.17      | )                        |     | $ | (0.38 | ) |
| Discontinued operations                         |   | —                              |       |                     | (0.19    | ) |
| Net loss                                        |   | $                                   | (0.17      | )                        |     | $ | (0.57 | ) |
|                                            |   |                                |       |                     |     |   |
| **Weighted average common shares outstanding**  |   |                                |       |                     |     |   |
| Basic and diluted                               |   | 3,594                               |       |                     | 3,569    |   |

 

See accompanying notes to consolidatedfinancial statements

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(unaudited, in thousands)**

 

 
|                                                                                             |   | **Successor  Company**              |      | **Predecessor  Company** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|--------------------------|--------|
|                                                                                             |   | **Three Months Ended  January 31,** |      |
|                                                                                             |   | **2003**                            |      | **2002**                 |   |
| **Cash Flows From Operating Activities:**                                                        |   |                                |      |                     |   |
| Net loss                                                                                         |   | $                                   | (624      | )                        |   | $ | (2,023 | ) |
| Adjustments to reconcile net loss to net cash flows provided by (used  in) operating activities: |   |                                |      |                     |   |   |
| Loss from discontinued operations                                                                |   | —                              |      |                     | 678    |   |
| Depreciation and amortization                                                                    |   | 366                                 |      |                     | 394    |   |
| Changes in operating assets and liabilities:                                                     |   |                                |      |                     |   |   |
| Accounts receivable                                                                              |   | (298                                | )         |                     | 79     |   |
| Inventories                                                                                      |   | 264                                 |      |                     | (160   | ) |
| Prepaid expenses and other current assets                                                        |   | (103                                | )         |                     | 520    |   |
| Accounts payable                                                                                 |   | 28                                  |      |                     | 137    |   |
| Employee compensation                                                                            |   | 201                                 |      |                     | (99    | ) |
| Deferred income                                                                                  |   | 108                                 |      |                     | (7     | ) |
| Warranty reserve                                                                                 |   | 8                                   |      |                     | (45    | ) |
| Other liabilities and accrued expenses                                                           |   | (240                                | )         |                     | 306    |   |
| Net cash provided by (used in) continuing operations                                             |   | (290                                | )         |                     | (220   | ) |
| Net cash used in discontinued operations                                                         |   | —                              |      |                     | (186   | ) |
| Net cash provided by (used in) operating activities                                              |   | (290                                | )         |                     | (406   | ) |
|                                                                                             |   |                                |      |                     |   |   |
| **Cash Flows From Investing Activities:**                                                        |   |                                |      |                     |   |   |
| Purchase of property and equipment                                                               |   | (12                                 | )         |                     | (58    | ) |
| Investment in proprietary software                                                               |   | —                              |      |                     | (236   | ) |
| Net cash used in continuing operations                                                           |   | (12                                 | )         |                     | (294   | ) |
| Net cash provided by discontinued operations                                                     |   | —                              |      |                     | 11     |   |
| Net cash used in investing activities                                                            |   | (12                                 | )         |                     | (283   | ) |
|                                                                                             |   |                                |      |                     |   |   |
| **Cash Flows From Financing Activities:**                                                        |   |                                |      |                     |   |   |
| Proceeds from stock transactions                                                                 |   | —                              |      |                     | 21     |   |
| Net cash provided by financing activities                                                        |   | —                              |      |                     | 21     |   |
|                                                                                             |   |                                |      |                     |   |   |
| **Net decrease in cash and cash equivalents**                                                    |   | (302                                | )         |                     | (668   | ) |
|                                                                                             |   |                                |      |                     |   |   |
| **Cash and cash equivalents at beginning of period**                                             |   | 4,434                               |      |                     | 2,019  |   |
|                                                                                             |   |                                |      |                     |   |   |
| **Cash and cash equivalents at end of period**                                                   |   | **$**                               | **4,132** | ** **               |   | **$** | **1,351** | ** ** |

 

See accompanying notes to consolidatedfinancial statements

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

January 31, 2003

(Unaudited)

 

**1.**                                      **Basis ofPresentation**

 

The consolidated balance sheet as of January31, 2003, the consolidated statements ofoperations and cash flows for the three months ended January 31, 2003 and 2002, and the related information presentedin these notes have been prepared by management in accordance with accountingprinciples generally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-QSB and Rule 10-01 ofRegulation S-B, without audit. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States of Americafor 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, 2002 was derived from theaudited consolidated financial statements as of that date.  Operating results for the three months endedJanuary 31, 2003 are not necessarilyindicative of the results that may be expected for the year ending October 31,2003.  For further information, refer tothe consolidated financial statements and notes thereto included in AngeionCorporation’s Annual Report on Form 10-KSB for the transition period endedOctober 31, 2002.

 

During March 2000, Angeion Corporationdiscontinued its historical business, the research, development, manufacturingand marketing of implantable cardioverter defibrillators (“ICD”).  Consequently, the accompanying consolidatedstatements of operations present all activities of the ICD business asdiscontinued operations.  Although thelast sales of ICD products were made during the second quarter of 2000, theCompany continues to pursue the license or transfer of its ICD technology.

 

Comprehensive income is a measure of allnon-owner changes in shareholders’ equity and includes such items as net income,certain foreign currency translation items, minimum pension liabilityadjustments and changes in the value of available-for-sale securities.  For the three months ended January31, 2003 and 2002, comprehensive loss forAngeion Corporation was equivalent to net loss as reported.

 

**2.**                                      **Reorganization**

 

***Reorganization UnderChapter 11.*** On June 17, 2002, the Company filed a voluntary petition for reliefunder Chapter 11 of the United States Bankruptcy Code in the United StatesBankruptcy Court for the District of Minnesota, Third Division (the “Court”)under case number 02-32260.  The filingwas done jointly with the holders of the Company’s 7 1/2% Senior ConvertibleNotes due April 2003 (“Notes”) and included a jointly submitted Plan ofReorganization (the “Plan”).  Thetransaction was implemented as a Chapter 11 Bankruptcy filing for the purposeof enabling the Company and the noteholders to accomplish the restructuring ina controlled manner and to enable the Company to retain a net operating losscarry forward of approximately $128 million out of the $133 millionpre-bankruptcy net operating loss carry forward.  During the bankruptcy period, the Company continued to operate asdebtor-in-possession.  Asdebtor-in-possession, the Company operated as an ongoing business, but couldnot engage in transactions outside the ordinary course of business withoutapproval of the Bankruptcy Court.  TheCompany’s subsidiary, Medical Graphics Corporation, was not part of the Chapter11 filing and continued to transact business as usual during the bankruptcyperiod.

 

On October 24,2002, the Court entered an order confirming the Joint Modified Plan ofReorganization dated September 4, 2002. The Plan became effective October 25, 2002, the next business day.

 

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As of June 17, 2002, the date the petition was filed with the Court,there were 3,594,627 shares of the Company’s common stock issued andoutstanding (the “Old Common Stock”). As a result of the Plan, all of the Company’s Old Common Stock wascanceled and all options and warrants to purchase the Company’s Old CommonStock existing as of the petition date were canceled.  To effectuate the Plan, the Company issued a total of 3,594,433 sharesof its common stock (i) upon conversion of the Notes and (ii) in replacement ofthe Old Common Stock (the “Replacement Common Stock”).  The difference between the 3,594,433 sharesactually issued under the Plan and the 3,594,627 shares outstanding as of June17, 2002 reflects a reduction of 194 shares representing fractional shares thatwere not issued under the Plan.

 

Under thePlan, each holder of the Company’s Notes and each holder of certain otherunsecured claims received such holder’s pro rata share of 95% of theReplacement Common Stock.  Each holderof the Company’s Old Common Stock received a pro rata share of 5% of theReplacement Common Stock and one common stock purchase warrant for each shareof Replacement Common Stock (the “New Warrants”).  For each 20 shares of Old Common Stock owned prior to the Planconfirmation date, shareholders received one share of Replacement Common Stockand one New Warrant to purchase one share of Replacement Common Stock at $7.79per share.  The New Warrants expire onOctober 31, 2007, and are subject to redemption at the Company’s option for$.01 per Warrant at any time after January 1, 2004, provided that the closingprice of the common stock exceeds $9.73 (subject to adjustment) for tenconsecutive trading days after January 1, 2004 and during the term of theWarrants.

 

**3.**                                      **Accounting Policies**

 

***Basis ofPresentation.*** The consolidated financial statements contained in this reportreflect the accounting principles set forth in Statement of Position 90-7, *“Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code”* (“SOP 90-7”).  This statement provides guidance for financial reporting byentities that have filed voluntary petitions for relief under and havereorganized in accordance with the bankruptcy code.  In accordance with fresh-start reporting, the reorganizationvalue of the entity is to be determined and allocated to the entity’s assets inconformity with purchase accounting guidelines.  All assets and liabilities are to be recorded at their respectivefair values.  Adopting fresh-startreporting results in a new reporting entity with no beginning retained earningsor deficit.  SOP 90-7 further statesthat fresh-start financial statements prepared by entities emerging frombankruptcy will not be comparable with those prepared before their plans wereconfirmed because they are, in effect, those of a new entity.  Among other things, a black line is to bedrawn in the financial statements to distinguish between the pre-reorganizationentity (“Predecessor Company”) and the post-reorganization entity (“SuccessorCompany”).  Consequently, after givingeffect to reorganization and fresh-start adjustments, the financial statementsof a Successor Company are deemed not comparable to those of a PredecessorCompany.  For financial reporting purposes,the results of the Predecessor Company and the Successor Company cannot becombined.

 

***Fresh-StartReporting. ***Theeffective date of the Company’s emergence from bankruptcy was October 25,2002.  For accounting purposes, theCompany adopted fresh-start reporting in accordance with SOP 90-7 as of October31, 2002.  In accordance withfresh-start reporting, all assets and liabilities were recorded at theirrespective fair values.  An independentthird-party appraiser determined the fair values of substantially all of theCompany’s tangible and intangible assets.

 

All financial information prior to October 31, 2002 is presented aspertaining to the Predecessor Company while all financial information presentedas of and after October 31, 2002 is presented as pertaining to the SuccessorCompany.  Accordingly, the ConsolidatedFinancial Statements present information pertaining to both the PredecessorCompany and the Successor Company. Tabular presentations in these Notes to Consolidated Financial Statementsmay include data pertaining to both the

 

6

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Predecessor Company and theSuccessor Company.  Accordingly, a blackline has been drawn in the financial statements to distinguish between thePredecessor Company and Successor Company.

 

***Fiscal YearChange. ***On November 13, 2002, the Company’s Board ofDirectors changed its fiscal year from December 31 to October 31 to coincidewith customer buying patterns of the Medical Graphic’s medical equipmentbusiness and the New Leaf health and fitness product business.  The change also enables the Company toreport its results in the future on a comparable basis as a result of the freshstart reporting that was required in conjunction with the Company’s emergencefrom Chapter 11 bankruptcy.

 

**4.**                                      **Intangible Assets**

 

As discussedin Note 3, “Accounting Policies,” the Company adopted fresh-start reporting asdescribed in SOP 90-7 under which the Company’s assets are to be recorded attheir respective fair value.  Anindependent third-party appraiser determined the fair values of the Company’sintangible assets as of October 31, 2002. Accordingly, all intangible assets have been valued at fair value as ofthe date of fresh-start reporting, October 31, 2002.  Intangible assets as of January 31, 2003 consisted of thefollowing:

 
| **(In thousands)**             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Intangible  Assets, net** |   |
|--------------------------------|--------|-----------------------------|--------|-------------------------------|--------|-----------------------------|--------|
|                           |   |                        |   |                          |   |                        |   |
| Amortized developed technology |   | $                           | 7,250  |                          | $      | 195                         |   | $ | 7,055 |   |
|                           |   |                        |   |                          |   |                        |   |
| Unamortized trade name         |   | 1,000                       |   | —                        |   | 1,000                       |   |
|                           |   | $                           | 8,250  |                          | $      | 195                         |   | $ | 8,055 |   |

 

Amortization expense was $195,000 and $235,000 for the three monthsended January 31, 2003 and 2002, respectively. Amortization expense was $636,000 for the ten-month transition periodended October 31, 2002.  Intangibleassets for the Predecessor Company were amortized using the straight-linemethod over the estimated useful lives of the assets that ranged from three totwelve years.  The revalued intangibleassets for the Successor Company are being amortized using the straight-linemethod over the estimated useful lives of the assets that range from seven toten years.  Estimated amortizationexpense for the remainder of fiscal year 2003 and for each of the succeeding yearsbased on the intangible assets as of January 31, 2003 is as follows:

 
| **(In thousands)**                  |   | **Amortization** |   |
|-------------------------------------|--------|------------------|--------|
| Nine months ending October 31, 2003 |   | $                | 629    |   |
| 2004                                |   | 824              |   |
| 2005                                |   | 824              |   |
| 2006                                |   | 824              |   |
| 2007                                |   | 824              |   |
| Thereafter                          |   | 3,130            |   |
|                                |   | $                | 7,055  |   |

 

**5.**                                      **Warranty Reserve**

 

Sales of the Company’s systems are subject toa warranty.  System warranties typicallyextend for a period of twelve months from the date of installation.  Standard warranty terms are included incustomer

 

7

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contracts.  Under the terms of these warranties, theCompany is obligated to repair or replace any components or assemblies that itdeems defective in workmanship or materials. The Company reserves the right to reject warranty claims where it determinesthat failure is due to normal wear, customer modifications, impropermaintenance or misuse.  The Companyadjusts the warranty reserve based on the number and type of systems that aresubject to warranty, adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects theCompany’s historical warranty experience based on type of system.  System warranty expenses are evaluated andadjusted periodically.  Warrantyprovisions and expenses for the three months ended January 31, 2003 were asfollows:

 
| **(In thousands)**        |   | **Warranty  Reserve** |   |
|---------------------------|--------|-----------------------|--------|
| Balance  October 31, 2002 |   | $                     | 111    |   |
| Warranty  provisions      |   | 66                    |   |
| Warranty  expenses        |   | (58                   | )      |
| Balance  January 31, 2003 |   | $                     | 119    |   |

 

**6.**                                      **Reclassifications**

 

Certain amounts in Angeion’s financialstatements for the three months ended January 31, 2002 have been reclassified to conform to the2003 presentation.  Thesereclassifications had no effect on net loss or shareholders’ equity.

 

**7.**                                      **Net Loss PerShare**

 

Basic lossesper share are computed by dividing net loss by the weighted average shares outstandingduring the reporting period.  Dilutedlosses per share are computed similar to basic losses per share except that theweighted average shares outstanding are increased to include additional sharesfrom the assumed exercise of stock options and warrants, if dilutive.  The number of additional shares iscalculated by assuming that outstanding stock options or warrants wereexercised and that the proceeds from such exercise were used to acquire sharesof common stock at the average market price during the reporting period.  There were no dilutive common sharesoutstanding for the three months ended January 31, 2003 and 2002.

 

**8.**                                      **OtherInformation**

 

In June 2002, Company’sformer joint venture partner, ELA Medical, notified the Company that some of the ICD’s formerly manufactured byAngeion were experiencing premature battery depletion.  The Company advised the attending physiciansof the patients with these ICD’s of the problems and provided the physicianswith a recommended procedure to determine what action is required.  As part of the May 1999 agreement betweenthe Company and ELA in which the Company withdrew from a joint venture withELA, ELA is responsible for the warranty coverage, technical service, and regulatorycompliance service for these ICDs.  TheCompany remains responsible for third party claims relating to these ICDs madeon behalf of a patient (i.e. product liability claims).  The Company believes that if any such claimsare made, it has adequate product liability insurance to cover them, subject todeductibles.

 

**9.**                                      **NewAccounting Pronouncements**

 

In June 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.  SFAS No. 146 addresses the financial accountingand reporting for costs associated with exit and disposal activities andnullifies Emerging Issues Task Force (EITF) Issue No. 94-3, LiabilityRecognition for Certain Employee Termination

 

8

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Benefits and Other Costs toExit an Activity (including Certain Costs Incurred in a Restructuring).  The provisions of SFAS No. 146 are effectivefor exit or disposal activities that are initiated after December 31, 2002, withearly application encouraged.  The Companywill account for any restructuring activities initiated after December 31, 2002under the provisions of SFAS No. 146.

 

In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure*.  SFAS No. 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The Company does not plan tochange its method of accounting for stock-based employee compensation.  The Company will make the required interimdisclosures effective with the quarter ending April 30, 2003.

 

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**Item 2.**           **Management’s Discussion and Analysis orPlan of Operation**

 

# **Forward-LookingStatements**

 

Statements included in this Quarterly Report on Form 10-QSB that arenot historical or current facts are “forward-looking statements” made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995.  The words “believe,” “expect,”“will,” “can,” “estimate,” “anticipate,” and similar expressions are intendedto identify forward-looking statements. Forward-looking statements are subject to certain risks and uncertaintiesthat could cause actual results to differ materially including the following:(i) the Company’s ability to successfully increase revenue from its New Leafhealth and fitness products, (ii) the Company’s ability to develop, improve andupdate its cardiopulmonary diagnostic products, (iii) the Company’s ability toprotect its intellectual property, (iv) potential product liability claimsrelated to the Company’s medical products, (v) dependence upon third partyvendors and (vi) the Company’s ability to maintain a bid price of $1.00 per sharefor its common stock to remain eligible for continued inclusion on Nasdaq aswell as other factors not now anticipated. Additional factors are set forth in the Section entitled “Certain RiskFactors” in Part I, Item 1, “Business” of the Company’s Form 10-KSB for thetransition period ended October 31, 2002. Various forward-looking statements have been made in this QuarterlyReport on Form 10-QSB and may also be made in other Angeion reports filed underthe Securities Exchange Act of 1934, in its press releases and in otherdocuments.  In addition, from time totime, the Company through its management may make oral forward-lookingstatements.  The Company undertakes noobligation to update any forward-looking statement.

 

# **Overview**

 

Angeion Corporation is a medical products company that reported revenueof $13.4 million for the ten months ended October 31, 2002 and $16.7 millionfor the year ended December 31, 2001. Domestic product sales and service revenues accounted for 83.4% of  revenue for the ten months ended October 31,2002 while international product sales accounted for the remaining 16.6%.

 

Angeion, through its Medical Graphics Corporation subsidiary, develops,manufactures and markets non-invasive cardiorespiratory diagnostic systems andrelated software for the management and improvement of cardiorespiratory healthunder the MedGraphics trade name.  Theprimary MedGraphics products include pulmonary function and cardiopulmonaryexercise testing systems.  The Companyalso develops, manufactures and markets health and fitness products andservices designed to assist consumers with weight management, fitnessimprovement and cardiac rehabilitation. These new products and services are sold under the New Leaf brand nameto consumers through various delivery sites such as health and fitness clubs,weight management and cardiac rehabilitation centers.

 

The ten-month transition period ended October 31, 2002 was a difficultperiod for the Company, but also represented a period of significantchange.  Through the Chapter 11Bankruptcy, all of the Company’s Senior Convertible Notes due April 2003 wereconverted into common stock.  Inaddition, the Company received $2.9 million in cash under an agreement thatgranted a perpetual, non-exclusive license to use the Company’s cardiacstimulation technology to Biotronik.  Asa result of these actions, the Company emerged from bankruptcy on October 25,2002 with a strong balance sheet, no debt and over $4.4 million in cash.  For the first time in several years,management is now completely focused on running the cardiopulmonary diagnosticbusiness as well as its new health and fitness products and services as opposedto the wind-down of its ICD business and all the financial issues associatedwith the debt that was incurred in April 1998.

 

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The Companyemerged from its Chapter 11 proceeding and adopted fresh-start reporting as ofOctober 31, 2002.  In accordance withfresh-start reporting, all assets and liabilities were recorded at theirrespective fair values.  An independentthird-party appraiser determined the fair values of substantially all of theCompany’s tangible and intangible assets. As a result of that appraisal, the Company (i) increased the net bookvalue of property and equipment from $899,000 to $2,164,000, (ii) decreased thenet book value of intangible assets from $10.1 million to $8.3 million, (iii)eliminated the $1.9 million value of goodwill, (iv) increased the value ofinventory by $59,000, and (v) decreased the value of deferred income by$224,000.

 

The foregoingrevaluation adjustments affect the Successor Company operating results in thefollowing manner.  On an annual basis,they (i) increase depreciation expense by $37,000, (ii) increase amortizationof intangibles by $50,000, (iii) decrease gross margins by $59,000 as currentinventory is sold and (iv) decrease gross margins by $224,000 as deferredservice contracts are recognized as income.

 

The Company’sfinancial statements after October 31, 2002 reflect a new reporting entity, theSuccessor Company, and are not directly comparable to the financial statementsof prior periods.  The principalcomparative differences between the three-month periods ended January 31, 2003and 2002 relate to the impact of the changes in indebtedness and therevaluation of the Company’s assets and liabilities to reflect thereorganization value on October 31, 2002. The changes primarily affect depreciation and amortization expense,gross margins and interest expense in the Company’s results of operations afterOctober 31, 2002.  However, for purposesof comparative analysis, the following discussion of the operating results ofthe Company compares the operating results of the Successor Company with theoperating results of the Predecessor Company for the three months ended January31, 2003 and 2002, respectively.  Theoperations comprised of revenues, selling and marketing, general andadministrative and research and development, of the Predecessor and SuccessorCompanies were substantially similar and the comparison of those items ismeaningful to understanding the business.

 

**Results of Operations**

 

AngeionCorporation recorded a net loss of $624,000 for the three months ended January31, 2003 compared to a net loss of $2,023,000 for the same period in 2002.  The net loss for 2002 included a loss of$678,000 from discontinued operations as well as $510,000 of interest expense.

 

**Revenues**

 

Revenues consist of product sales and service revenues.  Product sales reflect sales of MedicalGraphic’s non-invasive cardiorespiratory diagnostic systems and relatedsoftware, sales of New Leaf health and fitness products and services, andaftermarket sales of peripherals and supplies. Service revenues reflect contract revenues from extended servicecontracts, non-warranty service visits and training.

 

Total revenue increased by $247,000 or 5.6% to $4,670,000 from$4,423,000 for the three months ended January 31, 2003 and 2002,respectively.  Domestic product revenueincreased by $347,000 or 12.0% to $3,236,000 in 2003 compared to $2,889,000 in2002.  Internationally, product revenuedecreased $129,000 or 15.5% to $705,000 in 2003 from $834,000 in 2002.  Service revenue increased by $29,000 or 4.1%to $729,000 in 2003 from $700,000 in 2002.

 

The momentumof improving domestic system orders continued through the first quarter of2003.  Although customer interest inplacing new system orders continues to improve, the Company believes thatdomestic customers are continuing to exercise caution in making capitalexpenditures due to the overall uncertainty of the United States economy.  Internationally, customer system ordersremain

 

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sluggish.  European customers are delaying capitalexpenses unless there is a clear immediate need.  Latin America continues to suffer from very weak economies anddevaluating currencies.  The servicerevenue increase reflects an increase in service contracts being written due toon-going emphasis on the sale of extended service contracts.  The Company continues to develop its NewLeaf Personal Exercise products that are currently targeting weight-lossconsumers through fitness clubs and other delivery sites.

 

**Gross Margin**

 

Gross marginpercentage decreased to 41.6% of revenue for the three months ended January 31,2003 compared to 43.3% for the same period in 2002.  The 2003 gross margin percentage was negatively affected by thefresh start accounting rules that required the Company to write up itsinventory to fair market value at October 31, 2002, rather than carrying theinventory at the lower of cost or market. As a result, the Company increased the carrying value of its inventoryby $59,000 at October 31, 2002.  Inaddition, the Company was required to record the direct and incremental cost offulfilling its obligations associated with customer service contracts existingat October 31, 2002.  Consequently,deferred income was reduced by $224,000 at October 31, 2002.

 

As the Company’s inventory and deferred income turn during fiscal year2003, the fresh start adjustments for these assets will affect the Companygross margin negatively.  The impact ofthe October 31, 2002 fresh-start accounting adjustments resulted in a $134,000decrease in gross margin and caused a reduction of 2.8% in gross marginpercentage during the first quarter of 2003. Consequently, without these adjustments, the underlying first quarter2003 gross margin rate would have been 44.4% or 1.1% better than the comparablerate for 2002.  Gross margins willcontinue to be negatively affected by the October 31, 2002 fresh startaccounting adjustments by a total of $149,000 for the remainder of 2003.  The fresh start accounting adjustments hadno impact, however, on the Company’s cash flow.

 

**Selling and Marketing**

 

Selling and marketing expenses increased 1.2% to $1,490,000 for thethree months ended January 31, 2003 compared to $1,472,000 in 2002.  The expenses associated with the Company’sfocus on selling and marketing its New Leaf personal exercise products havebeen generally offset by lower travel costs and other selling and marketingexpenses associated with its cardiopulmonary diagnostic products.

 

**General andAdministrative**

 

General and administrative expenses decreased 16.8% to $548,000 for thethree months ended January 31, 2003 compared to $659,000 in 2002.  The decrease in general and administrativeexpenses is primarily due to professional fees related to the conversion ofdebt to equity that were incurred during the three months ended January 31,2002 and not incurred during the same period of 2003.

 

**Research andDevelopment**

 

Research anddevelopment expenses decreased 12.8% to $342,000 for the three months endedJanuary 31, 2003 compared to $392,000 in 2002. Lower personnel costs more than offset the impact of the Company’sdiscontinuance of capitalizing a portion of its software developmentcosts.  The Company’s previous focus onthe conversion and consolidation of software platforms is now complete.  Research and development expenses of$113,000 were capitalized as part of the Company’s proprietary

 

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software for the three monthsended January 31, 2002 while none were capitalized for the three months endedJanuary 31, 2003.

 

**Amortization ofIntangibles**

 

Amortization of intangibles decreased 17.0% to $195,000 for the threemonths ended January 31, 2003 compared to $235,000 in 2002.  Although amortization expenses resultingfrom fresh start accounting are somewhat higher than those that were incurredprior to the revaluation of intangible assets made by an independent thirdparty appraiser, amortization expense for the current quarter is lower due tothe Company’s January 1, 2002 adoption of SFAS Statement No. 141, *Goodwill and Other Intangible Assets*,wherein goodwill and trade name are no longer amortized.

 

**Other Income(Expense)**

 

Interestincome for the three months ended January 31, 2003 increased to $10,000 from$6,000 in 2002.  The increase ininterest income reflects an increase in excess cash balances available forshort-term investment.

 

There was nointerest expense for the three months ended January 31, 2003 compared to$510,000 for 2002.  Under the Joint Planof Reorganization, all of the Company’s Senior Convertible Notes due April 2003were converted into common stock of the Company upon emergence from bankruptcy.

 

**Liquidity and CapitalResources**

 

The Company has financed its liquidity needs over the last severalyears through revenue generated by the operations of its wholly ownedsubsidiary, Medical Graphics Corporation, through revenue from licenseagreements for patented ICD technology and through the use of cash balances.

 

The Company had cash of $4,132,000 and working capital of $7,222,000 asof January 31, 2003.  During the threemonths ended January 31, 2003, the Company used $290,000 in cash for alloperating activities.  The Company used$225,000 of cash for operating activities before depreciation and amortization.  In addition, cash was used by increases of$298,000 and $103,000 in accounts receivable and prepaid expenses and othercurrent assets, respectively, as well as a decrease of $240,000 in otherliabilities and accrued expenses.  Theseuses of cash were partially offset with cash generated by a $264,000 decreasein inventories as well as an increase of $201,000 in accrued employeecompensation.

 

During the three months ended January 31, 2003, the Company used$12,000 in cash for investing activities to purchase $12,000 of property andequipment.

 

The Company has no material commitments for capital expenditures forfiscal year 2003.

 

As a result of the Company’s October 25, 2002 emergence from bankruptcyand the resulting conversion of debt to equity and its cash of $4,132,000, theCompany believes that its liquidity and capital resource needs for the nexttwelve months will be met through its current cash and cash equivalents, cashflows from operations and working capital.

 

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**OtherCommitments**

 

The Company has made various financial commitments in the ordinarycourse of conducting its business operations. The following table summarizes all significant commitments:

 
| **(Amounts in thousands)  Description**                   |   | **Nine  months  ending  October 31,  2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007 &  Thereafter** |   |
|-----------------------------------------------------------|--------|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------------------------|--------|
| Continuing operations:                                    |   |                                        |   |     |   |     |   |     |   |                       |   |
| Minimum lease payments                                    |   | $                                           | 245    |     | $      | 212      |   | $        | 5      |                       | $      | 4 |   | $ | 8 |   |
| Minimum royalty payments for sales of  AeroSport products |   | 75                                          |   | 100      |   | 100      |   | 100      |   | —                     |   |
| Discontinued operations:                                  |   |                                        |   |     |   |     |   |     |   |                       |   |
| Minimum lease payments                                    |   | 61                                          |   | —   |   | —   |   | —   |   | —                     |   |
| Sublease income                                           |   | (35                                         | )      | —   |   | —   |   | —   |   | —                     |   |
|                                                      |   | $                                           | 346    |     | $      | 312      |   | $        | 105    |                       | $      | 104 |   | $ | 8 |   |

 

### **Item3.  Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Company’s Chief ExecutiveOfficer, Richard E. Jahnke, and Chief Financial Officer, Dale H. Johnson, haveevaluated the effectiveness of the Company’s disclosure controls and procedureswithin 90 days prior to the filing of this report.  Based upon this review, these officers believe that the Company’sdisclosure controls and procedures are effective in ensuring that materialinformation related to the Company is made known to them by others within theCompany.

 

**Changes inInternal Controls**

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls during thequarter covered by this report or from the end of the reporting period to thedate of this Form 10-QSB.

 

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**PARTII - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

The Company is subject to certain claims and lawsuits that have beenfiled in the ordinary course of business. Management is of the opinion that ultimate settlement of these matterswill not have a material impact on its financial statements.

 

**Item 2.  Changes in Securities**

 

None

 

**Item 3.  Defaults Upon Senior Securities**

 

None

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5.  Other Information**

 

# **Change in Fiscal Year**

 

On November 13, 2002, the Company’s Board of Directors changed itsfiscal year from December 31 to October 31 to coincide with customer buyingpatterns of the Medical Graphic’s medical equipment business and the New Leafhealth and fitness product business. The change also enables the Company to report its results in the futureon a comparable basis as a result of the fresh start reporting that wasrequired in conjunction with the Company’s emergence from Chapter 11bankruptcy.

 

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

 

(a)                                  ExhibitsList

 

99.1                           Certificatepursuant to 18 U.S.C. § 1350

 

(b)                                 Reportson Form 8-K

 

On November 25, 2002, the Company filed a Report on Form 8-K datedNovember 14, 2002 reporting on Item 5, other events.  The Company reported that it had achieved compliance with theNasdaq requirement of having a market value of publicly held shares of at least$1,000,000.

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                 | Angeion Corporation                   |   |
|----------------------|---------------------------------------|--------|
|                 | (Registrant)                          |
|                 |                                  |
|                 |                                  |
| Date: March 14, 2003 | /s/ Richard E. Jahnke                 |   |
|                 | Richard E. Jahnke                     |
|                 | President and Chief Executive Officer |
|                 | (Principal Executive Officer)         |
|                 |                                  |
|                 |                                  |
| Date: March 14, 2003 | /s/ Dale H. Johnson                   |   |
|                 | Dale H. Johnson                       |
|                 | Chief Financial Officer               |
|                 | (Chief Accounting Officer)            |
|                      |                                       |        |  |  |

 

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**CERTIFICATIONS**

 

I,Richard E. Jahnke, certify that:

 

1.                                       I have reviewed this quarterly report on Form10-QSB of Angeion Corporation;

 

2.                                     Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                   presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                     The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                                   all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 14, 2003 | /s/ Richard E. Jahnke                 |   |
|----------------------|---------------------------------------|--------|
|                 | Richard E. Jahnke                     |
|                 | President and Chief Executive Officer |

 

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I,Dale H. Johnson, certify that:

 

1.                                       I have reviewed this quarterly report on Form10-QSB of Angeion Corporation;

 

2.                                     Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                     Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)                                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                    presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                     The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                                    all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                   any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                     The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: March 14, 2003 | /s/ Dale H. Johnson     |   |
|----------------------|-------------------------|--------|
|                 | Dale H. Johnson         |
|                 | Chief Financial Officer |

 

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