UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A

(Amended Quarterly Report)

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

For the quarterly period ended July 31, 2006

OR

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

For the transition period from                         to                        .

Commission file number 001-13543

Angeion Corporation

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

 

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

(Address of principal executive offices)

(651) 484-4874

(Issuer’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 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  x      No  o

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

Yes  o       No  x

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 after distribution of securities under a plan confirmed by a court.

Yes  x      No  o

The Company had 3,630,677 shares of common stock, $0.10 par value, outstanding as of September 8, 2006.

EXPLANATORY STATEMENT

This Form 10-QSB/A amends and restates the Company’s Form 10-QSB for the quarter ended July 31, 2006, initially filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2006 (the “Original Filing”), and is being filed to reflect the restatement of the financial statements and other financial information of the Company for the third fiscal 2006 quarter and nine months ended July 31, 2006.

In connection with the audit of the Company’s consolidated financial statements as of and for the year ended October 31, 2006, the Company concluded that its consolidated financial statements for the first, second and third quarters of fiscal year 2006 should be restated as a result of a misapplication of an accounting principle regarding the accounting for income taxes in those financial statements.  The restatement does not change income before taxes and will have no cash impact on the results of these three periods.

During the first, second and third quarters of fiscal 2006 the Company did not correctly apply Generally Accepted Accounting Principles (“GAAP”) relating to accounting for the utilization of pre-emergence bankruptcy net operating loss (“NOL”) carry forwards.  The Company has determined that during the first three quarters of the fiscal year, it should have applied American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”) to the utilization of its pre-emergence bankruptcy NOL carry forwards.  Angeion was in Chapter 11 Bankruptcy Reorganization from June 2002 to October 2002.

Under SOP 90-7, the benefits realized from pre-emergence bankruptcy NOLs should not have been reflected on the Company’s consolidated statements of operations as a reduction in the provision for taxes.  Instead, the benefits should have been reflected in the consolidated financial statements first by reducing the specified intangible assets (including goodwill) resulting from the reorganization until exhausted and thereafter been reported as an increase to additional paid-in capital.

It is important to note that the application of this accounting principle changes only the financial reporting related to income taxes.  The amount of income taxes payable is determined after utilizing the Company’s pre-emergence bankruptcy NOLs and does not change cash flows.

Therefore, the Company has:

·                  Increased the provision for tax from continuing operations by $261,000 and $435,000 for the three and nine months ended July 31, 2006, respectively,

·                  Increased tax expense related to discontinued operations by $97,000 for the nine months ended July 31, 2006, and

·                  Decreased goodwill by $328,000, decreased intangible assets by $393,000, increased other current liabilities and accrued expenses by $17,000 and decreased deferred income tax liabilities by $207,000 as of July 31, 2006.

See Note 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for further details.

In addition to the adjustments discussed above, this restatement includes adjustments for the reclassification of bonus expenses previously included in general and administrative expenses to other statement of operations expense captions to properly classify bonus expense to the salary of the employee who earned the bonus. We refer to these as Other Adjustments, which were immaterial, individually and in the aggregate, to the previously issued financial statements.

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For the convenience of the reader, this Form 10-QSB/A sets forth the Original Filing in its entirety.  However, this Form 10-QSB/A only amends and restates certain information in Items 1, 2 and 3 of Part I of the Original Filing, in each case solely as a result of and to reflect the restatement, and no other information in the Original Filing is amended.  The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events.  Among other things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the restatement), and these forward looking statements should be read in their historical context.  In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to include certifications re-executed as of the date of this Form 10-QSB/A from the Company’s Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  The certifications of the Chief Executive Officer and Chief Financial Officer are attached to this Form 10-QSB/A as exhibits 31 and 32.

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

ANGEION CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

July 31, 2006 and October 31, 2005

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

		Restated July 31, 2006			October 31, 2005
Assets
Current assets:
Cash and cash equivalents		$	2,461		$	1,072
Cash restricted for discontinued operations		—			400
Accounts receivable, net of allowance for doubtful accounts of $177 and $210, respectively		6,037			4,100
Inventories		5,603			3,455
Prepaid expenses and other current assets		234			280
Current assets of discontinued operations		—			700
Total current assets		14,335			10,007
Property and equipment, net of accumulated depreciation of $1,799 and $1,598, respectively		1,106			1,035
Intangible assets, net		4,496			5,498
Goodwill		—			328
Total Assets		$	19,937		$	16,868
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	1,844		$	1,184
Employee compensation		1,724			1,166
Advance payments from customers		1,045			—
Deferred income		958			871
Warranty reserve		275			175
Other current liabilities and accrued expenses		313			366
Current liabilities of discontinued operations		—			517
Total current liabilities		6,159			4,279
Long-term liabilities:
Long-term deferred income		792			319
Deferred income taxes		132			337
Total long-term liabilities		924			656
Total Liabilities		7,083			4,935
Shareholders’ equity:
Common stock, $0.10 par value, authorized 25,000,000 shares, issued and outstanding, 3,630,677 shares in 2006 and 3,609,325 shares in 2005		363			361
Additional paid-in capital		17,812			17,589
Deferred compensation		—			(14		)
Accumulated deficit		(5,321		)	(6,003		)
Total shareholders’ equity		12,854			11,933
Total Liabilities and Shareholders’ Equity		$	19,937		$	16,868

 

See accompanying notes to consolidated financial statements.

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ANGEION CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited, in thousands except per share amounts)

		Three Months Ended July 31,						Nine Months Ended July 31,
		Restated 2006			2005			Restated 2006			2005
Revenues
Equipment and supply sales		$	8,159		$	5,363		$	20,970		$	15,015
Service revenue		638			695			1,972			2,105
		8,797			6,058			22,942			17,120
Cost of goods sold
Cost of equipment and supplies		4,393			2,968			11,258			8,482
Cost of service revenue		95			89			317			316
		4,488			3,057			11,575			8,798
Gross margin		4,309			3,001			11,367			8,322
Operating expenses:
Selling and marketing		2,013			1,744			5,818			5,309
General and administrative		809			659			2,328			1,937
Research and development		633			482			1,687			1,519
Amortization of intangibles		203			203			609			609
		3,658			3,088			10,442			9,374
Operating income (loss)		651			(87		)	925			(1,052		)
Interest income		22			10			50			26
Income (loss) before taxes		673			(77		)	975			(1,026		)
Provision for taxes		279			—			464			—
Income (loss) from continuing operations		394			(77		)	511			(1,026		)
Gain (loss) from discontinued operations, net of income taxes		—			(191		)	171			(191		)
Net income (loss)		$	394		$	(268	)	$	682		$	(1,217	)
Earnings (loss) per share - basic
Continuing operations		$	0.11		$	(0.02	)	$	0.14		$	(0.29	)
Discontinued operations		—			(0.05		)	0.05			(0.05		)
Net income (loss)		$	0.11		$	(0.07	)	$	0.19		$	(0.34	)
Earnings (loss) per share - diluted
Continuing operations		$	0.10		$	(0.02	)	$	0.14		$	(0.29	)
Discontinued operations		—			(0.05		)	0.04			(0.05		)
Net income (loss)		$	0.10		$	(0.07	)	$	0.18		$	(0.34	)
Weighted average common shares outstanding
Basic		3,626			3,607			3,619			3,605
Diluted		3,789			3,607			3,755			3,605

 

See accompanying notes to consolidated financial statements.

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ANGEION CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited, in thousands)

		Nine Months Ended July 31,
		Restated 2006			2005
					(Revised)
Cash Flows From Operating Activities:
Net income (loss)		$	682		$	(1,217	)
(Gain) loss from discontinued operations		(171		)	191
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		810			919
Stock-based compensation		187			25
Tax benefit from stock options exercised		1			—
Deferred income taxes		516			—
Provision for doubtful accounts		(2		)	(73		)
Changes in operating assets and liabilities:
Accounts receivable		(1,935		)	253
Inventories		(2,148		)	(502		)
Prepaid expenses and other current assets		46			113
Accounts payable		660			(429		)
Employee compensation		558			316
Advance payments from customers		1,045			—
Deferred income		560			79
Warranty reserve		100			—
Other current liabilities and accrued expenses		(53		)	73
Net cash provided by (used in) continuing operations		856			(252		)
Cash provided by (used in) operating activities of discontinued operations		754			(660		)
Net cash provided by (used in) operating activities		1,610			(912		)
Cash Flows From Investing Activities:
Purchase of property and equipment		(272		)	(188		)
Net cash used in investing activities		(272		)	(188		)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock		51			14
Net cash provided by financing activities of continuing operations		51			14
Cash provided by (used in) financing activities of discontinued operations:
Promissory note payments		(400		)	—
Cash restricted for discontinued operations		400			(400		)
Net cash provided by (used in) financing activities		51			(386		)
Net increase (decrease) in cash and cash equivalents		1,389			(1,486		)
Cash and cash equivalents at beginning of period		1,072			2,390
Cash and cash equivalents at end of period		$	2,461		$	904

 

Supplemental disclosure of non-cash investing activities:

During the nine months ended July 31, 2006, the Company decreased goodwill $328,000 and intangible assets $393,000 with an offsetting decrease to the deferred tax valuation allowance of $721,000 for the usage of pre-emergence bankruptcy net operating loss carry forwards.

See accompanying notes to consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2006

(Unaudited)

1.                                      Basis of Presentation

The accompanying consolidated balance sheet as of July 31, 2006 and the consolidated statements of operations for the three and nine months ended July 31, 2006 and the consolidated statement cash flows for the nine months  ended July 31, 2006 have been restated.  The nature of the restatement and the effect on the financial statement line items are discussed in Note 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements.”

The consolidated balance sheet as of July 31, 2006, the consolidated statements of operations for the three and nine months ended July 31, 2006 and 2005, and the consolidated statements of cash flows for the nine months ended July 31, 2006 and 2005, and the related information presented in these notes have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X, without audit.  Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation of results have been included.  The consolidated balance sheet at October 31, 2005 was derived from the audited consolidated financial statements as of that date.  Operating results for the three and nine months ended July 31, 2006 are not necessarily indicative of the results that may be expected for the year ending October 31, 2006.  For further information, refer to the consolidated financial statements and notes thereto included in Angeion Corporation’s Annual Report on Form 10-KSB for the year ended October 31, 2005.

Comprehensive income is a measure of all non-owner changes in shareholders’ equity and includes items such as net income (loss), certain foreign currency translation items, minimum pension liability adjustments and changes in the value of available-for-sale securities.  For the three and nine months ended July 31, 2006 and 2005, comprehensive income (loss) for Angeion Corporation was equivalent to net income (loss) as reported.

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

2.                                      Revenue Recognition

In accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition,” the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.  The Company’s products are sold for cash or on credit terms requiring payment based on the shipment date.  Credit terms can vary between customers due to many factors, but are generally 30-60 days.  Revenue, net of discounts, is recognized upon shipment or delivery to customers in accordance with written sales terms.  Standard sales terms do not include customer acceptance conditions, future credits, rebates, price protection or general rights of return.  The terms of sales to both domestic customers and international distributors are identical.  In instances when a customer order specifies final

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acceptance of the system, revenue is deferred until all customer acceptance criteria have been met.  Estimated warranty obligations are recorded upon shipment.

Service contract revenue is based on a stated contractual rate and is deferred and recognized ratably over the service period, which is typically from one to four years.  In accordance with paragraph 4, of the Emerging Issues Task Force abstract 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company applies Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 90-1 to service contract revenue.  Revenue from installation and training services provided to domestic customers is deferred until the service has been performed.  The total amount of deferred revenue was $1,750,000 and $1,190,000 at July 31, 2006 and October 31, 2005, respectively.

When a sale involves multiple deliverables, such as equipment, installation services and training, the amount of the consideration from an arrangement is allocated to each respective element based on the residual method and recognized as revenue when revenue recognition criteria for each element is met.  Consideration allocated to delivered equipment is equal to the total arrangement consideration less the fair value of installation and training.  The fair value of installation and training services is based on specific objective evidence, including third-party invoices.

Advance Payments from Customers.  The Company typically does not receive advance payments from its customers in connection with the sale of its products.  The Company occasionally enters into an arrangement under which a customer agrees to purchase a large quantity of product that is to be delivered over a period of time.  Depending on the size of these arrangements, the Company may negotiate an advance payment from these customers.  At July 31, 2006, advance payments from customers aggregated $1,045,000, of which $964,000 was from a single customer for product to be shipped and services to be delivered over the next several quarters.  Revenue recognition for customer orders that include advance payments is consistent with the Company’s revenue recognition policy described above.

3.                                      New Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

The FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) in December 2004.  SFAS No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and its related implementation guidance.  The Statement focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions.  SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.  The Company will adopt the standard for fiscal 2007 using the modified prospective method.  While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No. 123R, estimated compensation expense related to prior periods can be found in “Stock Based Compensation” below.  The ultimate amount of increased compensation expense will depend on a number of factors, including the number of option shares granted,

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their timing and vesting period and the method used to calculate the fair value of the awards.  We have yet to determine the impact of SFAS No. 123R on the Company’s consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” (“SFAS No. 154”) a replacement of APB Opinion No. 20 and FASB Statement No. 3.  The statement applies to all voluntary changes in accounting principle, and changes the requirements of accounting for and reporting a change in accounting principle.  SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  Earlier application is permitted for accounting changes and corrections of errors occurring in fiscal years beginning after June 1, 2005.  The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the statement.  The Company has adopted SFAS No. 154.  See Note 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for further details.

4.                                      Stock Based Compensation

The Company applies the intrinsic-value method prescribed under APB No. 25 and related interpretations to account for the issuance of stock incentives to employees and directors.  Accordingly, no compensation expense related to employees’ and directors’ stock incentives has been recognized in the consolidated financial statements.  In accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company is required to present pro forma information reflecting compensation cost for such issuances.  Had the Company determined compensation costs based on the fair value at the date of grant for options granted, the Company’s net income (loss) would have been decreased or increased to the pro forma amounts indicated in the following table:

		Three Months Ended  July 31,						Nine Months Ended  July 31,
		Restated						Restated
(In thousands, except for per share amounts)		2006			2005			2006			2005
Net income (loss)
As reported		$	394		$	(268	)	$	682		$	(1,217	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		32			25			118			25
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(258		)	(21		)	(286		)	(63		)
Pro forma		$	168		$	(264	)	$	514		$	(1,255	)
Net income (loss) per share – basic
As reported		$	0.11		$	(0.07	)	$	0.19		$	(0.34	)
Pro forma		$	0.05		$	(0.07	)	$	0.14		$	(0.35	)
Net income (loss) per share – diluted
As reported		$	0.10		$	(0.07	)	$	0.18		$	(0.34	)
Pro forma		$	0.04		$	(0.07	)	$	0.14		$	(0.35	)

 

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The above table reflects the acceleration of vesting for 46,800 options during the quarter ended July 31, 2006 due to the action taken by the Compensation Committee of the Board of Directors.  As further described below, this increased pretax stock-based compensation expense under the intrinsic-value method during the three and nine months ended July 31, 2006 by $50,000.  In addition, this acceleration also increased pretax stock-based compensation expense under the fair value method for the three and nine months ended July 31, 2006 by $38,000.  The table also reflects the granting of 93,000 options to purchase the Company’s common stock on May 25, 2006 to the Company’s directors and officers.  These new option grants were granted at an exercise price of $5.08 per share, the closing price for the Company’s stock on May 25, 2006, and were immediately vested.  The fair value of these awards was determined to be $370,000.

Variable Stock Option Grants

In September 2003 and July 2004, the Company granted employees’ options with an exercise price of $2.00 that vested at increasing rates as the Company’s common stock traded for increasing prices for 20 of 30 consecutive days.  There were 78,000 and 75,000 of these options outstanding at October 31, 2005 and July 31, 2006, respectively.  Notwithstanding the performance vesting schedule, these options were exercisable in full beginning October 1, 2009.  The options became exercisable earlier if the Company’s stock traded at the following prices for 20 of 30 consecutive trading days.

 

Because the vesting for these grants is dependent on achieving these common stock price milestones, the Company has accounted for the unvested option grants using variable accounting in accordance with APB No. 25.  Accordingly, the Company determined the intrinsic value of unvested variable option grants at each balance sheet date and recorded the changes in intrinsic value as deferred compensation.

During the second quarter of 2006, the Company’s stock traded at or above $4.50 per share for more than 20 of 30 consecutive trading days and therefore 31,200, or 40% of these options vested.  On July 18, 2006, the Compensation Committee of the Board of Directors immediately vested the remaining 46,800 options.  When the options were granted in 2003 and 2004, the Company had not yet achieved profitability after emerging from bankruptcy.  As part of its overall strategy, the Company granted options with exercise prices of $2.00, $6.23 and $7.79 per share, all above the $1.40 and $1.68 closing market prices for the Company’s stock on the option grant dates.  The $2.00 options were granted with the closing price exercisability provisions to reward employees as the stock price achieved these higher levels, in order to align these employees’ interests with those of shareholders.  The Compensation Committee believes that this goal has been largely achieved.  The Committee concluded that the significant additional stock-based compensation expense that the Company would incur in connection with the vesting of the additional options would adversely affect the Company’s future earnings.

Upon vesting, the options are considered fixed plan awards with no further adjustment to the aggregate intrinsic value.  In addition, all previously recorded deferred compensation expense is charged to earnings upon vesting.  Stock based compensation expense associated with these variable options was $50,000 and $187,000 for the three and nine months ended July 31, 2006, respectively.  These amounts include all of the intrinsic value of the options that vested during the second and third quarters of 2006.

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The total additional non-cash expense that the Company incurred in the third quarter of 2006 in connection with the accelerated vesting was $50,000.

5.                                      Inventories

Inventories consisted of the following at July 31, 2006 and October 31, 2005:

(In thousands)		2006			2005
Raw materials		$	2,043		$	1,304
Work-in-progress		539			186
Finished goods		3,021			1,965
		$	5,603		$	3,455

 

6.                                      Intangible Assets and Goodwill

Intangible assets consisted of the following at July 31, 2006 and October 31, 2005:

		Restated
(In thousands)		2006			2005
Intangible assets:
Developed technology		$	6,900		$	6,900
Trade name (unamortized)		607			1,000
		7,507			7,900
Amortization - developed technology		(3,011		)	(2,402		)
		$	4,496		$	5,498

 

Amortization expense was $609,000 for each of the nine-month periods ended July 31, 2006 and 2005.

Intangible assets are being amortized using the straight-line method over the estimated useful lives of the assets that range from three to ten years.  If the Company utilizes pre-emergence bankruptcy net operating loss carryforwards (“NOLs”), the Company will sequentially reduce the cost of goodwill, trade name and developed technology until the net carrying cost of these assets is zero.  To the extent that utilization of these NOLs reduces the cost of developed technology, future amortization expense will be reduced.  Estimated amortization expense for the remainder of fiscal year 2006 and for each of the succeeding years based on the intangible assets as of July 31, 2006, which does not reflect the possible reduction discussed above, is as follows:

(In thousands)		Amortization
Three months ending October 31, 2006		$	203
2007		779
2008		779
2009		778
2010		450
Thereafter		900
		$	3,889

 

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Goodwill and Trade name consisted of the following at July 31, 2006 and October 31, 2005:

(In thousands)		Goodwill			Trade Name
Balance at October 31, 2005		$	328		$	1,000
Reduction in balance due to utilization of pre-emergence bankruptcy NOL (restated)		(328		)	(393		)
Balance at July 31, 2006 (restated)		$	—		$	607

 

7.                                      Warranty Reserve

Sales of the Company’s equipment are subject to a warranty obligation.  Equipment warranties typically extend for a period of twelve months from the date of installation.  Standard warranty terms are included in customer contracts.  Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies that it deems defective in workmanship or materials.  The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve that reflects the estimated expenses that it will incur to honor the warranties on its products.  The Company adjusts the warranty reserve based on the number and type of equipment that is subject to warranty, adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects the Company’s historical warranty experience based on type of equipment.  Warranty activity for the nine months ended July 31, 2006 and 2005 was as follows:

(In thousands)		2006			2005
Balance, beginning of period		$	175		$	155
Warranty provisions		352			210
Warranty claims		(252		)	(210		)
Balance, end of period		$	275		$	155

 

8.                                      Net Income (Loss) per Share

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

Shares used in the earnings (loss) per share computations for the three and nine months ended July 31, 2006 and 2005 are as follows:

		Three Months Ended  July 31,				Nine Months Ended  July 31,
(In thousands)		2006		2005		2006		2005
Weighted average common shares outstanding – basic		3,626		3,607		3,619		3,605
Dilutive effect of stock options		163		—		136		—
Weighted average common shares outstanding – diluted		3,789		3,607		3,755		3,605

 

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The dilutive effect of stock options in the above table excludes all options for which the exercise price was higher than the average market price for the period.  The number of option shares excluded from the calculation was 455,800 for the three and nine months ended July 31, 2006.  As a result of the net loss, there were no dilutive common shares outstanding for the three and nine months ended July 31, 2005, and accordingly, 482,800 were excluded from the calculation.

The Company had warrants outstanding at July 31, 2006 and 2005 to purchase 179,480 and 179,481 shares, respectively, of its common stock that were considered antidilutive and therefore not considered to have been exercised.

9.                                      Discontinued Operations and Related Litigation

On April 12, 2006, Angeion Corporation and Medmarc Casualty Insurance Company (“Medmarc”) agreed to a settlement that resolved all matters with respect to the pending lawsuit between the parties related to the recovery of insurance proceeds for a claim associated with the Company’s former ICD business.  Medmarc made the settlement payment to the Company on June 9, 2006 and each party agreed to dismiss with prejudice all claims against the other in the pending lawsuit.

As a result of the settlement with Medmarc, the Company recorded a $171,000 gain, net of $103,000 taxes, from discontinued operations for the nine months ended July 31, 2006.  There were no adjustments made to discontinued operations during the third quarter of 2006.  The Company expects that the only expense for discontinued operations in the future will be the purchase of product liability insurance for as long as the Company believes it necessary to cover ICDs that remain implanted in patients.  The current policy for product liability insurance covering ICDs expires in July 2007.

The $191,000 loss from discontinued operations for the three and nine months ended July 31, 2005 primarily consisted of legal expenses and the purchase of liability insurance coverage for claims associated with the Company’s discontinued ICD products.

10.                               Income Taxes (Restated)

The Company has recorded a provision for taxes from continuing operations of $279,000 and $464,000 for the three and nine months ended July 31, 2006, respectively. The Company has also allocated $103,000 of the provision for taxes to discontinued operations for the nine months ended July 31, 2006.  The provision for taxes has been calculated and presented in the statement of operations as if the Company’s earnings were fully taxable.  The amount of income taxes payable is determined after utilizing the Company’s pre-emergence bankruptcy NOLs.  Under American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), the tax benefit for the utilization of these loss carry forwards must be recognized as a reduction of intangibles rather than a reduction of the provision for taxes in the statement of operations.  See Note 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for further details.

The Company had a federal net operating loss carry forward at October 31, 2005 of approximately $130.6 million, which is available to reduce income taxes payable in future years.  If not used, this carry forward will expire in years 2006 through 2025.  Approximately $72.5 million of this carry forward will expire over the next five years.  In addition, the Company has a general business tax credit carry forward of approximately $989,000 that is available to reduce future federal income taxes, if any.  If not used, these general business tax credits will expire in years 2006 through 2014.  Approximately $515,000 of the general business tax carry forward will expire over the next five years.  The Company also has $90,000 of alternative minimum tax credit carry forwards that do not have expiration dates.  Under the Tax Reform Act of 1986, the utilization of these tax loss and tax credit carry forwards may be limited as a result of significant changes in ownership.  Even though the Company has

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substantial federal net operating loss carry forwards, any income is still subject to U.S. and State alternative minimum taxes and deferred taxes on non-amortizable intangible assets other than goodwill.

The Company has recorded a full valuation allowance against its net deferred tax asset, excluding the effect of deferred tax liability which is unable to be used as a source of income against these deferred tax assets, based on its belief that it is more likely than not that the asset will not be realized in the future.  This determination was made in a prior fiscal year and is still applicable for the third quarter of 2006.  The Company will continue to assess the need for a full valuation allowance in future quarters.  The Company has recognized a deferred tax liability of $132,000 as of July 31, 2006 related to an indefinite lived intangible that is being amortized for tax purposes.  Under SOP 90-7, a substantial portion of any future reversal of the valuation allowance will first reduce any intangible assets and then be credited directly to additional paid-in capital.  After the exhaustion of pre- emergence bankruptcy NOLs, approximately $2.3 million of the valuation allowance is related to post-bankruptcy NOLs and would be available to reduce the provision for taxes in the statement of operations.

11.                               Restatement of Quarterly Financial Statements

In connection with the audit of the Company’s consolidated financial statements as of and for the year ended October 31, 2006, the Company concluded that its consolidated financial statements for the first, second and third quarters of fiscal year 2006 should be restated as a result of a misapplication of an accounting principle regarding the accounting for income taxes in those financial statements.  The restatement does not change income before taxes and will have no cash impact on the results of these three periods.

During the first, second and third quarters of fiscal 2006 the Company did not correctly apply Generally Accepted Accounting Principles (“GAAP”) relating to accounting for the utilization of pre-emergence bankruptcy net operating loss (“NOL”) carry forwards.  The Company has determined that during the first three quarters of the fiscal year, it should have applied SOP 90-7 to the utilization of its pre-emergence bankruptcy NOL carry forwards.  Angeion was in Chapter 11 Bankruptcy Reorganization from June 2002 to October 2002.

Under SOP 90-7, the benefits realized from pre-emergence bankruptcy NOLs should not have been reflected on the Company’s consolidated statements of operations as a reduction in the provision for taxes.  Instead, the benefits should have been reflected in the consolidated financial statements first by reducing the specified intangible assets (including goodwill) resulting from the reorganization until exhausted and thereafter been reported as an increase to additional paid-in capital.

The following adjustments have been recorded to the previously issued financial statements:

(1)  The Company has increased the provision for taxes from continuing operations by $261,000 and $435,000 for the three and nine months ended July 31, 2006, respectively, increased tax expense related to discontinued operations by $97,000 for the nine months ended July 31, 2006, and decreased goodwill by $328,000, decreased intangible assets by $393,000, increased other current liabilities and accrued expenses by $17,000 and decreased deferred income tax liabilities by $207,000 as of July 31, 2006 to properly account for income taxes.

(2)  The Company has reclassified $145,000 and $341,000, for the three and nine months ended July 31, 2006, respectively, of bonus expenses previously included in general and administrative expenses to other statement of operations expense captions to properly classify bonus expense to the salary of the employee who earned the bonus.

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The Company has restated its balance sheet as of July 31, 2006, its statements of operations for the three and nine months ended July 31, 2006 and statement of cash flows for the nine months ended July 31, 2006 for the impact of the above items as follows (adjustment number corresponds with the adjustments noted above):

		As of July 31, 2006
		As
		Previously			Adjustments					As
(In thousands)		Reported			Amount			No.		Restated
Balance Sheet Data:
Intangible assets, net		$	4,889		$	(393	)	1		$	4,496
Goodwill		328			(328		)	1		—
Total Assets		20,658			(721		)			19,937
Other current liabilities and accrued expenses		296			17			1		313
Total current liabilities		6,142			17					6,159
Deferred income taxes		339			(207		)	1		132
Total long-term liabilities		1,131			(207		)			924
Total Liabilities		7,273			(190		)			7,083
Additional paid-in capital		17,811			1			1		17,812
Accumulated deficit		(4,789		)	(532		)	1		(5,321		)
Total shareholders’ equity		13,385			(531		)			12,854
Total Liabilities and Shareholders’ Equity		$	20,658		$	(721	)			$	19,937

 

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		Three Months Ended July 31, 2006
		As
		Previously			Adjustments					As
(In thousands)		Reported			Amount			No.		Restated
Statement of Operations Data:
Revenues:
Equipment and supply sales		$	8,159		$	—				$	8,159
Service revenue		638			—					638
		8,797			—					8,797
Cost of goods sold:
Cost of equipment and supply sales		4,355			38			2		4,393
Cost of service revenue		95			—					95
		4,450			38					4,488
Gross margin		4,347			(38		)			4,309
Operating expenses:
Selling and marketing		1,936			77			2		2,013
General and administrative		954			(145		)	2		809
Research and development		603			30			2		633
Amortization of intangibles		203			—					203
		3,696			(38		)			3,658
Operating income		651			—					651
Interest income		22			—					22
Income before taxes		673			—					673
Provision for taxes		18			261			1		279
Income from continuing operations		655			(261		)			394
Gain from discontinued operations, net of $0 taxes		—			—					—
Net income		$	655		$	(261	)			$	394
Earnings per share – basic
Continuing operations		$	0.18		$	(0.07	)			$	0.11
Discontinued operations		—			—					—
Net Income		$	0.18		$	(0.07	)			$	0.11
Earnings per share - diluted
Continuing operations		$	0.17		$	(0.07	)			$	0.10
Discontinued operations		—			—					—
Net Income		$	0.17		$	(0.07	)			$	0.10

 

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		Nine Months Ended July 31, 2006
		As
		Previously			Adjustments					As
(In thousands)		Reported			Amount			No.		Restated
Statement of Operations Data:
Revenues:
Equipment and supply sales		$	20,970		$	—				$	20,970
Service revenue		1,972			—					1,972
		22,942			—					22,942
Cost of goods sold:
Cost of equipment and supply sales		11,165			93			2		11,258
Cost of service revenue		317			—					317
		11,482			93					11,575
Gross margin		11,460			(93		)			11,367
Operating expenses:
Selling and marketing		5,633			185			2		5,818
General and administrative		2,669			(341		)	2		2,328
Research and development		1,624			63			2		1,687
Amortization of intangibles		609			—					609
		10,535			(93		)			10,442
Operating income		925			—					925
Interest income		50			—					50
Income before taxes		975			—					975
Provision for taxes		29			435			1		464
Income from continuing operations		946			(435		)			511
Gain from discontinued operations, net of $103 taxes		268			(97		)	1		171
Net income		$	1,214		$	(532	)			$	682
Earnings per share – basic
Continuing operations		$	0.26		$	(0.12	)			$	0.14
Discontinued operations		0.08			(0.03		)			0.05
Net Income		$	0.34		$	(0.15	)			$	0.19
Earnings per share - diluted
Continuing operations		$	0.25		$	(0.11	)			$	0.14
Discontinued operations		0.07			(0.03		)			0.04
Net Income		$	0.32		$	(0.14	)			$	0.18

 

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		Nine Months Ended July 31, 2006
		As
		Previously			Adjustments					As
(In thousands)		Reported			Amount			No.		Restated
Statement of Cash Flows Data:
Cash Flows From Operating Activities:
Net income		$	1,214		$	(532	)	1		$	682
Gain from discontinued operations		(268		)	97			1		(171		)
Tax benefit from stock options exercised		—			1			1		1
Deferred income taxes		2			514			1		516
Other current liabilities and accrued expenses		(70		)	17			1		(53		)
Net cash provided by continuing operations		759			97					856
Cash provided by operating activities of discontinued operations		851			(97		)	1		754
Net cash provided by operating activities		$	1,610		$	—				$	1,610

 

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