Overview

The Company, through its Medical Graphics Corporation subsidiary, designs and markets non-invasive cardiorespiratory diagnostic systems that are sold under the MedGraphics and New Leaf brand and trade names. These cardiorespiratory diagnostic systems have a wide range of applications in healthcare, wellness and health and fitness. Revenues consist of equipment and supply sales as well as service revenues. Equipment and supply sales reflect sales of non-invasive cardiorespiratory diagnostic equipment and aftermarket sales of peripherals and supplies. Service revenues consist of revenues from extended service contracts, non-warranty service visits and additional training.

During the first quarter of fiscal 2009, the Company launched an all-new, updated CCM ExpressTM, which provides accurate resting energy expenditure measurements ("REE") for either ventilated or spontaneously breathing patients. The Company expects the added features of the CCM Express to expand the scope of use for this product and its REE function beyond critical care management into cardiology, oncology and other markets.

Total revenues for the second quarter of 2009 was $6.2 million, a decrease of 15.2% from $7.3 million in 2008. Operating expense for the second quarter of 2009 was $3.5 million, a decrease of 17.1% from the same period in 2008. Net loss for the three months ended April 30, 2009 was $225,000, or $0.05 per share, compared to a net loss of $373,000, or $0.09 per share, for the same period in 2008.

Total revenues for the six months ended April 30, 2009 was $12.6 million, a decrease of 14.8% from $14.8 million in 2008. Operating expenses for the six months ended April 30, 2009 were $7.4 million, a decrease of 14.8% from the same period in 2008. Net loss for the six months ended April 30, 2009 was $847,000, or $0.21 per share, compared to a net loss of $1.0 million, or $0.26 per share, for the same period in 2008.

Results of Operations

     The following table contains selected information from the Company's
consolidated statements of operations, expressed as a percentage of revenues:


                                      Three Months Ended April 30,          Six Months Ended April 30,
                                        2009               2008              2009               2008
Revenues                                    100.0 %            100.0 %           100.0 %            100.0 %
Cost of revenues                             46.8               47.6              47.7               48.6
Gross margin                                 53.2               52.4              52.3               51.4

Operating expenses:
Selling and marketing                        26.0               31.6              27.0               31.6
General and administrative                   16.1               14.3              17.0               16.0
Research and development                     11.8                9.7              12.0                8.9
Amortization of intangibles                   2.9                2.5               2.9                2.5
                                             56.8               58.1              58.9               59.0
Operating loss                               (3.6 )             (5.7 )            (6.6 )             (7.6 )
Interest income                               0.0                0.6               0.0                0.7
Loss before taxes                            (3.6 )             (5.1 )            (6.6 )             (6.9 )
Provision for taxes                           0.0                0.0               0.1                0.2
Net loss                                     (3.6 %)            (5.1 %)           (6.7 %)            (7.1 %)

The following paragraphs discuss the Company's performance for the three and six-month periods ending April 30, 2009 and 2008:

Revenue

Total revenue for the three and six months ended April 30, 2009, decreased by 15.2% and 14.8%, respectively, compared to the same periods in 2008. The decrease in revenue of $1.1 million for the three-month period ended April 30, 2009 was primarily caused by the general deterioration in the economic environment as hospitals and other health care facilities continued to delay or freeze spending on capital projects. A total of $194,000 of the decrease in revenues resulted from a decrease in clinical research customer revenue due to the 2008 early conclusion of our large clinical research customer's trials.

The decrease in revenue of $2.2 million for the six month period ended April 30, 2009 was primarily due to the economic conditions, and in part due to $695,000 decrease in clinical research customer revenue from the 2008 early conclusion of our large clinical research customer's trials.

Gross Margin

Gross margin percentage for the three and six-months ended April 30, 2009 increased to 53.2% and 52.3% of revenue, respectively, compared to 52.4% and 51.4%, respectively, for the same periods in 2008. Gross margin percentage for the three-month period increased by one percentage point as a result of cost reductions implemented in the second quarter of 2008 as well as an improved sales mix. The increase in gross margin percentage for the six-month period was positively impacted by the same factors as the second quarter, but also included a larger amount of high margin service revenues as a percentage of total sales.

Selling and Marketing

Selling and marketing expenses decreased to $1.6 million and $3.4 million, respectively, for the three and six-month periods ended April 30, 2009 from $2.3 million and $4.7 million for the same periods in 2008.

The $697,000, or 30.1%, decrease for the three month period ended April 30, 2009 compared to the same period in 2008, is primarily due to a drop in payroll, benefits and other employee related expenses of $353,000 related to the implementation of a Reduction-in-Force (RIF) in the prior year. On April 30, 2008, the Company terminated nine employees as part of an on-going restructuring. The Company also accrued $65,000 of severance and medical benefits for those employees related to the selling and marketing function in the prior year. The Company also paid a one-time non-recurring termination fee of $63,000 to a distributor in the second quarter of 2008. During the second quarter of 2009, the Company also eliminated, due to a change in estimate, a portion of senior management incentive bonus accrual, which decreased operating expense by $57,000. In addition, commissions decreased by $126,000 as a result of lower revenues due to the challenging sales environment.

The $1.3 million, or 27.1%, decrease for the six-month period ended April 30, 2009 is also primarily due to a drop in payroll, benefits and other employee-related expenses of $769,000. During the first half of 2008, the Company implemented two RIFs to better manage operating expenses. The Company also paid the one-time termination fee of $63,000 to a distributor in the second quarter of 2008. As noted above, during the second quarter of 2009, the Company also eliminated, due to a change in estimate, a portion of senior management incentive bonus accrual, which decreased operating expense by $57,000. In addition, commissions decreased by $206,000 as a result of lower revenues due to the challenging sales environment.

General and Administrative

For the three months ended April 30, 2009, general and administrative expenses decreased by $51,000, or 4.9%, compared to the same period in 2008. For the six months ended April 30, 2009, general and administrative expenses decreased by $215,000, or 9.1%, compared to the same periods in 2008.

For the three months ended April 30, 2009, professional fees, mostly related to the audit function, decreased by $17,000 compared to the same period in 2008. During the second quarter of 2009, the Company also eliminated a portion of senior management incentive bonus accrual, due to a change in estimate, which decreased general and administrative expense by $57,000. This was partially offset by an increase in non-cash stock-based compensation expense of $55,000, which was incurred as a result of the issuance of options and restricted stock awards on August 28, 2008. Payroll expense also decreased by $17,000 since the CFO position was open for half of the second quarter of 2008.

For the six months ended April 30, 2009, non-cash stock-based compensation expense increased by $101,000 due to stock option and restricted share grants issued August 28, 2008. This was offset by a one-time severance payment in 2008 of $194,000, a decrease in audit and other professional fees of $79,000 and a net reduction in general and administrative expense of $43,000 when the Company eliminated a portion of senior management incentive bonus accrual, due to a change in estimate, in the second quarter.

Research and Development

Research and development expenses for the three and six months ended April 30, 2009 were $729,000 and $1.5 million, respectively, compared to $708,000 and $1.3 million, respectively, for the same period in 2008.

Payroll and benefits expense increased by $191,000 for the six months ended April 30, 2009 compared to the same period in 2008 as the Company expanded its investment in new product development and quality assurance. Project expenses associated with new products increased by $31,000 due to the launch of the updated CCM Express in the first quarter of 2009. This was partially offset by a decrease in legal fees of $30,000 due to less patent-related work compared to the prior year. The Company's current new product development initiatives include products targeted for hospital intensive care units, cardiology, dietary, asthma, allergy and primary care physicians, health and fitness club professionals, as well as international markets.

Amortization of Intangibles

Amortization of developed technology was $182,000 and $364,000, respectively, for the three and six months ended April 30, 2009, unchanged from the comparable periods in 2008.

Interest Income

Interest income for the three months and six month periods ended April 30, 2009 decreased $42,000 and $101,000, respectively, compared to the same periods in 2008. The decrease in interest income is principally due to significantly lower market interest rates as the Company moved its invested cash and cash equivalents into investments where the main goal is preservation of capital. The Company is exploring alternatives to increase its interest income while maintaining the highest degree of safety in its investments.

Provision for Income Taxes

The Company is required to present the provision for taxes as if it were fully taxable in accordance with SOP 90-7. With respect to the actual payment of taxes, however, the Company has utilized its pre-emergence bankruptcy NOLs in the calculation of its income taxes payable but is still required to pay U.S. and State alternative minimum taxes ("AMT") in certain jurisdictions, even though it has substantial federal and state NOL carry forwards. During the quarters ended April 30, 2009 and 2008, the Company did not use any tax benefits related to pre-emergence bankruptcy NOLs. See note 9 to the consolidated financial statements, "Income Taxes," in this Form 10-Q for additional discussion of the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

Liquidity and Capital Resources

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

The Company had cash and cash equivalents of $9.6 million and working capital of $15.1 million as of April 30, 2009. During the first half of fiscal 2009, the Company reported a net loss of $847,000. However, cash flow from operating activities were $567,000, primarily due to the collections of accounts receivable for $691,000 and the add-back of non-cash expenses totaling $947,000 for depreciation, amortization and stock-based compensation expense.

Partially offsetting these cash inflows were a decrease in accounts payable balances of $162,000, a decrease in employee compensation payables of $102,000 and a decrease in deferred income of $108,000. Employee compensation accruals decreased due to a lower bonus accrual for 2009 year-to-date performance compared to 2008. Accounts payable balances have dropped as the business environment that the Company operates in has slowed.

For the six months ended April 30, 2009, the Company used $48,000 in cash for the purchase of property and equipment and intangible assets. The Company has no material commitments for capital expenditures for the remainder of fiscal year 2009.

The Company generated cash from financing activities of $74,000 during the six months ended April 30, 2009 from the exercise of stock options and the issuance of shares under the Employee Stock Purchase Plan.

The Company believes that its liquidity and capital resource needs for at least the next 12 months will be met through its current cash and cash equivalents as well as cash flows resulting from operations. In addition, as previously announced, the Company has developed a market-focused approach to leverage the strength of its MedGraphics brand and worldwide selling and distribution capability. Specifically, the Company has held discussions with various potential product and technology partners. If the Company is successful in concluding these negotiations, it may use some of its cash and capital resources in the acquisition of new technologies or businesses. Although the Company is continuing to look at a number of these opportunities, it currently has no agreements or understandings with any of these third parties.

Forward Looking Statements.

The discussion in this Form 10-Q, including statements in this Management Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements about Angeion's future financial results and business prospects that by their nature involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "believe," "estimate," "expect," "project," "intend," "plan," "will," "target," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects. Our actual results may differ materially depending on a variety of factors including: (1) national and worldwide economic and capital market conditions; (2) continuing cost-containment efforts in our hospital, clinics, and office market, (3) our ability to explore and acquire new businesses and products that complement our existing products, (4) our ability to successfully operate our business including our ability to develop, improve, and update our cardiorespiratory diagnostic products and successfully sell these products under the MedGraphics and New Leaf Fitness brand names into existing and new markets, (5) our ability to maintain our cost structure at a level that is appropriate to our near to mid-term revenue expectations and that will enable us to increase revenues and profitability as opportunities develop, (6) our ability to achieve constant margins for our products and consistent and predictable operating expenses in light of variable revenues from our clinical research customers, (7) our ability to effectively manufacture and ship products in required quantities to meet customer demands, (8) our ability to expand our international revenue through our distribution partners and our Milan, Italy representative branch office; (9) our ability to successfully defend ourselves from product liability claims related to our cardiorespiratory diagnostic products and claims associated with our prior cardiac stimulation products, (10) our ability to defend our existing intellectual property and to obtain United States and international intellectual property protection for our new products;
(11) our ability to develop and maintain an effective system of internal controls and procedures and disclosure controls and procedures, and (12) our dependence on third-party vendors for some of our products.

Additional information with respect to the risks and uncertainties faced by the Company may be found in, and the above discussion is qualified in its entirety by, the other risk factors that are described from time to time in the Company's Securities and Exchange Commission reports, including the Annual Report on Form 10-K for the year ended October 31, 2008 and subsequently-filed reports.