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 Express®, 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, rehabilitation medicine and other markets.

Total revenue for the third quarter of 2009 was $6.2 million, a decrease of 18.0% from $7.6 million in 2008. Operating expense for the third quarter of 2009 was $3.6 million, a decrease of 3.0% from the same period in 2008. Net loss for the three months ended July 31, 2009 was $173,000, or $0.04 per share, compared to net earnings of $259,000, or $0.06 per diluted share, for the same period in 2008.

Total revenues for the nine months ended July 31, 2009 was $18.9 million, a decrease of 15.9% from $22.4 million in 2008. Operating expenses for the nine months ended July 31, 2009 were $11.0 million, a decrease of 11.3% from the same period in 2008. Net loss for the nine months ended July 31, 2009 was $1.0 million, or $0.25 per share, compared to a net loss of $789,000, or $0.19 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 July 31,           Nine Months Ended July 31,
                                              2009               2008              2009               2008
Revenues                                          100.0 %            100.0 %           100.0 %            100.0 %
Cost of revenues                                   45.6               48.4              47.0               48.6
Gross margin                                       54.4               51.6              53.0               51.4

Operating expenses:
Selling and marketing                              27.1               26.0              27.0               29.7
General and administrative                         15.7               12.5              16.6               14.8
Research and development                           11.4                7.4              11.8                8.4
Amortization of intangibles                         2.9                2.4               2.9                2.4
                                                   57.1               48.3              58.3               55.3
Operating loss                                     (2.7 )              3.3              (5.3 )             (3.9 )
Interest income                                     0.1                0.4               0.0                0.6
Loss before taxes                                  (2.6 )              3.7              (5.3 )             (3.3 )
Provision for taxes                                 0.2                0.3               0.1                0.2
Net loss                                           (2.8 %)             3.4 %            (5.4 %)            (3.5 %)

The following paragraphs discuss the Company's performance for the three and nine-month periods ending July 31, 2009 and 2008:

Revenue

Total revenue for the three and nine months ended July 31, 2009, decreased by 18.0% and 15.9%, respectively, compared to the same periods in 2008. The decrease in revenue of $1.4 million for the three-month period ended July 31, 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 $378,000 of the decrease in revenues resulted from a drop in clinical research customer revenue due to the early conclusion of our large clinical research customer's trials in late 2008.

The decrease in revenue of $3.6 million for the nine-month period ended July 31, 2009 was primarily due to the economic conditions, and in part due to a $1.1 million decrease in clinical research customer revenue from the early conclusion of our large clinical research customer's trials.

Gross Margin

Gross margin percentage for the three and nine-months ended July 31, 2009 increased to 54.4% and 53.0% of revenue, respectively, compared to 51.6% and 51.4%, respectively, for the same periods in 2008. Gross margin percentage for the three-month period increased by almost three percentage points mainly as a result of the Company's fiscal year 2008 change in estimate for the reserve for obsolescence related to inventory used in sales and customer demonstrations due to changing economic conditions and aging related to these inventory items -the related inventory charge negatively impacted 2008 gross margin. The increase in gross margin percentage for the 2009 nine-month period was positively affected by the obsolescence charge in the prior year, but also included a larger portion of high margin service revenues as a percentage of total sales.

Selling and Marketing

Selling and marketing expenses decreased to $1.7 million and $5.1 million, respectively, for the three and nine-month periods ended July 31, 2009 from $2.0 million and $6.7 million for the same periods in 2008.

The $289,000, or 14.6%, decrease for the three-month period ended July 31, 2009 compared to the same period in 2008, is partially due to a drop in payroll, benefits and other employee-related expenses of $120,000 related to the reallocation of resources within the Company. During the third quarter of the prior year, the Company also took a one-time charge to write off $123,000 of obsolete computer equipment and peripherals related to sales and marketing. In addition, commissions decreased by $58,000 as a result of lower revenues due to the challenging sales environment.

The $1.6 million, or 23.4%, decrease for the nine-month period ended July 31, 2009 is primarily due to a drop in payroll, benefits and other employee-related expenses of $1.0 million. During the first half of 2008, the Company implemented two RIFs to better manage operating expenses. The Company also paid a one-time termination fee of $63,000 to a distributor in the second quarter of 2008. As noted above, during the third quarter of 2008, the Company took a one-time charge to write off $123,000 of obsolete computer equipment and peripherals. In addition, commissions decreased by $264,000 as a result of lower revenues due to the challenging sales environment.

General and Administrative

For the three months ended July 31, 2009, general and administrative expenses increased by $34,000, or 3.6%, compared to the same period in 2008. For the nine months ended July 31, 2009, general and administrative expenses decreased by $181,000, or 5.5%, compared to the same period in 2008.

The increase in expense compared to prior year for the third quarter was impacted by the prior year elimination of a portion of the senior management incentive bonus accrual due to a change in estimate, which decreased general and administrative expense by $101,000 in the third quarter of fiscal 2008. Also, 2009 non-cash stock-based compensation expense increased by $32,000 primarily as a result of the issuance of restricted stock awards and options on August 28, 2008 and June 3, 2009. These items were partially offset by professional fees, mostly related to the audit function, which decreased by $114,000 compared to the same period in 2008.

For the nine months ended July 31, 2009, audit and other professional fees decreased by $238,000 compared to the prior year. In addition, a one-time severance payment of $194,000 was made in the first quarter of 2008. This was partially offset by an increase in non-cash stock-based compensation expense of $132,000 due to restricted share grants and options issued August 28, 2008 and June 3, 2009 as well as an increase in consulting expenses of $110,000.

Research and Development

Research and development expenses for the three and nine months ended July 31, 2009 were $710,000 and $2.2 million, respectively, compared to $565,000 and $1.9 million, respectively, for the same periods in 2008.

Payroll and benefits expense increased by $296,000 for the nine months ended July 31, 2009 compared to the same period in 2008 as the Company expanded its investment in new product development and quality assurance. Non-cash stock-based compensation expense increased by $41,000 which was partially offset by a decrease in legal and consulting fees of $17,000 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 $546,000, respectively, for the three and nine months ended July 31, 2009, unchanged from the comparable periods in 2008.

Interest Income

Interest income for the three months and nine month periods ended July 31, 2009 decreased $26,000 and $127,000, 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 July 31, 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 $10.6 million and working capital of $15.2 million as of July 31, 2009. During the first three quarters of fiscal 2009, the Company reported a net loss of $1.0 million. However, cash flow from operating activities was $1.6 million, primarily due to the collections of accounts receivable for $1.4 million and the add-back of non-cash expenses totaling $1.4 million for depreciation, amortization and stock-based compensation expense.

Partially offsetting these operating cash inflows were a decrease in accounts payable balances of $179,000, a decrease in employee compensation payables of $217,000 and a decrease in deferred income of $142,000. Employee compensation accruals decreased due to lower commission payables as a result of lower 2009 year-to-date sales performance compared to 2008. Accounts payable balances have dropped as the business environment that the Company operates in has slowed.

For the nine months ended July 31, 2009, the Company used $159,000 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 $83,000 during the nine months ended July 31, 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) any changes in national healthcare reform that affects medical reimbursement; (4) our ability to explore and acquire new businesses and products that complement our existing products; (5) 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; (6) 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; (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.