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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended June 30, 2005
 o
    
    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from  to
 Commission File Number 0-9407
 COMPEX TECHNOLOGIES, INC.
  Minnesota
(State of Incorporation)
    
    41-0985318
(I.R.S. Employer Identification No.)
 
   Common Stock, $.10 par value per share
 þ o
 o
 þ o
 o o
   Documents incorporated by reference.




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial StatementsItem 9. Changes In and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesItem 15. Exhibits, Financial Statement SchedulesSIGNATURESManufacturing AgreementConsent of Independent Registered Public Accounting Firm - Ernst & Young LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906    Table of Contents  CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
  
    
    We maintain a reserve against the revenue we record for sales allowances on the
contracted or negotiated sales and rental prices. Many third party reimbursement entities
maintain schedules of the amount of sales and rental rates for our medical products that
they will reimburse. Because it is difficult to collect from patients the excess of our
contract price over these scheduled rates, and because our acceptance of the payment from
the reimbursement entity in some cases constitutes acceptance of that rate for our sales or
rental price, we normally do not pursue collection of the excess. The rate schedules from
the various reimbursement entities vary and we do not know in advance the rates of
reimbursement for all of our products from all of the reimbursement entities that may cover
the patients that use our products. When we record revenue upon billing of a patient or
health care provider, we offset the sales and rental prices, before recording it as
revenue, with an allowance based on our historical experience of a blended average rate
schedule of the reimbursement entities, weighting our current experience with known rates
from larger entities. Nevertheless, to the extent there is a shift in the reimbursement
entities that pay for sales or rentals of our products, or to the extent the reimbursement
rate schedules of third party reimbursement entities change, our allowance may be
inaccurate and we may be required to record additional allowances, resulting in a reduction
in our revenue, with a corresponding reduction in net revenue and income.
    
    Like many medical device companies that rely on third party reimbursement entities for
payment, we have a large balance of uncollected accounts receivable. We also have a
reserve for the portion of those receivables that we estimate will not be collected based
on our historical experience. If we cannot collect an amount of receivables that is
consistent with historical collection rates, we might be required to increase our reserve
and charge off the portion of receivables we cannot collect. This additional provision
for uncollectible accounts could significantly impact our operating results.
    
    In the United States, our products are subject to reimbursement by private and public
healthcare reimbursement entities that generally impose strict rules on applications for
reimbursement. Changes in eligibility or requirements for reimbursement, or failure to
comply with reimbursement requirements, could cause a reduction in our income from
operations.
    
    Healthcare reform, the expansion of managed care organizations and buying groups, and
continued legislative pressure to control healthcare costs have all contributed to downward
pressure on reimbursement rates and the prices of our medical products. Under the Medicare
Modernization Act, Medicare is prohibited from increasing reimbursement rates for durable
medical equipment, such as our medical products, through 2008. Further, this Act requires
that Medicare commence a competitive bidding process for off-the-shelf products, such as
our TENS devices, in 2007. Although this process will not initially be nationwide and is
not binding on private reimbursement entities, we expect that Medicare and most
reimbursement entities will be inclined to adjust their rate schedules based on the bidding
results. Further, increasing healthcare costs has caused the formation of buying groups
that enter into preferred supplier arrangements with one or more manufacturers of medical
products in return for price discounts. If we are not able to obtain preferred supplier
commitments from major buying groups or retain those commitments that we currently have,
our sales and profitability could be adversely affected.
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
    
    The products we sell in our United States medical products business may only be sold on
physician prescription and, for most of those products where there is a government
sponsored payor, only if we receive detailed documentation from the physician indicating
the medical necessity of the product, together with forms which we must submit to the
paying agency. In most cases, the reimbursement agency, including Medicare, requires strict
adherence to the requirements of the form and the failure to properly obtain and maintain
the documentation can result in significant fines, penalties, and civil litigation. For
example, we were subject to a Medicare whistleblower suit that we settled in 2000 for
approximately $1.6 million. Although we believe we have implemented a compliance program
designed to detect errors in complying with these regulations, if our program fails, our
operations and results could be adversely affected.
    
    The clinical effectiveness of our electrotherapy products has periodically been
challenged and the effectiveness of electrotherapy products such as those offered by Compex
for fitness and health applications has sometimes been questioned. Publicity about the
effectiveness of electrotherapy for pain relief or other clinical applications and
continued questions about the effectiveness of electrotherapy for conditioning could
negatively impact revenue and income from operations.
    
    We maintain significant amounts of finished goods inventory on consignment at clinics
for distribution to patients. We may not be able to completely control losses of this
inventory and, if inventory losses are not consistent with historical experience, we might
be required to write off a portion of the carrying value of inventory.
    
    The manufacture of medical and consumer products, and the labeling of those products for
sale in the United States, requires compliance with quality assurance and labeling
regulations of the Food and Drug Administration (FDA). Although we believe our
manufacturing facilities and operations comply with these regulations, a failure to comply
could result in our inability to manufacture, refurbish, and sell products until compliance
is achieved.
    
    The marketing of our consumer products is subject to regulations and oversight by both
the FDA and the Federal Trade Commission (FTC) relating to misleading advertising. The FTC
has commenced several enforcement actions against advertisers of abdominal belts during the
past few years based on unsubstantiated claims. Although we have attempted to limit the
claims made in our advertisements to matters that can be substantiated, if the FTC were to
disagree with our conclusions, it could enjoin our marketing of these products for a period
of time and impose fines and penalties. Any such actions would have a significant adverse
impact on our operations.
    
    We operate in both the medical device and consumer products markets, both of which are
subject to a significant amount of regulation that affects the way we can advertise our
products, sell our products, bill customers for our products and collect payment for our
products.
    
    We have not sold substantial volumes of consumer products in the United States, but
intend to devote significant resources to market consumer products for health and fitness
applications. The consumer market for electrical stimulation products is new and
developing, and our success in this market will depend on a number of factors, including:
 
    
    our ability to obtain clearance from the FDA and other regulatory authorities to
market the products for all relevant consumer applications;
    
    our ability to maintain distribution rights with, and to obtain adequate quantities
of product from, the manufacturers of consumer products for which we serve as
distributors;
    
    our ability to establish consumer demand with a limited marketing budget;
    
    our ability to secure shelf space in the United States with significant retailers; and,
    
    the effectiveness of our products for their intended applications
 
    
    We market and sell several products manufactured by a number of different companies,
including abdominal belts and other garment-based consumer products, iontophoresis
products, traction devices, bone growth stimulation products, other orthopedic durable
medical equipment (DME) products, and electrodes. We generally have less control over the
quality and reliability of these third party products. If these products do not comply with
their specifications or otherwise fail to
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properly function, we may receive an increased amount of returns for which we are primarily
responsible, may be required to recall products, may suffer a decrease in product reputation
and goodwill in the marketplace, and may be unable to sell products currently on hand. Any
of these events could negatively impact our operations, particularly if the sale of these
third party products becomes a substantial part of our business.
    
    The terms of our third party distribution contracts, including our contracts for
Slendertone products, may be altered if we do not meet the contract requirements. Although
we believe we are currently in compliance with those contracts, we cannot be certain that
we will be able to continue to sell product at the rates these contracts require. To
concentrate our resource on our core products in Europe, we have elected to discontinue
distribution of Slendertone in those markets. In the United States, our contract for the
sale of Slendertone product in the United States currently calls for minimum purchases
which we have budgeted for in the coming year. Although we believe that we will able to
renegotiate this contract if we do not meet these minimums, we cannot be certain that we
will be able to do so on similar terms, or at all.
    
    Approximately 33% of our revenue for the year ended June 30, 2005 was generated by
Compex SA, a subsidiary headquartered in Switzerland that does business primarily in
Europe. There are risks in doing business in international markets which could adversely
affect our business, including:
 
    
    regulatory requirements;
    
    export restrictions and controls, tariffs and other trade barriers;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    reduced protection for intellectual property rights;
    
    changes in political and economic conditions;
    
    seasonal reductions in business activity; and
    
    potentially adverse tax assessments.
 
    
    Although our products were among the first products sold for muscle toning and
conditioning in Europe, the consumer markets for these products in some of the geographies
have matured, and we have increasingly become subject to competition from lower cost
products. Although we believe that we have maintained our reputation as the manufacturer
of the highest quality products in these markets, the introduction and sale of lower cost
products has caused some erosion of our sales volumes in these geographies and pressure on
the price we charge for our products.
    
    The revenue we have reported during the past three years, and to a lesser extent the
income we have reported, has benefited from the decreasing value of the dollar in Europe,
where Compex SA operates. Because we bill for and account for sales in Europe in local
currency, during periods in which U.S. currency is devalued, sales of the same number of
products at the same prices in Europe will result in our recording increasing sales revenue
after conversion to U.S. currency. Conversely, if U.S. currency increases in value
relative to the Euro and other European currencies in the future, we would report less
revenue and potentially less income even at times when our operations in Europe continued
to perform at historical levels. A large or rapid increase in the value of the dollar
relative to the Euro could have a significant adverse impact on our reported revenue.
    
    We have entered into a contract to perform private label OEM manufacturing. The
contract contains some minimum purchase requirements for the customer. If this customer
does not meet any more than the minimum purchase requirements, it may result in lower than
projected revenues and earnings in fiscal year 2006.
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PART I
 
 Item 1 . Business
 General
  ® ® ®
     5




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Products
  ® ® ®
 U.S. MEDICAL DIVISION  REHABILICARE
  U.S. Medical Devices
 Pain Management
  Transcutaneous Electrical Nerve Stimulation (TENS) Devices.
 ProMax
 Maxima®
 NuWave® carry-over
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Staodyn Max2 and Max2 Elite
 Interferential (IF) Stimulation Devices.
 IF3Wave
 IF II
 Rehabilitation and Edema Reduction
  Neuromuscular Electrical Stimulation (NMES) Devices
 EMS+2
 Ortho D X  X
 NT2000
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Pulsed Direct Current (PDC) Devices.
 GV II
 SPORTX ®
 Iontophoresis
 Cervical and Lumbar Traction Devices. ®
 Accessories and Supplies
  Distribution and Billing
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Reimbursement
   9




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SPECTRABRACE, LTD.
  EUROPEAN MEDICAL AND CONSUMER DIVISION  COMPEX EUROPE
  10




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Sports Products
 Compex Sport
 mi-Sport 500 mi mi-Sport 500
 SPORT 400. Sport 400
 Energy Energy Sport 400 Sport 400
 Fitness Products
  mi-Fitness Trainer mi-Fitness Trainer
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Top Fitness Top Fitness mi-Fitness Trainer
 Fitness Tens. Fitness Tens
 Wellness Products
  Body. Body
 Medicompex Medicompex
 Professional Products
  mi-Theta Pro. mi-Theta Pro mi-Sport
500 mi-Fitness Trainer
 Compex 2 Compex 2
 Theta-Stim Theta-Stim
 Theta-Sound. Theta-Sound
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Compex 0 -SOUND
 Slendertone
 Accessories and Supplies
  Distribution and Marketing
     U.S. CONSUMER DIVISION  COMPEX U.S.
  13




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Fitness and Wellness Products
 Slendertone Slendertone
 Slendertone Flex Slendertone Flex FLEX
 Slendertone GymBody® Slendertone GymBody® Flex
 Slendertone Bottom & Thigh Slendertone Bottom & Slendertone Shorts Flex,
  Slendertone
 Sports Products
 Compex Sport
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Research and Development
  Competition
 Medical Devices
  Consumer
  Manufacturing and Sources of Supply
  15




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Patents and Trademarks
   Regulation
 United States
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International
  17




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Employees
   
 Item 2 . Properties
      
 Item 3 . Legal Proceedings .
   
 Item 4. Submission of Matters to a Vote of Security Holders .
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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters.
  High
    
    
    LowFiscal year ended June 30, 2004First Quarter
    
    $
    8.250
    
    
    $
    4.680Second Quarter
    
    
    12.000
    
    
    
    7.600Third Quarter
    
    
    10.100
    
    
    
    7.550Fourth Quarter
    
    
    9.200
    
    
    
    5.030
 High
    
    
    LowFiscal year ended June 30, 2005First Quarter
    
    $
    6.180
    
    
    $
    4.830Second Quarter
    
    
    5.750
    
    
    
    4.460Third Quarter
    
    
    5.290
    
    
    
    4.200Fourth Quarter
    
    
    5.230
    
    
    
    3.150
   
 Item 6. Selected Financial Data.
 For the Years Ended June 30,2001
    
    2002
    
    2003
    
    2004
    
    2005Operating
results Revenue
    
    $
    62,957,415
    
    
    $
    72,506,677
    
    
    $
    75,459,916
    
    
    $
    85,960,663
    
    
    $
    96,074,039Gross profit
    
    
    43,245,085
    
    
    
    48,972,916
    
    
    
    52,881,653
    
    
    
    57,524,983
    
    
    
    65,129,497Net income
    
    
    3,319,989
    
    
    
    4,942,010
    
    
    
    4,961,555
    
    
    
    3,050,367
    
    
    
    2,551,281Per diluted
common share Net income
    
    $
    0.31
    
    
    $
    0.44
    
    
    $
    0.45
    
    
    $
    0.24
    
    
    $
    0.20Financial data/otherCash
    
    $
    759,611
    
    
    $
    2,086,650
    
    
    $
    5,056,007
    
    
    $
    3,198,832
    
    
    $
    3,044,158Working capital
    
    
    22,391,874
    
    
    
    25,777,799
    
    
    
    26,578,403
    
    
    
    37,483,078
    
    
    
    38,558,620Total assets
    
    
    51,495,871
    
    
    
    57,477,736
    
    
    
    65,652,307
    
    
    
    76,209,396
    
    
    
    89,318,591Shareholders equity
    
    
    28,459,216
    
    
    
    35,281,190
    
    
    
    41,544,644
    
    
    
    56,331,035
    
    
    
    58,319,213Long-term obligations
    
    
    10,433,542
    
    
    
    6,455,209
    
    
    
    1,217,268
    
    
    
    2,436,200
    
    
    
    4,127,019
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Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
 
 Critical Accounting Policies
  Revenue Recognition and Provisions for Credit Allowances and Returns
   20




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Reserve for Uncollectible Accounts Receivable.
 Carrying Value of Inventory.
 Carrying Value of Intangible Assets.
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
    
    significant under-performance relative to expected historical or projected future operating results;
    
    significant changes in the manner of use of the acquired assets or our overall business strategy;
    
    significant negative industry or economic trends; and,
    
    significant decline in our stock price for a sustained period and our market
capitalization relative to net book value.
  Income Taxes.
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Results of Operations
   Results of Operation
 Year Ended June 30,2003
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    29.9
    
    
    
    33.1
    
    
    
    32.2Gross profit
    
    
    70.1
    
    
    
    66.9
    
    
    
    67.8Operating expensesSelling and marketing
    
    
    39.7
    
    
    
    41.6
    
    
    
    43.2General and administrative
    
    
    16.2
    
    
    
    16.5
    
    
    
    17.1Research and development
    
    
    2.8
    
    
    
    3.0
    
    
    
    2.6Total operating expenses
    
    
    58.7
    
    
    
    61.1
    
    
    
    62.9Income from operations
    
    
    11.4
    
    
    
    5.8
    
    
    
    4.9Other expense, net
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.4Income tax provision
    
    
    4.4
    
    
    
    1.8
    
    
    
    1.8Net Income
    
    
    6.6
    %
    
    
    3.5
    %
    
    
    2.7
    %
 Comparison of Year Ended June 30, 2005 to Year Ended June 30, 2004
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Comparison of Year Ended June 30, 2004 to Year Ended June 30, 2003
      25




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Liquidity and Capital Resources
   26




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Payments Due by PeriodTotal
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    After 5 yearsLong Term Debt
    
    $
    5,719,600
    
    
    $
    1,609,800
    
    
    $
    2,509,800
    
    
    $
    1,600,000
    
    
    $
    Notes Payable
    
    
    7,500,000
    
    
    
    7,500,000
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligation
    
    
    23,712
    
    
    
    5,472
    
    
    
    10,944
    
    
    
    7,296
    
    
    
    Operating Leases
    
    
    3,112,660
    
    
    
    441,096
    
    
    
    744,864
    
    
    
    656,064
    
    
    
    1,270,636Celebrity Endorsements
    
    
    566,667
    
    
    
    566,667
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash
Obligations
    
    $
    16,922,639
    
    
    $
    10,123,035
    
    
    $
    3,265,608
    
    
    $
    2,263,360
    
    
    $
    1,270,636
  
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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Item 8. Financial Statements.
 Financial Statement Index
 Schedule
    
    PageReport of Ernst & Young LLP
    
    
    29Consolidated Balance Sheets as of June 30, 2005 and 2004
    
    
    30Consolidated Statements of Operations for the years ended June 30, 2005, 2004 and 2003
    
    
    31Consolidated Statements of Changes in Stockholders Equity for the years ended
June 30, 2005, 2004 and 2003
    
    
    32Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003
    
    
    33Notes to Consolidated Financial Statements
    
    
    34-51Report of Ernst & Young LLP  Section 404
    
    
    52
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Report of Independent Registered Public Accounting Firm
 
      
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
 2004
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,198,832
    
    
    $
    3,044,158Receivables, less reserves of $17,665,865 and $19,250,165
at June 30, 2004 and 2005, respectively
    
    
    28,802,468
    
    
    
    37,268,582InventoriesRaw materials
    
    
    1,037,944
    
    
    
    1,280,370Work in process
    
    
    10,765
    
    
    
    417,090Finished goods
    
    
    11,941,708
    
    
    
    13,656,012Deferred tax assets
    
    
    6,008,936
    
    
    
    6,108,627Prepaid expenses
    
    
    3,646,300
    
    
    
    3,217,406Total current assets
    
    
    54,646,953
    
    
    
    64,992,245Property, plant, and equipment, net
    
    
    4,798,656
    
    
    
    5,902,780Goodwill, net
    
    
    15,501,566
    
    
    
    16,630,871Other intangible assets, net
    
    
    908,841
    
    
    
    1,636,682Deferred tax assets
    
    
    224,679
    
    
    
    13,396Other assets
    
    
    128,701
    
    
    
    142,617Total assets
    
    $
    76,209,396
    
    
    $
    89,318,591LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    1,268,910
    
    
    $
    1,614,596Notes payable
    
    
    2,200,000
    
    
    
    7,500,000Accounts payable
    
    
    5,678,181
    
    
    
    7,421,609Accrued
liabilities Payroll
    
    
    1,990,591
    
    
    
    2,719,545Commissions
    
    
    917,068
    
    
    
    1,073,365Income taxes
    
    
    1,731,444
    
    
    
    1,368,679Other
    
    
    3,377,681
    
    
    
    4,735,831Total current liabilities
    
    
    17,163,875
    
    
    
    26,433,625LONG-TERM LIABILITIESLong-term debt
    
    
    2,436,200
    
    
    
    4,127,019Deferred tax liabilities
    
    
    278,286
    
    
    
    438,734Total liabilities
    
    
    19,878,361
    
    
    
    30,999,378STOCKHOLDERS EQUITYCommon stock, $.10 par value: 30,000,000 shares authorized;
issued and outstanding 12,425,747 and 12,526,880 shares
at June 30, 2004 and 2005, respectively
    
    
    1,242,574
    
    
    
    1,252,688Preferred stock, no par value: 5,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Additional paid in capital
    
    
    32,887,912
    
    
    
    33,440,966Unearned compensation on restricted stock
    
    
    (119,370
    )
    
    
    (47,329
    )Accumulated other non-owner changes in equity
    
    
    2,340,916
    
    
    
    1,142,604Retained earnings
    
    
    19,979,003
    
    
    
    22,530,284Total stockholders equity
    
    
    56,331,035
    
    
    
    58,319,213Total liabilities and stockholders equity
    
    $
    76,209,396
    
    
    $
    89,318,591
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
 2003
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    $
    75,459,916
    
    
    $
    85,960,663
    
    
    $
    96,074,039Cost of sales and rentals
    
    
    22,578,263
    
    
    
    28,435,680
    
    
    
    30,944,542Gross profit
    
    
    52,881,653
    
    
    
    57,524,983
    
    
    
    65,129,497Operating expenses:Selling and marketing
    
    
    29,969,004
    
    
    
    35,763,300
    
    
    
    41,548,556General and administrative
    
    
    12,201,022
    
    
    
    14,197,056
    
    
    
    16,440,874Research and development
    
    
    2,122,659
    
    
    
    2,554,290
    
    
    
    2,497,671Total operating expenses
    
    
    44,292,685
    
    
    
    52,514,646
    
    
    
    60,487,101Income from operations
    
    
    8,588,968
    
    
    
    5,010,337
    
    
    
    4,642,396Other income (expense):Interest expense
    
    
    (428,467
    )
    
    
    (517,717
    )
    
    
    (467,948
    )Other
    
    
    109,054
    
    
    
    84,747
    
    
    
    81,948Income before income taxes
    
    
    8,269,555
    
    
    
    4,577,367
    
    
    
    4,256,396Income tax provision
    
    
    3,308,000
    
    
    
    1,527,000
    
    
    
    1,705,115Net income
    
    $
    4,961,555
    
    
    $
    3,050,367
    
    
    $
    2,551,281Net income per common and common equivalent shareBasic
    
    $
    0.45
    
    
    $
    0.26
    
    
    $
    0.20Diluted
    
    $
    0.45
    
    
    $
    0.24
    
    
    $
    0.20Weighted average number of shares outstandingBasic
    
    
    10,951,808
    
    
    
    11,804,768
    
    
    
    12,472,204Diluted
    
    
    11,068,860
    
    
    
    12,683,587
    
    
    
    12,853,262
  31




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##### Table of Contents



COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30
 UnearnedCompensation
    
    
    Accumulated
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Additional Paid-
    
    
    on Restricted
    
    
    Other Non-Owner
    
    
    Retained
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    In Capital
    
    
    Stock
    
    
    Changes in Equity
    
    
    Earnings
    
    
    EquityBalance, June 30, 2002
    
    
    10,922,618
    
    
    
    1,092,262
    
    
    
    21,564,096
    
    
    
    (77,813
    )
    
    
    735,564
    
    
    
    11,967,081
    
    
    
    35,281,190Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,961,555
    
    
    
    4,961,555Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,134,619
    
    
    
    
    
    
    
    1,134,619Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,096,174Exercise of stock options and related tax benefits
    
    
    58,226
    
    
    
    5,823
    
    
    
    156,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,308Common stock issued through Employee Stock Purchase
Plan
    
    
    5,125
    
    
    
    512
    
    
    
    20,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,909Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,937
    )
    
    
    
    
    
    
    
    
    
    
    (15,937
    )Cancelled restricted stock
    
    
    (37,500
    )
    
    
    (3,750
    )
    
    
    (90,000
    )
    
    
    93,750
    
    
    
    
    
    
    
    
    
    
    
    Balance, June 30, 2003
    
    
    10,948,469
    
    
    
    1,094,847
    
    
    
    21,650,978
    
    
    
    
    
    
    
    1,870,183
    
    
    
    16,928,636
    
    
    
    41,544,644Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,050,367
    
    
    
    3,050,367Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,733
    
    
    
    
    
    
    
    470,733Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,521,100Exercise of stock options and related tax benefits
    
    
    157,250
    
    
    
    15,725
    
    
    
    447,744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463,469Common stock issued through Employee Stock Purchase
Plan
    
    
    57,130
    
    
    
    5,713
    
    
    
    195,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,584Issuance of restricted stock
    
    
    20,498
    
    
    
    2,049
    
    
    
    123,603
    
    
    
    (125,652
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,282
    
    
    
    
    
    
    
    
    
    
    
    6,282Options granted to Non-Employees
    
    
    
    
    
    
    
    
    
    
    74,007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,007Shares issued in stock offering
    
    
    1,250,000
    
    
    
    125,000
    
    
    
    10,414,498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,539,498Cancelled restricted stock
    
    
    (7,500
    )
    
    
    (750
    )
    
    
    (18,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,750
    )Cancellation of subsidiary stock
    
    
    (100
    )
    
    
    (10
    )
    
    
    (789
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (799
    )Balance, June 30, 2004
    
    
    12,425,747
    
    
    $
    1,242,574
    
    
    $
    32,887,912
    
    
    $
    (119,370
    )
    
    $
    2,340,916
    
    
    $
    19,979,003
    
    
    $
    56,331,035Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,551,281
    
    
    
    2,551,281Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,198,312
    )
    
    
    
    
    
    
    (1,198,312
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,352,969Exercise of stock options and related tax benefits
    
    
    35,456
    
    
    
    3,546
    
    
    
    87,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,644Common stock issued through Employee Stock Purchase
Plan
    
    
    65,677
    
    
    
    6,568
    
    
    
    291,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297,785Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,041
    
    
    
    
    
    
    
    
    
    
    
    72,041Options granted to Non-Employees
    
    
    
    
    
    
    
    
    
    
    174,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174,739Balance, June 30, 2005
    
    
    12,526,880
    
    
    $
    1,252,688
    
    
    $
    33,440,966
    
    
    $
    (47,329
    )
    
    $
    1,142,604
    
    
    $
    22,530,284
    
    
    $
    58,319,213
 32




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##### Table of Contents



COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED JUNE 30
 2003
    
    
    2004
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    4,961,555
    
    
    $
    3,050,367
    
    
    $
    2,551,281Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation
    
    
    1,349,988
    
    
    
    1,552,485
    
    
    
    1,397,621Amortization
    
    
    267,018
    
    
    
    258,269
    
    
    
    270,167Stock based compensation
    
    
    (15,937
    )
    
    
    60,740
    
    
    
    246,780Change in deferred taxes
    
    
    80,111
    
    
    
    (1,162,347
    )
    
    
    270,781Changes in current assets and liabilitiesReceivables
    
    
    2,011,498
    
    
    
    (4,416,548
    )
    
    
    (7,451,422
    )Inventories
    
    
    (1,799,677
    )
    
    
    776,259
    
    
    
    (1,892,524
    )Prepaid expenses
    
    
    (601,051
    )
    
    
    (462,147
    )
    
    
    418,539Accounts payable
    
    
    394,799
    
    
    
    24,643
    
    
    
    1,302,626Accrued liabilities
    
    
    (1,578,475
    )
    
    
    (1,686,870
    )
    
    
    1,846,941Net cash provided by (used in) operating
activities
    
    
    5,069,829
    
    
    
    (2,005,149
    )
    
    
    (1,039,210
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,163,893
    )
    
    
    (1,606,844
    )
    
    
    (2,429,617
    )Cash paid in asset acquisitions, net of cash received
    
    
    (3,150,000
    )
    
    
    (3,424,563
    )
    
    
    (3,300,000
    )Sale of fixed assets
    
    
    350,027
    
    
    
    
    
    
    
    Change in other assets, net
    
    
    (6,036
    )
    
    
    108,433
    
    
    
    (6,312
    )Net cash used in investing activities
    
    
    (3,969,902
    )
    
    
    (4,922,974
    )
    
    
    (5,735,929
    )FINANCING ACTIVITIES:Proceeds from new debt financing
    
    
    
    
    
    
    3,835,501
    
    
    
    3,300,000Principal payments on long-term obligations
    
    
    (2,521,736
    )
    
    
    (7,715,240
    )
    
    
    (1,238,275
    )Proceeds from (payments on) line of credit, net
    
    
    4,500,000
    
    
    
    (2,300,000
    )
    
    
    5,300,000Proceeds from exercise of stock options
    
    
    162,308
    
    
    
    463,469
    
    
    
    90,644Proceeds from employee stock purchase plan
    
    
    20,909
    
    
    
    201,584
    
    
    
    297,785Proceeds from stock offering
    
    
    
    
    
    
    10,539,498
    
    
    
    Net cash provided by financing activities
    
    
    2,161,481
    
    
    
    5,024,812
    
    
    
    7,750,154Effect of exchange rates on cash and cash equivalents
    
    
    (292,051
    )
    
    
    46,136
    
    
    
    (1,129,689
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,969,357
    
    
    
    (1,857,175
    )
    
    
    (154,674
    )Cash and cash equivalents at beginning of year
    
    
    2,086,650
    
    
    
    5,056,007
    
    
    
    3,198,832Cash and cash equivalents at end of year
    
    $
    5,056,007
    
    
    $
    3,198,832
    
    
    $
    3,044,158Non-cash transactionPurchase of
equipment through capital lease obligation
    
    
    126,870
    
    
    
    
    
    
    
    Supplemental cash flow informationInterest paid
    
    $
    418,121
    
    
    $
    517,719
    
    
    $
    276,479Income taxes paid
    
    $
    2,451,062
    
    
    $
    3,105,223
    
    
    $
    1,860,857
  33




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##### Table of Contents



COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies:
 Principles of Consolidation
  Revenue Recognition and Provisions for Credit Allowances and Returns
  United States Medical.
    34




---



##### Table of Contents



United States Consumer.
 International.
 Reserve for Uncollectible Accounts Receivable
 United States Revenue
 United States Consumer and International
 35




---



##### Table of Contents



Inventories
  Property and Equipment
  Building
    
    39 yearsOffice furniture and equipment
    
    3-10 yearsProduction equipment
    
    3-5 yearsClinical and rental equipment
    
    5 years
 Impairment of Long-Lived Assets
  Goodwill and Intangibles
  36




---



##### Table of Contents



U.S. Medical
    
    
    International
    
    
    ConsolidatedGoodwill as of June 30, 2003
    
    $
    1,458,530
    
    
    $
    9,124,757
    
    
    $
    10,583,287Acquisition of Filsport Assistance S.r.l.
    
    
    
    
    
    
    4,165,369
    
    
    
    4,165,369Effect of exchange rates
    
    
    
    
    
    
    189,481
    
    
    
    189,481Elimination of Rehabilicare UK Goodwill
    
    
    
    
    
    
    (34,999
    )
    
    
    (34,999
    )Adjustment of BMR Neurotech Goodwill
    
    
    598,428
    
    
    
    
    
    
    
    598,428Goodwill as of June 30, 2004
    
    $
    2,056,958
    
    
    $
    13,444,608
    
    
    $
    15,501,566Acquisition of SpectraBrace, Ltd.
    
    
    1,158,978
    
    
    
    
    
    
    
    1,158,978Effect of exchange rates
    
    
    
    
    
    
    (29,673
    )
    
    
    (29,673
    )Goodwill as of June 30, 2005
    
    $
    3,215,936
    
    
    $
    13,414,935
    
    
    $
    16,630,871
   June 30, 2004
    
    
    June 30, 2005Gross Carrying
    
    
    Accum.
    
    
    Net Carrying
    
    
    Gross Carrying
    
    
    Accum.
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    Amount
    
    
    Value
    
    
    Amortization
    
    
    AmountAcquired Technology
    
    $
    1,400,000
    
    
    $
    866,043
    
    
    $
    533,957
    
    
    $
    1,400,000
    
    
    $
    1,041,039
    
    
    $
    358,961Non-Compete
    
    
    850,000
    
    
    
    789,848
    
    
    
    60,152
    
    
    
    850,000
    
    
    
    809,853
    
    
    
    40,147Debt Structure Costs
    
    
    346,970
    
    
    
    343,435
    
    
    
    3,535
    
    
    
    346,970
    
    
    
    346,970
    
    
    
    Patents
    
    
    36,716
    
    
    
    17,745
    
    
    
    18,971
    
    
    
    36,716
    
    
    
    20,367
    
    
    
    16,349Customer List
    
    
    369,754
    
    
    
    77,528
    
    
    
    292,226
    
    
    
    369,754
    
    
    
    148,529
    
    
    
    221,225Customer Relationships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000Total
    
    $
    3,003,440
    
    
    $
    2,094,599
    
    
    $
    908,841
    
    
    $
    4,003,440
    
    
    $
    2,366,758
    
    
    $
    1,636,682
  Advertising
  Research and Development
  Income Taxes
  37




---



##### Table of Contents



Stock-Based Compensation
   2003
    
    
    2004
    
    
    2005Net Income
    
    As reported
    
    $
    4,961,555
    
    
    $
    3,050,367
    
    
    $
    2,551,281Stock-based compensation
on restricted stock
    
    
    (15,937
    )
    
    
    60,740
    
    
    
    246,780Pro forma option
expense, net of tax
    
    
    (535,587
    )
    
    
    (887,976
    )
    
    
    (1,168,474
    )Pro forma
    
    $
    4,410,031
    
    
    $
    2,223,131
    
    
    $
    1,629,587Basic earnings per share
    
    As reported
    
    $
    0.45
    
    
    $
    0.26
    
    
    $
    0.20Pro forma
    
    
    0.40
    
    
    
    0.19
    
    
    
    0.13Diluted
earnings per share
    
    As reported
    
    $
    0.45
    
    
    $
    0.24
    
    
    $
    0.20Pro forma
    
    
    0.40
    
    
    
    0.18
    
    
    
    0.13
    38




---



##### Table of Contents



Earnings Per Share
  Twelve Months Ended June 302003
    
    
    2004
    
    
    2005NumeratorNet Income
    
    $
    4,961,555
    
    
    $
    3,050,367
    
    
    $
    2,551,281DenominatorDenominator for basic net income per share- weighted average shares outstanding
    
    
    10,951,808
    
    
    
    11,804,768
    
    
    
    12,472,204Effect of dilutive stock options and
restricted stock
    
    
    117,052
    
    
    
    878,819
    
    
    
    381,058Denominator for diluted net income per share- weighted average shares outstanding
    
    
    11,068,860
    
    
    
    12,683,587
    
    
    
    12,853,262Basic net income per share
    
    $
    0.45
    
    
    $
    0.26
    
    
    $
    0.20Diluted net income per share
    
    
    0.45
    
    
    
    0.24
    
    
    
    0.20
  Fair Value of Financial Instruments
  Foreign Currency Translation
  39




---



##### Table of Contents



Shipping and Handling Costs
  Reclassification
  Use of Estimates
  Selected Financial Statement Data
 2004
    
    
    2005Property, plant and equipment -Land
    
    $
    150,000
    
    
    $
    150,000Buildings
    
    
    1,683,614
    
    
    
    1,683,614Clinical and rental equipment
    
    
    1,401,842
    
    
    
    1,744,193Production equipment
    
    
    4,454,729
    
    
    
    3,547,785Office furniture and equipment
    
    
    10,594,573
    
    
    
    9,931,107$
    18,284,758
    
    
    $
    17,056,699Less accumulated depreciation
    
    
    (13,486,102
    )
    
    
    (11,153,919
    )Net property, plant and equipment
    
    $
    4,798,656
    
    
    $
    5,902,780
  Recent
Accounting Pronouncements
  2. Business Acquisition
 Acquisition of SpectraBrace, Ltd.:
  40




---



##### Table of Contents



Acquisition of Filsport Assistance S.r.l.:
   2003Net sales
    
    $
    81,343,139Income before taxes
    
    
    8,698,815Net income
    
    
    5,180,533Earnings per shareBasic
    
    
    .47Diluted
    
    
    .47
  Accounts Receivable
    
    $
    2,193,589Inventories
    
    
    1,775,876Prepaid Expenses
    
    
    681,888Property and equipment, net
    
    
    135,748Goodwill
    
    
    4,165,369Other long-term assets
    
    
    12,401Accounts payable
    
    
    (1,007,062
    )Accrued liabilities
    
    
    (1,179,090
    )Liabilities forgiven
    
    
    (2,563,870
    )Long-term liabilities
    
    
    (790,286
    )Net assets acquired
    
    $
    3,424,563
 Acquisition of the assets of BMR Neurotech, Inc.:
  3. Stock Offering
  41




---



##### Table of Contents



4. Comprehensive Income
  5. Notes Payable and Long-Term Debt:
    2004
    
    2005Average balance outstanding
    
    $
    1,764,000
    
    
    $
    1,833,000Maximum balance outstanding
    
    
    4,400,000
    
    
    
    8,100,000Weighted average interest rate
    
    
    4.00
    %
    
    
    5.37
    %
 6. Long-Term Debt:
  2004
    
    
    2005Term loan, principal
payments due on a
quarterly basis and
interest due in monthly
installments through June
2010; interest at the back
reference rate or LIBOR
plus a margin);
collateralized by
substantially all assets
of the Company other than
those pledged as
collateral on existing
lease or mortgage
obligations.
    
    $
    
    
    
    $
    3,300,000Swiss credit facility that
provides for a three-year
term loan at varying
rates. Borrowings under
the Swiss credit facility
are secured by all of the
equity interest held by
the Companys Swiss
subsidiary in Filsport.
The first advance on the
loan bears interest at
3.69%, the second advance
bears interest at 4.09%,
and the third and final
advance bears interest at
4.40%.
    
    
    3,654,300
    
    
    
    2,419,600Capital lease obligations
    
    
    50,810
    
    
    
    22,0153,705,110
    
    
    
    5,741,615Less current maturities
    
    
    (1,268,910
    )
    
    
    (1,614,596
    )$
    2,436,200
    
    
    $
    4,127,019
 42




---



##### Table of Contents



2006
    
    $
    1,609,8002007
    
    
    1,809,8002008
    
    
    700,0002009
    
    
    800,0002010
    
    
    800,000$
    5,719,600
 Leases
  Capital
    
    OperatingLeases
    
    Leases2006
    
    $
    5,472
    
    
    $
    441,0962007
    
    
    5,472
    
    
    
    395,2112008
    
    
    5,472
    
    
    
    349,6532009
    
    
    5,472
    
    
    
    354,407Thereafter
    
    
    1,824
    
    
    
    1,572,293Total future minimum lease payments
    
    
    23,712
    
    
    $
    3,112,660Less amount representing interest
    
    
    (1,697
    )Present value of net minimum lease payments
    
    
    22,015Less current portion
    
    
    (4,796
    )Long-term capital lease obligation
    
    $
    17,219
  7. Income Taxes:
   2003
    
    
    2004
    
    
    2005Domestic
    
    $
    6,602,158
    
    
    $
    4,035,087
    
    
    $
    5,045,089Foreign
    
    
    1,667,397
    
    
    
    542,280
    
    
    
    (788,693
    )$
    8,269,555
    
    
    $
    4,577,367
    
    
    $
    4,256,396
 43




---



##### Table of Contents



2003
    
    
    2004
    
    
    2005Currently
payable Federal
    
    $
    2,293,758
    
    
    $
    2,227,768
    
    
    $
    1,591,112State
    
    
    345,061
    
    
    
    380,186
    
    
    
    285,474Foreign
    
    
    596,510
    
    
    
    445,755
    
    
    
    (473,513
    )Deferred
    
    
    72,671
    
    
    
    (1,526,709
    )
    
    
    (168,187
    )Valuation Allowance
    
    
    
    
    
    
    
    
    
    
    470,229$
    3,308,000
    
    
    $
    1,527,000
    
    
    $
    1,705,115
  2003
    
    
    2004
    
    
    2005Statutory rate
    
    $
    2,894,344
    
    
    $
    1,602,078
    
    
    $
    1,447,175Valuation allowance
    
    
    
    
    
    
    
    
    
    
    470,229State taxes
    
    
    347,688
    
    
    
    211,502
    
    
    
    235,802Foreign
    
    
    80,507
    
    
    
    78,821
    
    
    
    716,819Resolution of tax issue
    
    
    
    
    
    
    (433,635
    )
    
    
    (1,210,000
    )Change in rate on deferred tax assets
    
    
    
    
    
    
    
    
    
    
    214,899Other
    
    
    (14,539
    )
    
    
    68,234
    
    
    
    (169,809
    )Total
    
    $
    3,308,000
    
    
    $
    1,527,000
    
    
    $
    1,705,115
    44




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##### Table of Contents



2004
    
    
    2005Deferred tax
assets Reserve for uncollectible accounts
    
    $
    5,258,588
    
    
    $
    5,178,809Inventory
    
    
    552,467
    
    
    
    193,144Accruals and other reserves
    
    
    197,881
    
    
    
    539,774Net
operating losses
    
    
    
    
    
    
    193,895Other
    
    
    224,679
    
    
    
    275,685Valuation allowance
    
    
    
    
    
    
    (470,229
    )Total
    
    $
    6,233,615
    
    
    $
    5,911,078Deferred tax
liabilities Depreciation
    
    $
    (278,286
    )
    
    $
    (227,789
    )Net deferred tax assets
    
    $
    5,955,329
    
    
    $
    5,683,289
  8. Stockholders Equity:
 Stock Options
  45




---



##### Table of Contents



Weighted Average
    
    
    Number ofExercise Price
    
    
    SharesBalance outstanding at June 30, 2002
    
    $
    3.11
    
    
    
    802,073Granted
    
    
    3.63
    
    
    
    1,247,000Exercised
    
    
    2.82
    
    
    
    (80,000
    )Cancelled
    
    
    3.28
    
    
    
    (189,073
    )Balance outstanding at June 30, 2003
    
    $
    3.46
    
    
    
    1,780,000Granted
    
    
    7.27
    
    
    
    510,998Exercised
    
    
    2.95
    
    
    
    (157,250
    )Cancelled
    
    
    3.21
    
    
    
    (115,000
    )Balance outstanding at June 30, 2004
    
    $
    4.50
    
    
    
    2,018,748Granted
    
    
    4.75
    
    
    
    210,500Exercised
    
    
    2.82
    
    
    
    (40,000
    )Cancelled
    
    
    6.71
    
    
    
    (60,500
    )Balance outstanding at June 30, 2005
    
    $
    4.49
    
    
    
    2,128,748Exercisable at June 30, 2005
    
    $
    4.25
    
    
    
    866,875Available for grant at June 30, 2005
    
    
    
    
    
    
    184,384
 Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted
    
    
    
    
    
    
    WeightedWeighted
    
    
    Average
    
    
    
    
    
    
    AverageAverage
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of
    
    
    
    
    
    Remaining
    
    
    Price
    
    
    
    
    
    
    PriceExercise Price
    
    Shares
    
    
    Contractual Life
    
    
    Per Share
    
    
    Shares
    
    
    Per Share$ 2.25 to $   2.94
    
    
    133,000
    
    
    2.3 Years
    
    $
    2.52
    
    
    
    104,250
    
    
    $
    2.55$ 3.30 to $   3.85
    
    
    1,175,250
    
    
    4.4 Years
    
    
    3.63
    
    
    
    494,500
    
    
    
    3.65$ 3.87 to $   5.92
    
    
    479,500
    
    
    6.7 Years
    
    
    4.51
    
    
    
    181,750
    
    
    
    4.52$ 6.13 to $ 10.75
    
    
    340,998
    
    
    5.6 Years
    
    
    8.21
    
    
    
    86,375
    
    
    
    9.192,128,748
    
    
    
    
    
    
    
    
    
    866,875
    
    
    
    9.19
  Stock Purchase Plan
  Restricted Stock Grants
  46




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##### Table of Contents



9. Commitments and Contingencies:
 Litigation
   Commitments
  401(k) Plan
  10. Segment Information:
  47




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##### Table of Contents



48




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##### Table of Contents



Revenue,
cost of sales and rentals, and selling expenses by division are as
follows:
 For the Year Ended June 30, 2003U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    49,448,393
    
    
    $
    68,151
    
    
    $
    25,943,372
    
    
    $
    75,459,916Cost of sales and rentals
    
    
    13,361,368
    
    
    
    21,001
    
    
    
    9,195,894
    
    
    
    22,578,263Gross margin
    
    
    36,087,025
    
    
    
    47,150
    
    
    
    16,747,478
    
    
    
    52,881,653Percentage
    
    
    73.0
    %
    
    
    69.2
    %
    
    
    64.6
    %
    
    
    70.1
    %Selling and marketing expenses
    
    
    21,286,640
    
    
    
    791,682
    
    
    
    7,890,682
    
    
    
    29,969,004Segment profit
    
    $
    14,800,385
    
    
    $
    (744,532
    )
    
    $
    8,856,796
    
    
    $
    22,912,649
 For the Year Ended June 30, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    52,025,672
    
    
    $
    791,757
    
    
    $
    33,143,234
    
    
    $
    85,960,663Cost of sales and rentals
    
    
    13,943,173
    
    
    
    333,540
    
    
    
    14,158,967
    
    
    
    28,435,680Gross margin
    
    
    38,082,499
    
    
    
    458,217
    
    
    
    18,984,267
    
    
    
    57,524,983Percentage
    
    
    73.2
    %
    
    
    57.9
    %
    
    
    57.3
    %
    
    
    66.9
    %Selling and marketing expenses
    
    
    22,541,852
    
    
    
    3,805,755
    
    
    
    9,415,693
    
    
    
    35,763,300Segment profit
    
    $
    15,540,647
    
    
    $
    (3,347,538
    )
    
    $
    9,568,574
    
    
    $
    21,761,683
 For the Year Ended June 30, 2005U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    59,981,294
    
    
    $
    4,249,980
    
    
    $
    31,842,765
    
    
    $
    96,074,039Cost of sales and rentals
    
    
    15,766,545
    
    
    
    1,861,572
    
    
    
    13,316,425
    
    
    
    30,944,542Gross margin
    
    
    44,214,749
    
    
    
    2,388,408
    
    
    
    18,526,340
    
    
    
    65,129,497Percentage
    
    
    73.7
    %
    
    
    56.2
    %
    
    
    58.2
    %
    
    
    67.8
    %Selling and marketing expenses
    
    
    25,259,199
    
    
    
    6,788,389
    
    
    
    9,500,968
    
    
    
    41,548,556Segment profit
    
    $
    18,955,550
    
    
    $
    (4,399,981
    )
    
    $
    9,025,372
    
    
    $
    23,580,941
  Reconciliation
of segment profit to income from operations:
 For the Year EndedJune 302003
    
    
    2004
    
    
    2005Total profit from segments
    
    $
    22,912,649
    
    
    $
    21,761,683
    
    
    $
    23,580,941Unallocated corporate expenses:General and administrative
    
    
    12,201,022
    
    
    
    14,197,056
    
    
    
    16,440,874Research and development
    
    
    2,122,659
    
    
    
    2,554,290
    
    
    
    2,497,671Income from operations
    
    $
    8,588,968
    
    
    $
    5,010,337
    
    
    $
    4,642,396
 49




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##### Table of Contents



Net
revenues by product lines are as follows:
 Year ended June 302003
    
    
    2004
    
    
    2005Rehabilitation products
    
    $
    15,085,264
    
    
    $
    17,693,448
    
    
    $
    17,319,361Pain management
    
    
    15,431,708
    
    
    
    16,652,988
    
    
    
    21,969,232Consumer products
    
    
    19,364,142
    
    
    
    26,116,237
    
    
    
    28,971,600Accessories and supplies
    
    
    25,578,802
    
    
    
    25,497,990
    
    
    
    27,813,846Total
    
    $
    75,459,916
    
    
    $
    85,960,663
    
    
    $
    96,074,039
   Assets by
segment are as follows:
 U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalSegment assets at June 30, 2004
    
    $
    25,771,895
    
    
    $
    2,972,642
    
    
    $
    14,621,634
    
    
    $
    43,366,171Segment assets at June 30, 2005
    
    $
    37,857,601
    
    
    $
    2,113,933
    
    
    $
    14,350,201
    
    
    $
    54,321,735
  June 30, 2004
    
    
    June 30, 2005Assets from segments
    
    $
    43,366,171
    
    
    $
    54,321,735Unallocated corporate assets:
    
    
    32,843,225
    
    
    
    34,996,856Total assets
    
    $
    76,209,396
    
    
    $
    89,318,591
 11. Quarterly Data (Unaudited):
 Year ended June 30, 20041st Quarter
    
    
    2nd Quarter
    
    
    3rd Quarter
    
    
    4th Quarter
    
    
    TotalRevenue
    
    $
    19,156,266
    
    
    $
    22,464,599
    
    
    $
    21,651,597
    
    
    $
    22,688,201
    
    
    $
    85,960,663Gross profit
    
    
    12,719,020
    
    
    
    15,304,092
    
    
    
    14,571,045
    
    
    
    14,930,826
    
    
    
    57,524,983Net Income
    
    
    354,157
    
    
    
    1,228,583
    
    
    
    428,735
    
    
    
    1,038,892
    
    
    
    3,050,367Net income per
common share Basic
    
    
    0.03
    
    
    
    0.11
    
    
    
    0.03
    
    
    
    0.09
    
    
    
    0.26Diluted
    
    
    0.03
    
    
    
    0.10
    
    
    
    0.03
    
    
    
    0.08
    
    
    
    0.24
 50




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##### Table of Contents



Year ended June 30, 20051st Quarter
    
    
    2nd Quarter
    
    
    3rd Quarter
    
    
    4th Quarter
    
    
    TotalRevenue
    
    $
    21,653,738
    
    
    $
    25,212,350
    
    
    $
    22,902,107
    
    
    $
    26,305,844
    
    
    $
    96,074,039Gross profit
    
    
    14,739,120
    
    
    
    16,744,916
    
    
    
    15,049,144
    
    
    
    18,596,317
    
    
    
    65,129,497Net Income
    
    
    228,723
    
    
    
    1,028,323
    
    
    
    17,926
    
    
    
    1,276,309
    
    
    
    2,551,281Net income per
common share Basic
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.00
    
    
    
    0.10
    
    
    
    0.20Diluted
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.00
    
    
    
    0.10
    
    
    
    0.20
 51




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     .
   
 52




---



##### Table of Contents



Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.
  
 Item 9A. Controls and Procedures.
 Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
 Internal Control -Integrated Framework Internal Control  Integrated Framework
  
 Item 9B. Other Information.
  53




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services.
  
 Item 15 . Exhibits, Financial Statement Schedules.
 Financial Statements
  Financial Statement Schedules
  54




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##### Table of Contents



Exhibits
 Number
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to our Annual Report on Form 10-K for the year ended June 30,
2002 filed September 30, 2003 (File Number 0-9407))3.2
    
    Articles of Merger changing the name of the Registrant to Compex
Technologies, Inc. (Incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form S-8 filed March 14, 2003 (File No.
333-103817))3.3
    
    Restated Bylaws of Compex Technologies, Inc., as amended (incorporated by
reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
Quarter ended March 31, 2003 (File Number 0-9407))4.1
    
    1988 Restated Stock Option Plan, as amended (incorporated by reference to
Exhibit 4.1 to our Annual Report on Form 10-K for the year ended June 30,
2002 filed September 30, 2003 (File Number 0-9407))4.2
    
    1993 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.4
to our Registration Statement on Form S-8 filed March 14, 2003 (File No.
333-103817))4.3
    
    Compex Technologies, Inc. 1998 Stock Incentive Plan (Incorporated by
reference to Appendix E to the final prospectus included in Amendment No. 1
to the our Registration Statement on Form S-4 filed February 2, 1998 (file
no. 333-44139))4.4
    
    Rights Agreement dated as of February 17, 2003 between Compex Technologies,
Inc. and Registrar and Transfer Company (incorporated by reference to our
Form 8-A filed February 18, 2003 (File Number 0-9407))+10.1
    
    Form of Severance Pay Agreement (Incorporated by reference to our Form
10-KSB for the year ended June 30, 1997 (File Number 0-9407))10.2
    
    Amended and Restated Credit Agreement dated June 2, 2004 between Compex
Technologies, Inc. and U.S. Bank National Association.10.3
    
    Security Agreement dated June 23, 2005 between Compex Technologies, Inc. and
U.S. Bank National Association. (Incorporated by reference to the Companys
Current Report on Form 8-K filed June 27, 2005 (File No. 0-9407)10.4
    
    Stock Pledge Agreement dated July 19, 1999 between Rehabilicare Inc. and
U.S. Bank National Association covering all shares of capital stock in
Compex SA owned by Rehabilicare Inc. (Incorporated by reference to the
Companys Current Report on Form 8-K filed August 2, 1999 (File No. 0-9407))+10.5
    
    Employment Agreement dated as of August 12, 2002 between Rehabilicare Inc.
and Dan Gladney (incorporated by reference to Exhibit 10.10 to our Annual
Report on Form 10-K for the year ended June 30, 2002 filed September 30,
2003)+10.6
    
    Employment Agreement Amendment dated February 5, 2003 between Compex
Technologies, Inc. and Dan Gladney (incorporated by reference to Exhibit
10.11 to our Annual Report on Form 10-K for the year ended June 30, 2003)+10.7
    
    Non-Incentive Option Agreement dated August 12, 2003 between Compex
Technologies, Inc. and
 55




---



##### Table of Contents



Number
    
    DescriptionDan Gladney (incorporated by reference to Exhibit
10.12 to our Annual Report on Form 10-K for the year ended June 30, 2003)+10.8
    
    Non-Incentive Option Agreement (with acceleration) dated August 12, 2003
between Compex Technologies, Inc. and Dan Gladney (incorporated by reference
to Exhibit 10.13 to our Annual Report on Form 10-K for the year ended June
30, 2003)+10.9
    
    Employment Agreement dated as of December 2, 2002 between Rehabilicare Inc.
and Scott Youngstrom (incorporated by reference to Exhibit 10.14 to our
Annual Report on Form 8-K filed May 18, 2005)+10.10
    
    Amended and Restated Employment Agreement dated May 15, 2005 between Compex
Technologies, Inc. and Marshall Masko ( incorporated by reference to Exhibit
10.15 to our Annual Report on Form 8-K filed May 18, 2005)+10.11
    
    Employment Agreement dated as of September 1, 2003 between Rehabilicare Inc.
and G. Michael Goodpaster (incorporated by reference to Exhibit 10.11 to our
Annual Report on Form 10-K for the year ended June 30, 2004)+10.12
    
    Form of Incentive Option Agreement granted to Scott Youngstrom, Marshall
Masko and G. Michael Goodpaster. (incorporated by reference to Exhibit 10.12
to our Annual Report on Form 10-K for the year ended June 30, 2004)+10.13
    
    Form of Restricted Stock Agreement for restricted stock grants to Dan
Gladney, Scott Youngstrom, Marshall Masko, and G. Michael Goodpaster
(incorporated by reference to Exhibit 10.12 to our Annual Report on Form
10-K for the year ended June 30, 2004)10.14
    
    Amendment No. 2 dated as of June 23, 2005 to Amended and Restated Credit
Agreement between Compex Technologies, Inc. and U.S. Bank National
Association (incorporated by reference to Exhibit 10.1 to our Annual Report
on Form 8-K filed June 27, 2005)10.15
    
    Term Note dated June 23, 2005 to U.S. Bank National Association
(incorporated by reference to Exhibit 10.2 to our Annual Report on Form 8-K
filed June 27, 2005)10.16
    
    Guarantee dated June 23, 2005 by SpectraBrace, Ltd. of Amended and Restated
Credit Agreement (incorporated by reference to Exhibit 10.4 to our Annual
Report on Form 8-K filed June 27, 2005)*10.17
    
    Manufacturing Agreement dated May 24, 2005 between Compex Technologies, Inc.
and Bionicare, Inc.21
    
    Subsidiaries (Incorporated by reference to Exhibit 21 to Rehabilicares
Annual Report on Form 10-K for the year ended June 30, 2001 (File No.
0-9407))*23.1
    
    Consent of Independent Registered Public Accounting Firm  Ernst & Young LLP*31.1
    
    Certification of Chief Executive Officer pursuant to Rule 15d-14(a)(17 CFR
240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of Chief Financial Officer pursuant to Rule 15d-14(a)(17 CFR
240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002*32
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished but not filed)
 
 +
    
    Management compensatory plan or agreement*
    
    Filed with this Form 10-K 56




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##### Table of Contents



SIGNATURES
  COMPEX TECHNOLOGIES, INC.Dated: September 13, 2005
    
    By:
    
    /s/ Dan W. GladneyDan W. GladneyPresident and Chief Executive Officer
  NAME
    
    TITLE
    
    DATE/s/ Dan W. Gladney

Dan W. Gladney
    
    Chairman, President, Chief Executive
Officer
    
    September 13, 2005/s/ Scott P. Youngstrom

Scott P. Youngstrom
    
    Vice President of Finance
(Principal Financial and
Accounting Officer)
    
    September 13, 2005/s/ Frederick H. Ayers
    
    Director
    
    September 13, 2005Frederick H. Ayers/s/ Gary D. Blackford
    
    Director
    
    September 13, 2005Gary D. Blackford/s/ Richard E. Jahnke
    
    Director
    
    September 13, 2005Richard E. JahnkeDirectorPaulita M. LaPlante/s/ Richard J. Nigon
    
    Director
    
    September 13, 2005Richard J. Nigon/s/ Jack A. Smith
    
    Director
    
    September 13, 2005Jack A. Smith
 57




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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts
 Accounts ReceivableReserve
    
    
    
    
    
    Additions
    
    
    DeductionsCharged toBalance at
    
    
    
    
    
    
    
    
    
    
    Charged to
    
    
    allowance forbeginning of
    
    
    Credit
    
    
    Bad Debt
    
    
    credit
    
    
    doubtful
    
    
    Balance atDescription
    
    period
    
    
    Reserve
    
    
    Reserve
    
    
    reserve
    
    
    accounts
    
    
    end of periodAccount Receivable ReserveJune 30, 2005
    
    $
    17,665,865
    
    
    $
    18,976,772
    
    
    $
    3,947,890
    
    
    $
    17,429,425
    
    
    $
    3,910,937
    
    
    $
    19,250,165June 30, 2004
    
    
    15,200,590
    
    
    
    15,051,933
    
    
    
    4,067,765
    
    
    
    13,659,597
    
    
    
    2,994,826
    
    
    
    17,665,865June 30, 2003
    
    
    12,891,864
    
    
    
    12,219,742
    
    
    
    5,772,354
    
    
    
    11,851,052
    
    
    
    3,826,318
    
    
    
    15,200,590
 Inventory Reserve
    
    
    
    
    
    
    
    
    
    DeductionsBalance at
    
    
    
    
    
    
    Charges to
    
    
    Charged tobeginning of
    
    
    
    
    
    
    other
    
    
    inventory
    
    
    Balance atDescription
    
    period
    
    
    Additions
    
    
    accounts
    
    
    reserve
    
    
    end of periodInventory ReserveJune 30, 2005
    
    $
    941,331
    
    
    $
    997,880
    
    
    
    
    
    
    $
    1,285,131
    
    
    $
    654,080June 30, 2004
    
    
    838,413
    
    
    
    527,075
    
    
    
    
    
    
    
    424,157
    
    
    
    941,331June 30, 2003
    
    
    515,013
    
    
    
    835,562
    
    
    
    
    
    
    
    512,162
    
    
    
    838,413
 58