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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly period Ended December 31, 2004OR
 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 No. 0-9407 COMPEX TECHNOLOGIES, INC.
  Minnesota
(State or other jurisdiction of
incorporation or organization)
    
    41-0985318
(I.R.S. Employer Identification No.)
 1811 Old Highway 8
New Brighton, Minnesota 55112
(Address of principal executive offices) (651) 631-0590
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (Yes þ No o) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) (Yes þ No o) Indicate the number of shares outstanding of each of the issuers classes of common stock as of
February 4, 2005 was:  Common Stock, $.10 par value
    
    
    
    12,456,607 Shares
   1




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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Our Quarterly Report on Form 10-Q contains a number of forward-looking statements where we
indicate that we anticipate, believe, expect or estimate or use similar words to indicate
what might happen in the future. These forward looking statements represent our expectations about
future events, including anticipated product introductions; changes in markets, customers and
customer order rates; changes in third party reimbursement rates; expenditures for research and
development; growth in revenue; taxation levels; and the effects of pricing decisions. When used
in this 10-Q, the words anticipate, believe, expect, estimate and similar expressions are
generally intended to identify forward-looking statements. You should evaluate these
forward-looking statements in the context of a number of factors that may affect our financial
condition and results of operations, including the following:  
    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
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. 2




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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 Sates, requires compliance with quality assurance and labeling
regulations of the Food and Drug Administration. 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. The FTC has commenced several enforcement actions
against advertisers of abdominal belts during the past few years relating to misleading
advertising and 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, 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 properly function, we may receive an increased amount
of returns for which we are primarily 3




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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 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. In
particular, our contract for sale of Slendertone product in Europe currently calls for
minimum purchases in excess of what we have budgeted for the coming year. Although we
believe that we will be 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 35% of our revenue for the six months ended December 31, 2004 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 two 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 US 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 US currency. Conversely, if US 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. 4




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II - OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Included herein is the following unaudited condensed financial information: Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004 Consolidated Statements of Operations for the three months and six months
ended December 31, 2004 and 2003 Consolidated Statements of Cash Flows for the six months ended December
31, 2004 and 2003 Notes to Consolidated Financial Statements 5




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS June 30,
    
    
    December 31,2004
    
    
    2004(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,198,832
    
    
    $
    2,722,206Receivables, less reserves of $17,665,865 and $19,142,456
at June 30, 2004 and December 31, 2004, respectively
    
    
    28,802,468
    
    
    
    34,690,767Inventories, net
    
    
    12,990,417
    
    
    
    14,114,528Deferred tax assets
    
    
    6,008,936
    
    
    
    6,008,936Prepaid expenses
    
    
    3,646,300
    
    
    
    3,416,948Total current assets
    
    
    54,646,953
    
    
    
    60,953,385Property, plant, and equipment, net
    
    
    4,798,656
    
    
    
    5,606,495Goodwill
    
    
    15,501,566
    
    
    
    15,985,994Other intangible assets, net
    
    
    908,841
    
    
    
    778,843Deferred tax assets
    
    
    224,679
    
    
    
    318,509Other assets
    
    
    128,701
    
    
    
    149,317Total assets
    
    $
    76,209,396
    
    
    $
    83,792,543LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    1,268,910
    
    
    $
    1,807,159Notes payable
    
    
    2,200,000
    
    
    
    6,500,000Accounts payable
    
    
    5,678,181
    
    
    
    6,289,066Accrued liabilities -Payroll
    
    
    1,990,591
    
    
    
    1,744,486Commissions
    
    
    917,068
    
    
    
    1,156,579Income taxes
    
    
    1,731,444
    
    
    
    1,238,320Other
    
    
    3,377,681
    
    
    
    4,515,602Total current liabilities
    
    
    17,163,875
    
    
    
    23,251,212LONG-TERM LIABILITIESLong-term debt
    
    
    2,436,200
    
    
    
    1,353,600Deferred tax liabilities
    
    
    278,286
    
    
    
    345,062Total liabilities
    
    
    19,878,361
    
    
    
    24,949,874STOCKHOLDERS EQUITYCommon stock, $.10 par value: 30,000,000 shares authorized;
issued and outstanding 12,425,747 and 12,456,607 shares
at June 30, 2004 and December 31, 2004, respectively
    
    
    1,242,574
    
    
    
    1,245,660Preferred stock, no par value: 5,000,000 shares authorized;
none issued and outstanding
    
    
    
    
    
    
    Additional paid in capital
    
    
    32,887,912
    
    
    
    33,147,197Unearned compensation on restricted stock
    
    
    (119,370
    )
    
    
    (81,674
    )Accumulated other non-owner changes in equity
    
    
    2,340,916
    
    
    
    3,295,437Retained earnings
    
    
    19,979,003
    
    
    
    21,236,049Total stockholders equity
    
    
    56,331,035
    
    
    
    58,842,669Total liabilities and stockholders equity
    
    $
    76,209,396
    
    
    $
    83,792,543
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 31(unaudited)
    
    
    (unaudited)2003
    
    
    2004
    
    
    2003
    
    
    2004Net sales and rental revenue
    
    $
    22,464,599
    
    
    $
    25,212,349
    
    
    $
    41,620,865
    
    
    $
    46,866,088Cost of sales and rentals
    
    
    7,160,507
    
    
    
    8,467,434
    
    
    
    13,597,753
    
    
    
    15,382,052Gross profit
    
    
    15,304,092
    
    
    
    16,744,915
    
    
    
    28,023,112
    
    
    
    31,484,036Operating expenses:Selling and marketing
    
    
    8,769,570
    
    
    
    10,353,246
    
    
    
    16,871,091
    
    
    
    20,196,876General and administrative
    
    
    3,719,596
    
    
    
    3,933,364
    
    
    
    7,021,317
    
    
    
    7,677,895Research and development
    
    
    646,673
    
    
    
    656,892
    
    
    
    1,275,150
    
    
    
    1,379,427Total operating expenses
    
    
    13,135,839
    
    
    
    14,943,502
    
    
    
    25,167,558
    
    
    
    29,254,198Income from operations
    
    
    2,168,253
    
    
    
    1,801,413
    
    
    
    2,855,554
    
    
    
    2,229,838Other income (expense):Interest expense
    
    
    (142,868
    )
    
    
    (104,232
    )
    
    
    (296,611
    )
    
    
    (183,817
    )Other
    
    
    22,198
    
    
    
    15,142
    
    
    
    77,797
    
    
    
    46,025Income before income taxes
    
    
    2,047,583
    
    
    
    1,712,323
    
    
    
    2,636,740
    
    
    
    2,092,046Income tax provision
    
    
    819,000
    
    
    
    684,000
    
    
    
    1,054,000
    
    
    
    835,000Net income
    
    $
    1,228,583
    
    
    $
    1,028,323
    
    
    $
    1,582,740
    
    
    $
    1,257,046Net income per common and common equivalent shareBasic
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.10Diluted
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.10Weighted average number of shares outstandingBasic
    
    
    11,561,292
    
    
    
    12,454,759
    
    
    
    11,293,216
    
    
    
    12,454,433Diluted
    
    
    12,593,070
    
    
    
    12,912,695
    
    
    
    12,217,516
    
    
    
    12,968,667
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months EndedDecember 31(unaudited)2003
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    1,582,740
    
    
    $
    1,257,046Adjustments to reconcile net income to net cash
used in operating activitiesDepreciation and amortization
    
    
    945,944
    
    
    
    824,467Amortization of unearned compensation
    
    
    33,078
    
    
    
    120,952Change in deferred taxes
    
    
    (10,909
    )
    
    
    (6,511
    )Changes in current assets and liabilities  net of
amounts acquired in acquisitionReceivables
    
    
    (2,176,616
    )
    
    
    (4,924,129
    )Inventories
    
    
    (1,160,881
    )
    
    
    (603,521
    )Prepaid expenses
    
    
    940,289
    
    
    
    410,792Accounts payable
    
    
    (1,011,991
    )
    
    
    177,589Accrued liabilities
    
    
    (223,119
    )
    
    
    243,744Net cash used in operating activities
    
    
    (1,081,465
    )
    
    
    (2,499,571
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (630,515
    )
    
    
    (1,328,069
    )Cash paid in acquisition, net of cash received
    
    
    (3,389,912
    )
    
    
    Changes in other assets, net
    
    
    (246,855
    )
    
    
    (6,300
    )Net cash used in investing activities
    
    
    (4,267,282
    )
    
    
    (1,334,369
    )FINANCING ACTIVITIES:Proceeds from new debt financing
    
    
    3,835,501
    
    
    
    Principal payments on long-term obligations
    
    
    (6,296,205
    )
    
    
    (956,072
    )(Payments on) proceeds from line of credit, net
    
    
    (3,500,000
    )
    
    
    4,300,000Proceeds from stock offering
    
    
    8,335,754
    
    
    
    Proceeds from employee stock purchase plan
    
    
    398,493
    
    
    
    131,720Proceeds from exercise of stock options
    
    
    96,417
    
    
    
    47,395Net cash provided by financing activities
    
    
    2,869,960
    
    
    
    3,523,043Effect of exchange rates on cash and cash equivalents
    
    
    343,186
    
    
    
    (165,729
    )Net decrease in cash and cash equivalents
    
    
    (2,135,601
    )
    
    
    (476,626
    )Cash and cash equivalents at beginning of period
    
    
    5,056,007
    
    
    
    3,198,832Cash and cash equivalents at end of period
    
    $
    2,920,406
    
    
    $
    2,722,206Supplemental cash flow informationInterest paid
    
    $
    296,611
    
    
    $
    183,817Income taxes paid
    
    $
    1,834,183
    
    
    $
    1,251,124
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COMPEX TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 1. Accounting Policies The amounts set forth in the preceding financial statements are unaudited as of and for the periods
ended December 31, 2004 and 2003, however, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair statement of the results for
the periods presented. Such results are not necessarily indicative of results for the full year.
The accompanying financial statements of the Company should be read in conjunction with the audited
consolidated financial statements for the year ended June 30, 2004 included in the Companys Annual
Report on Form 10-K. Reclassification Certain prior year items have been reclassified to conform with the current year presentation. Stock-Based Compensation The Company has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148.
Accordingly, the Company continues to account for stock-based compensation using the intrinsic
value method as prescribed under Accounting Principles Board Opinion (APB) No. 25 and related
Interpretations. Had compensation expense for the Companys stock-based compensation plans been determined based on
the fair value at the grant dates consistent with the method of SFAS No. 123, the Companys net
income and earnings per share would have been reduced to the pro forma amounts indicated below: Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 312003
    
    
    2004
    
    
    2003
    
    
    2004Net Income
    
    As reported
    
    $
    1,228,583
    
    
    $
    1,028,323
    
    
    $
    1,582,740
    
    
    $
    1,257,046Pro forma option expense, net of tax
    
    
    (207,682
    )
    
    
    (227,457
    )
    
    
    (392,655
    )
    
    
    (454,468
    )Pro forma
    
    $
    1,020,901
    
    
    $
    800,866
    
    
    $
    1,190,085
    
    
    $
    802,578Basic earnings
    
    As reported
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.10per share
    
    Pro forma
    
    
    0.09
    
    
    
    0.06
    
    
    
    0.11
    
    
    
    0.06Diluted earnings
    
    As reported
    
    $
    0.10
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.10per share
    
    Pro forma
    
    
    0.08
    
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.06
 The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in fiscal 2004
and 2005: dividend yield of 0%; expected volatility of 52.3% and 61.9%; risk-free interest rate of
3.22% and 3.56%; and expected lives of 5 years. Recent Accounting Pronouncements In December 2004, the FASB issued FASB Statement No. 123(R), Share Based Payment (FAS 123(R) revises FASB Statement No. 123,
Accounting for Stock-Based Compensation and requires 9




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companies
to expense the fair value of employee stock options and other forms of stock-based
compensation. The standard is effective for our 2006 fiscal year beginning July 1, 2005 and
will apply to our employee stock option and stock purchase plans. We are currently evaluating
the impact of the adoption of FAS 123® and have not selected a transition method or valuation
model. As such, we are unable to estimate the expected effect on our financial statements, but
believe it will have a significant adverse impact on our results from operations. 2. Inventory June 30, 2004
    
    
    December 31, 2004Inventories, netRaw materials
    
    $
    1,037,944
    
    
    $
    1,106,649Work in process
    
    
    10,765
    
    
    
    17,802Finished goods
    
    
    11,941,708
    
    
    
    12,990,077$
    12,990,417
    
    
    $
    14,114,528
 3. Fixed Assets June 30, 2004
    
    
    December 31, 2004Property, plant and equipment -Land
    
    $
    150,000
    
    
    $
    150,000Buildings
    
    
    1,683,614
    
    
    
    1,683,614Clinical and rental equipment
    
    
    1,401,842
    
    
    
    1,547,205Production equipment
    
    
    4,454,729
    
    
    
    1,433,411Office furniture and equipment
    
    
    10,594,573
    
    
    
    11,676,925$
    18,284,758
    
    
    $
    16,491,155Less accumulated depreciation
    
    
    (13,486,102
    )
    
    
    (10,884,660
    )Net property, plant and equipment
    
    $
    4,798,656
    
    
    $
    5,606,495
 Included in the Companys consolidated balance sheet at December 31, 2004 and June 30, 2004 are net
property, plant and equipment of the Companys foreign operations, which are located in Europe and
which total $1,680,517 and $1,274,130, respectively. During the six months ended December 31, 2004 the Company disposed of approximately $3.8 million of
production and office equipment that was fully depreciated and no longer in service. 4. Note Payable and Long Term Debt The Company has a $15,000,000 U. S. credit facility which provides for revolving borrowings at
varying rates based either on the banks prime rate or LIBOR. As of December 31, 2004, there were
borrowings outstanding of $6,500,000 on the revolving credit line. As of December 31, 2003, there
were outstanding borrowings of $1,000,000 on the revolving credit line. The Company currently has
$8,500,000 available under the revolving credit line. Borrowings under the U. S. credit facility
are secured by substantially all
assets of the Company. The weighted average rate on borrowings under the revolving line of credit
was 4.77%. The Company was in compliance with all financial covenants in its U. S. credit agreement as of
December 31, 2004 and for the period then ended. 10




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The Company has a $4,975,000 Swiss credit facility that provides for a three-year term loan at
varying rates. As of December 31, 2004 and 2003, there were borrowings outstanding of $3,160,759
and $4,621,924 respectively, under this credit facility. Borrowings under this credit facility
were used to fund the acquisition of Filsport Assistance S.r.l. on July 3, 2003. Borrowings under
the Swiss credit facility are secured by all of the equity interest held by the Companys Swiss
subsidiary in Filsport. The second advance bears interest at 4.09% and the third and final advance
bears interest at 4.40%. The Company was in compliance with all financial covenants in its Swiss Credit agreement as of
December 31, 2004 and for the period then ended. 5. Per Share Data Net income per share is calculated in accordance with Financial Accounting Standards Board
Statement No. 128, Earnings Per Share. Potential common shares are included in the diluted net
income per share calculation when dilutive. Potential common shares consisting of common stock
issuable upon exercise of outstanding common stock options are computed using the treasury stock
method. Our basic net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common shares outstanding during the period,
increased to include dilutive potential common shares issuable upon the exercise of stock options
that were outstanding during the period. The table below is a reconciliation of the numerator and
denominator in the basic and diluted net income per share calculation. For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312003
    
    
    2004
    
    
    2003
    
    
    2004NumeratorNet Income
    
    $
    1,228,583
    
    
    $
    1,028,323
    
    
    $
    1,582,740
    
    
    $
    1,257,046DenominatorDenominator for basic net
income per share - weighted
average shares outstanding
    
    
    11,561,292
    
    
    
    12,454,759
    
    
    
    11,293,216
    
    
    
    12,454,433Effect of dilutive stock options
    
    
    1,031,778
    
    
    
    457,936
    
    
    
    924,300
    
    
    
    514,234Denominator for diluted net
income per share - weighted
average shares outstanding
    
    
    12,593,070
    
    
    
    12,912,695
    
    
    
    12,217,516
    
    
    
    12,968,667Basic net income per share
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.10Diluted net income per share
    
    
    0.10
    
    
    
    0.08
    
    
    
    0.13
    
    
    
    0.10
 Employee stock options of 418,215 and 392,737 for the three and six month periods ended
December 31, 2004, respectively, have been excluded from the diluted net income per share
calculation because their effect would be anti-dilutive. For the three and six month periods ended
December 31, 2003, employee options of 54,478 and 27,239, respectively, were excluded from the
diluted net income per share calculation because their effect would be anti-dilutive. 6. Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display
of comprehensive income and its components. Adjustments to comprehensive income for the six months
ended December 31, 2004 and December 31, 2003 consisted solely of gains on translation of foreign 11




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subsidiary financial statements from the functional currency to US dollars of $954,000 and
$1,061,000, respectively, resulting in total comprehensive income of $2,211,000 and $2,644,000,
respectively. 7. Segment Information Since July 1, 2004, Compex Technologies, Inc. and its consolidated subsidiaries are now reporting
in three reportable segments. The Company had previously reported as one operating segment which
included the manufacture and distribution of electrical stimulation products for pain management,
rehabilitation and fitness applications. However, given the establishment and growth of the
Companys consumer products segment, which includes electrical stimulation products for consumer
distribution, the Company has reorganized the manner in which it reviews and manages its business.
The Companys new reporting structure is based on a geographical basis in segmenting its
international and U.S. operations. Further segmentation of the U.S. operations is based on product
offering by separating its U.S. consumer from its U.S. medical division. The Companys U.S.
medical segment consists of electrical stimulation products for rehabilitation, pain management and
accessories and supplies distributed to patients through healthcare providers. Consumers of our
U.S. medical segment require a physicians prescription to purchase or rent products, and the
Company is normally reimbursed through a third party reimbursement organization such as an
insurance company, health maintenance organization, or a governmental agency under Medicare,
Medicaid, workers compensation or other programs. Our U.S. consumer segment consists of the sale
of electrical stimulation products for consumers. Because the regulatory requirements and the
markets differ substantially from the regulatory requirements and markets in the United States, the
Company sells a completely different line of both medical, sport, fitness and wellness products
over the counter under the Compex name in Europe. There is no reporting distinction between
medical and consumer products within our international reporting segment, because the European
regulatory environment does not necessitate the distinction between method of distribution of
medical and consumer products as is necessary in the U.S. The Companys chief operating decision makers make operating and strategic decisions based on
measure of segment profit that includes gross profit less selling and marketing expenses. Revenue, cost of sales and rentals, and selling expenses by division are as follows: For the Three Months Ended December 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    14,923,642
    
    
    $
    1,523,880
    
    
    $
    8,764,827
    
    
    $
    25,212,349Cost of sales and rentals
    
    
    4,127,797
    
    
    
    759,125
    
    
    
    3,580,512
    
    
    
    8,467,434Gross margin
    
    
    10,795,845
    
    
    
    764,755
    
    
    
    5,184,315
    
    
    
    16,744,915Percentage
    
    
    72.3
    %
    
    
    50.2
    %
    
    
    59.1
    %
    
    
    66.4
    %Selling and marketing expenses
    
    
    6,325,004
    
    
    
    1,308,595
    
    
    
    2,719,647
    
    
    
    10,353,246Segment profit (loss)
    
    $
    4,470,841
    
    
    $
    (543,840
    )
    
    $
    2,464,668
    
    
    $
    6,391,669
 For the Three Months Ended December 31, 2003U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    13,259,459
    
    
    $
    219,565
    
    
    $
    8,985,575
    
    
    $
    22,464,599Cost of sales and rentals
    
    
    3,352,570
    
    
    
    72,173
    
    
    
    3,735,764
    
    
    
    7,160,507Gross margin
    
    
    9,906,889
    
    
    
    147,392
    
    
    
    5,249,811
    
    
    
    15,304,092Percentage
    
    
    74.7
    %
    
    
    67.1
    %
    
    
    58.4
    %
    
    
    68.1
    %Selling and marketing expenses
    
    
    5,566,233
    
    
    
    685,464
    
    
    
    2,517,873
    
    
    
    8,769,570Segment profit (loss)
    
    $
    4,340,656
    
    
    $
    (538,072
    )
    
    $
    2,731,938
    
    
    $
    6,534,522
 12




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##### Table of Contents



For the Six Months Ended December 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    28,122,753
    
    
    $
    2,448,898
    
    
    $
    16,294,437
    
    
    $
    46,866,088Cost of sales and rentals
    
    
    7,445,597
    
    
    
    1,188,667
    
    
    
    6,747,788
    
    
    
    15,382,052Gross margin
    
    
    20,677,156
    
    
    
    1,260,231
    
    
    
    9,546,649
    
    
    
    31,484,036Percentage
    
    
    73.5
    %
    
    
    51.5
    %
    
    
    58.6
    %
    
    
    67.2
    %Selling and marketing expenses
    
    
    12,070,162
    
    
    
    3,323,860
    
    
    
    4,802,854
    
    
    
    20,196,876Segment profit
    
    $
    8,606,994
    
    
    $
    (2,063,629
    )
    
    $
    4,743,795
    
    
    $
    11,287,160
 For the Six Months Ended December 31, 2003U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    25,736,635
    
    
    $
    268,909
    
    
    $
    15,615,321
    
    
    $
    41,620,865Cost of sales and rentals
    
    
    6,754,289
    
    
    
    86,415
    
    
    
    6,757,049
    
    
    
    13,597,753Gross margin
    
    
    18,982,346
    
    
    
    182,494
    
    
    
    8,858,272
    
    
    
    28,023,112Percentage
    
    
    73.8
    %
    
    
    67.9
    %
    
    
    56.7
    %
    
    
    67.3
    %Selling and marketing expenses
    
    
    11,137,947
    
    
    
    1,179,550
    
    
    
    4,553,594
    
    
    
    16,871,091Segment profit
    
    $
    7,844,399
    
    
    $
    (997,056
    )
    
    $
    4,304,678
    
    
    $
    11,152,021
 Reconciliation of segment profit to income from operations: For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312003
    
    
    2004
    
    
    2003
    
    
    2004Total profit from segments
    
    $
    6,534,522
    
    
    $
    6,391,669
    
    
    $
    11,152,021
    
    
    $
    11,287,160Unallocated corporate expenses:General and administrative
    
    
    3,719,596
    
    
    
    3,933,364
    
    
    
    7,021,317
    
    
    
    7,677,895Research and development
    
    
    646,673
    
    
    
    656,892
    
    
    
    1,275,150
    
    
    
    1,379,427Income from operations
    
    $
    2,168,253
    
    
    $
    1,801,413
    
    
    $
    2,855,554
    
    
    $
    2,229,838
 Net revenue by product lines are as follows: For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312003
    
    
    2004
    
    
    2003
    
    
    2004Rehabilitation products
    
    $
    5,222,787
    
    
    $
    4,474,345
    
    
    $
    9,049,828
    
    
    $
    8,115,606Pain management
    
    
    3,800,398
    
    
    
    5,412,750
    
    
    
    7,920,380
    
    
    
    10,076,655Consumer products
    
    
    6,800,639
    
    
    
    8,236,387
    
    
    
    12,012,482
    
    
    
    15,040,288Accessories and supplies
    
    
    6,640,775
    
    
    
    7,088,867
    
    
    
    12,638,175
    
    
    
    13,633,539$
    22,464,599
    
    
    $
    25,212,349
    
    
    $
    41,620,865
    
    
    $
    46,866,088
 The Company does not have a single customer that accounts for more than 5% of consolidated
revenue or more than 5% of total accounts receivable as of December 31, 2004. 13




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##### Table of Contents



Assets by segment are as follows: U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalSegment assets at December 31, 2004
    
    $
    30,395,479
    
    
    $
    4,365,641
    
    
    $
    16,177,008
    
    
    $
    50,938,128Segment assets at December 31, 2003
    
    $
    24,644,017
    
    
    $
    2,631,424
    
    
    $
    16,756,960
    
    
    $
    44,032,401
 Reconciliation of segment assets to total assets: As of December 312003
    
    
    2004Assets from segments
    
    $
    44,032,401
    
    
    $
    50,938,128Unallocated corporate assets:
    
    
    30,475,680
    
    
    
    32,978,446Total assets
    
    $
    74,508,081
    
    
    $
    83,916,574
 8. Commitments Throughout the remainder of the fiscal year, the Company has approximately $400,000 that will
become due to maintain celebrity endorsements. 14




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Overview We discuss the factors that significantly affected our financial results and our financial
condition in this Managements Discussion and Analysis of Financial Condition and Results of
Operations. For a more complete understanding of these factors, you should also review our
consolidated balance sheets at June 30, 2003 and June 30, 2004, our consolidated statements of
operations, statements of shareholders equity and statement of cash flows for the three years
ended June 30, 2004, and the notes to those financial statements. These financial statements and
the report of Ernst & Young LLP on our financial statements are included at Item 8 of our Form 10-K
for the year ended June 30, 2004. Critical Accounting Policies We prepare our financial statements in accordance with accounting principles generally accepted in
the United States. Nevertheless, the preparation of these financial statements requires that we
make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We base these estimates
on historical experience and on various other assumptions that we believe are reasonable under the
circumstances. It is our policy to evaluate and update these estimates on an ongoing basis. The
judgments and policies that we believe would have the most significant impact on the presentation
of our financial position and results are as follows: Revenue Recognition and Provisions for Credit Allowances and Returns. In our business, we
recognize revenue upon notification from a health care provider that equipment has been prescribed
and provided to a patient and approved by the patient and/or their insurance provider or upon
shipment for wholesale and consumer sales. Many providers reimburse at rates which differ from our
invoice rate based on contracts, buying agreements or negotiated rate adjustments. In addition,
patients sometimes return units after initial acceptance when they determine that their
responsibilities for co-payments, deductibles or other charges are more than expected. We provide
for these credit allowances and returns by recording such amount as an offset to revenue and
including the provision as a part of the reserve for uncollectible accounts receivable. We
estimate the amount of this provision for credit allowances and returns based on our historical
experience with the various reimbursement entities, any recent notifications of changes in
reimbursement rates and our historic rates of product returns. Possible changes in the number of
units returned by patients or the rates of reimbursement could cause this provision for credit
allowances and the reserve for uncollectible accounts to be inadequate. Reserve for Uncollectible Accounts Receivable.Managing our accounts receivable represents one of
our biggest business challenges. The process of determining what products will be reimbursed by
third party payors and the amounts that they will reimburse is very complex and the reimbursement
environment is constantly changing. We maintain a reserve for uncollectible receivables, and
provide for additions to the reserve, to account for the risk of nonpayment. We set the amount of
the reserve, and adjust the reserve at the end of each reporting period, based on a number of
factors, including historical rates of collection, trends in the historical rates of collection and
current relationships and experience with insurance companies or other third party payors. If the
rates of collection of past-due receivables recorded for previous fiscal periods changes, or if
there is a trend in the rates of collection on those receivables, we may be required to change the
rate at which we provide for additions to the reserve. Such a change, even though small in
absolute terms, can significantly affect financial performance in current periods. A change in the
rates of our collection can result from a number of factors, including turnover in our personnel,
changes in the reimbursement policies or practices of payors, or changes in industry rates of
reimbursement. Further, the reserve may be affected by significant charge-offs if a related group
of receivables become doubtful that were not previously anticipated to be doubtful. Accordingly,
the provision for uncollectible accounts recorded in the income statement has fluctuated and may
continue to fluctuate significantly from quarter to quarter as such trends change. 15




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##### Table of Contents



Carrying Value of Inventory.We maintain a large balance of electrical stimulation devices on
consignment at clinics and other health care providers that are not under our control. In the
course of our business, some of this product is lost. Although we have the right in most cases to
seek reimbursement for the lost product from our sales representatives or the health care
providers, in some instances we forego that right in order to maintain favorable relationships. We
maintain a reserve for the amount of consignment inventory that may be lost based on our experience
as developed through periodic field audits. We cannot be certain that future rates of product loss
will be consistent with our historical experience and we could be required to increase the rate at
which we provide for such lost inventory, thus adversely affecting our operating results. Carrying Value of Intangible Assets.We had a balance of intangible assets of approximately $16.7
million at December 31, 2004, most of which constituted goodwill and the value of acquired
technology, from several acquisitions. We are required to charge-off the carrying value of
identifiable intangibles and related goodwill to the extent it may not be recoverable. We assess
the impairment of identifiable intangibles and related goodwill annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include the following:  
    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. If we determine that the carrying value of intangibles and related goodwill might not be
recoverable based upon the existence of one or more of the above indicators of impairment, we would
reduce the carrying value to its fair value. 16




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##### Table of Contents



Results of Operations The following table sets forth information from the statements of operations as a
percentage of revenue for the periods indicated: Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 312003
    
    
    2004
    
    
    2003
    
    
    2004Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    31.9
    
    
    
    33.6
    
    
    
    32.7
    
    
    
    32.8Gross profit
    
    
    68.1
    
    
    
    66.4
    
    
    
    67.3
    
    
    
    67.2Operating expensesSelling
    
    
    39.0
    
    
    
    41.1
    
    
    
    40.6
    
    
    
    43.1General and administrative
    
    
    16.6
    
    
    
    15.6
    
    
    
    16.9
    
    
    
    16.4Research and development
    
    
    2.9
    
    
    
    2.6
    
    
    
    3.0
    
    
    
    2.9Total operating expenses
    
    
    58.5
    
    
    
    59.3
    
    
    
    60.5
    
    
    
    62.4Income from operations
    
    
    9.6
    
    
    
    7.1
    
    
    
    6.9
    
    
    
    4.8Other expense, net
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.3Income tax provision
    
    
    3.6
    
    
    
    2.7
    
    
    
    2.5
    
    
    
    1.8Net Income
    
    
    5.5
    %
    
    
    4.1
    %
    
    
    3.8
    %
    
    
    2.7
    %
 Our revenue increased by 12% to $25.2 million during the quarter ended December 31, 2004 from $22.5
million during the quarter ended December 31, 2003, and increased 13% to $46.8 million during the
six months ended December 31, 2004 from $41.6 million during the six months ended December 31,
2003. For the quarter, increases in revenues from both our U.S. medical business and in our U.S.
consumer business accounted for 13% of the increase, partially offset by a 1% decrease in
international. For the six-month period, increases in both U.S. business segments accounted for
11% of the increase with an additional 3% due to favorable exchange rates . Again, this was
partially offset by a slight decrease in international. U.S. medical revenue for the quarter was $14.9 million, up 13% from the prior years quarter
of $13.3 million, and was $28.1 million for the six month period ended December 31, 2004, up 9%
from the $25.7 million from the comparable period last year.
On a sequential basis, our U.S. medical revenue was up 13% over the
first fiscal quarter.
This increase is primarily due to an
increase in volumes of our direct unit sales and rental business, and a slight increase in our
accessories and supplies reflecting our trend of increasing our direct medical sales force. We
also expanded our direct sales by increasing the amount of rentals that are originated directly
through physician offices. Our U.S. consumer division recorded revenue of $1.5 million and $2.4 million for the quarter and
six month periods ended December 31, 2004, respectively. This compares to $220,000 and $269,000,
respectively, of revenue recorded for the comparable periods last year. Our increased sales have
been driven through our current agreements with The Home Shopping Network (HSN) and General
Nutrition Centers (GNC) and we will continue to focus on landing other major retail chains. Our international division posted revenue of $8.8 million for the quarter ended December 31, 2004.
This represents a decrease of 2% from the $9.0 million recorded during the comparable quarter last
year. Sales of our Compex line of products accounted for 7% of the decrease, as unit sales fell
below prior year amounts. This was partially offset by a 5% favorable impact of exchange rates,
reflecting the strength of
the Euro versus the U.S. Dollar. Revenues for the quarter from the Slendertone line of products
were comparable to the same period last year. For the six months ended December 31, 2004, our
international division posted revenue of $16.3 million or a 4% increase over the $15.6 million for 17




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##### Table of Contents



the comparable six month period last year. A 6% favorable impact of exchange rates was partially
offset by a 1% decrease in our Compex line of products and a 1% decrease in our Slendertone product
revenues. The actual number of Compex units sold for the six month period was up 8% over
comparable unit sales for prior year. This increase in unit sales, however, reflects our change in
product mix to more of the lower priced Energy and Body models that were introduced toward the
end of fiscal 2004. Revenue by product line during the quarter ended December 31, 2004 was roughly $4.5 million in
rehabilitation products, $5.4 million in pain management products, $8.2 million in consumer
products, and $7.1 million in accessories and supplies. All revenue segments are above prior year
amounts with consumer products, primarily Slendertone product sales in the U.S., reflecting the
largest nominal increase. The decrease in rehabilitation products is due primarily to a shift in
our U.S. medical revenue from rehabilitation products to the pain management category and a
reduction in our medical products sold in Europe. Our gross profit was $16.7 million or 66.4% of revenue during the quarter, and $31.5 million or
67.2% of revenue during the six months ended December 31, 2004. This compares to gross profit of
$15.3 million or 68.1% of revenue in the quarter and $28.0 million or 67.3% of revenue during the
six months ended December 31, 2003. The overall decrease in margin percentage reflects a modest
shift in our mix of products sold in our medical division from the higher reimbursement categories
to the group contract insurance segments. Additionally, a change in our overall revenue mix toward
more U.S. consumer products, which carry a lower margin than our U.S. medical division and our
international division, also contributed to the decrease. We are currently selling a greater
percentage of U.S. consumer products through retailers, which carry lower gross margins, than were
sold in the previous periods. We anticipate gross profit will settle in the middle-to-lower 60%
range as our domestic consumer business becomes a greater percentage of our total revenue. Cost of
sales and gross profit for periods ended December 31, 2003 also reflect the sale of inventory that
was acquired in the Filsport acquisition which, because Filsport was a distributor, has a higher
cost than inventory we have manufactured and sold through Filsport after this acquired inventory
was sold. Subsequently, all of the inventory that was acquired as a part of the Filsport
acquisition was sold. For the quarter ended December 31, 2004, our selling expenses increased 18% to $10.4 million or
41.1% of revenue, up from $8.8 million or 39.0% of revenue for the comparable quarter last year.
Selling expenses for the six month period ended December 31, 2004, increased 20% to $20.2 million
or 43.1% of revenue, up from $16.9 million, or 40.6% of revenue for the comparable six month period
last year. Our U.S. medical divisions selling expenses increased as we have increased our number
of direct medical sales representatives to 64 as of December 31, 2004, as compared to 54 as of
December 31, 2003. We continue to invest in our direct sales team and in our commitment to our
physician selling model. A significant increase in our U.S. consumer division in promoting our
Compex and Slendertone product lines accounted for approximately 50% of the increase. The negative
effect of the exchange rate on expenses in our International division also contributed to the
increases. General and administrative expenses for the quarter ended December 31, 2004, totaled $3.9 million
or 15.6% of revenue, representing a 6% increase over the $3.7 million or 16.6% of revenue recorded
for the quarter ended December 31, 2003. General and administrative expenses for the six month
period ended December 31, 2004, was $7.7 million, or 16.4% of revenue, representing a 9% increase
over the $7.0 million, or 16.9% of revenue for the same period last year. Costs in both our
corporate and International offices for additional personnel and consulting fees associated with
our Sarbanes Oxley compliance also contributed to the increase. Although general and
administrative expenses have increased in absolute dollars, cost containment programs have reduced
our expenditures as a percent of revenues. Our research and development expenses for the quarter ended December 31, 2004, increased 2% to
$657,000 from $647,000 for the comparable quarter ended December 31, 2003. Research and development
expenses for the six month period ended December 31, 2004, totaled $1.4 million, or 2.9% of
revenue, representing an 8% increase over the $1.3 million, or 3.0% of revenue for the same period
last year. Research and development spending, in absolute dollars, has increased as we develop new
products such as our IF3Wave product for the U.S. medical division and our Fitness Trainer model
that was introduced in our U.S. consumer division. For both periods, approximately 4% of the
increase is due to the negative impact of the currency exchange. We anticipate research and
development spending will 18




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grow in absolute dollars, but will decrease as a percent of revenue in
future periods as our revenue from our U.S. consumer division increases. Interest expense decreased to $104,000 for the quarter ended December 31, 2004 from $143,000 for
the quarter ended December 31, 2003. Interest expense decreased to $184,000 for the six month
period ended December 31, 2004 from $297,000 for the comparable period last year. In July 2003, we
incurred additional borrowings of approximately $3.8 million that we used to finance an
acquisition. In November 2003, we used proceeds from a private equity placement to reduce
borrowings under our domestic credit facilities. As a result, our average outstanding borrowing
levels for the quarter and six months period ended December 31, 2004 were lower than the comparable
periods in 2003. The provision for income taxes was 40% for fiscal years 2005 and 2004. We believe 40% is a
reasonable estimate of the effective rate for fiscal 2005. As a result of the above activity, our net income decreased to $1.0 million in the second quarter
of fiscal 2005 from $1.2 million in the second quarter of fiscal 2004. For the six months ended
December 31, 2004, net income decreased to $1.3 million from $1.6 million during the same period in
fiscal 2004. Diluted earnings per share decreased from $0.10 during the quarter ended December 31,
2003 to $0.08 during the quarter ended December 31, 2004 and diluted earnings per share decreased
from $.13 to $.10 per share for the six-month period. Liquidity and Capital Resources Our operating activities used cash of $2.5 million during the six months ended December 31,
2004, as compared to $1.1 million used in operating activities during the six months ended December
31, 2003. Although we generated cash from earnings, after adjustment for depreciation and
amortization, of approximately $2.1 million during the first six months of fiscal 2005, we used
over $4.9 million to finance increased receivables during fiscal 2005, as a result of larger sales
late in the period, and slow collections throughout the period. Receivables also increased in
fiscal 2004 by $2.2 million. An increase in inventory was offset by an increase in liabilities and
a decrease in prepaid expenses due to year-end timing differences and tax payments. We used $1.3 million in investing activities in the first six months of fiscal 2005, for purchases
of property and equipment, primarily clinical and rental equipment, and new computer software and
hardware in our international division. We used over $4.3 million of cash in the first six months
of fiscal 2004, primarily because of the application of $3.4 million to acquire all of the capital
stock of Filsport Assistance, S.r.l., a distributor of our products in Italy, in July 2003. Our
financing activities provided $3.6 million of cash during the first six months of fiscal 2005,
mainly from $3.3 million in net borrowings under our domestic credit line to finance expenditures
in the U.S. Consumer division and from the exercise of employee stock options. During fiscal 2003,
we generated $2.9 million from financing activities, as we generated $8.3 million in a stock
offering and $3.8 million through our European subsidiary to finance an acquisition. This was
partially offset by the repayment of $9.8 million in debt. At December 31, 2004, we had a balance of $6.5 million outstanding under our US credit facility and
$3.2 million under our European credit facility. Based on our credit agreement, we believe we
could borrow up to approximately an additional $8.5 million under our credit facility. In addition
to approximately $2.5 million of payments due under our debt agreements and lease obligations
during the following year, we have approximately $450,000 that will become due to maintain
celebrity endorsements. We will continue to invest in sales and marketing, and in inventory and
infrastructure, over the remainder of the fiscal year to introduce these products and the Compex
sport products to the United States markets. We may also apply cash to acquisitions during future
periods. We believe that available cash and borrowings under our credit lines will be adequate to fund cash
requirements for the current fiscal year and the foreseeable future. 19




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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the quarter ended December 31, 2004, our revenue originating outside the U.S. was 35%
of total revenue, substantially all of which was denominated in the local functional currency.
Currently, we do not employ currency-hedging strategies to reduce the risks associated with the
fluctuation of foreign currency exchange rates. Our international business is subject to risks typical of an international business, including, but
not limited to: differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or other factors. We are exposed to market risk from changes in the interest rates on certain outstanding debt. The
outstanding loan balance under our $20 million credit facility bears interest at a variable rate
based on the banks prime rate or LIBOR. Based on the average outstanding bank debt for fiscal
2004, a 100 basis point change in interest rates would not change interest expense by a material
amount. 
 ITEM 4.CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose in the reports that
we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized,
and reported within the time periods specified in Securities and Exchange Commission rules and
forms. (b) Changes in internal controls. There were no changes made in our internal controls over financial reporting during the period
covered by this report that has materially affected, or is reasonable likely to materially affect,
our internal controls over financial reporting. 20




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PART II - OTHER INFORMATION 
 ITEM 1.LEGAL PROCEEDINGS In late January 2001, we were served with documents in connection with a product
liability case brought in the California Superior Court for Solano County. Although we had
no record of the proceedings, the action had progressed to the entry of a default judgment
on January 11, 2001. We appealed the default judgment to the California Court of Appeals in
March 2001. On May 10, 2002, the appeals court overturned the default judgment holding that
there was no valid complaint against us. The plaintiff filed an amended complaint in the
Fall of 2004. We have filed a motion to dismiss this case which remains pending with the
Court. From time to time, we have also been a party to claims, legal actions and complaints arising
in the ordinary course of our business. We do not believe that the resolution of such
matters has had or will have a material impact on our results of operations or financial
position. 
 ITEM 2.CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES None 
 ITEM 3.DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held on November 11, 2004. Shareholders
holding 11,568,987 shares, or approximately 92.9% of outstanding shares, were
represented at the meeting by proxy or in person. The matter below was submitted for
vote by the shareholders as follows: Election of Directors The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 2005 or until such time
as a successor may be elected. In Favor
    
    
    WithheldFrederick H. Ayers
    
    
    11,227,680
    
    
    
    341,307Dan W. Gladney
    
    
    11,298,789
    
    
    
    270,198Rick E. Jahnke
    
    
    11,225,230
    
    
    
    343,757John H.P. Maley
    
    
    10,817,207
    
    
    
    751,780Jack A. Smith
    
    
    11,250,109
    
    
    
    318,878
 21




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ITEM 5.OTHER INFORMATION The chairman of our board of directors, John H. P. Maley, died after a long battle
with cancer on January 26, 2005. He had served on our board since 1996 and had served as
chairman since 2001. Our CEO, Dan Gladney, will assume the role of chairman until the
March 10, 2005 meeting of the board of directors when a new chairman will be elected. 
 ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  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 200231.2
    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 200232
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Furnished but not filed) (b) Reports on Form 8-K. The following reports on Form 8-K were filed during the
quarter ended December 31, 2004. A Form 8-K, filed November 9, 2004 furnishing (but not filing) the earnings
release for the quarter ended September 30, 2004. 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPEX TECHNOLOGIES, INC.February 9, 2005
    
    /s/ Dan W. GladneyDate
    
    Dan W. GladneyPresident and Chief Executive OfficerFebruary 9, 2005
    
    /s/ Scott P. YoungstromDate
    
    Scott P. YoungstromVice President of Finance(Principal Financial and Accounting Officer)
 23