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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 1934For the Quarterly period Ended September 30, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  to


Commission File No. 0-9407

COMPEX TECHNOLOGIES, INC.


(Exact name of registrant as specified in its charter)


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 X  No )

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) (Yes   No X)

Indicate the number of shares outstanding of each of the issuers classes of
common stock as of November 4, 2003 was:

Common Stock, $.10 par value
    
    11,102,925 Shares


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|                                               |                                                                                               |                                            |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                
|                                               | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                               | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                   
|                                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                    
|EX-31.1 Certification of CEO - Section 302    
|EX-31.2 Certification of CFO - Section 302    
|EX-32 Certification of CEO & CFO - Section 906



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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This 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:



| |  | 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. The uncollectible portion of
receivables includes both sales allowances for contracted or
negotiated selling prices and rental rates and bad debts. 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 limits on reimbursement and strict rules on applications for
reimbursement. Changes in the rates, eligibility or requirements for
reimbursement, or failure to comply with reimbursement requirements,
could cause a reduction in our 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 clinical effectiveness of our electrotherapy products has
periodically been challenged and the effectiveness of electrotherapy
products such as those offered by Compex SA 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 operate in both the medical and consumer fitness 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 payer, 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 manufacture of medical 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 such regulations, a failure to comply
could result in our inability to manufacture and refurbish products
until compliance is achieved.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | The marketing of our consumer products is subject to
regulations and oversight by both the FDA and the Federal Trade
Commission 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Approximately 35% of our revenue for the three months ended September 30, 2003 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;
| | - |  | ----------------------------------------------------



| |  |  | seasonal reductions in business activity; and
| | - |  | ---------------------------------------------



| |  |  | potentially adverse tax assessments.
| | - |  | ------------------------------------



| |  | 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 contracts and shelf space in the United States with significant retailers;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the effectiveness of our products for their intended applications.
| | - |  | ------------------------------------------------------------------

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PART I  FINANCIAL INFORMATION







ITEM 1. FINANCIAL STATEMENTSIncluded herein is the following unaudited condensed financial information:Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002Consolidated Statements of Cash Flows for the three months ended September 30, 2003 and 2002Notes to Consolidated Financial Statements


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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

June 30,
    
    September 30,2003
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,056,007
    
    
    $
    4,674,944Receivables, less reserve of $15,200,590
and $14,900,164
    
    
    24,955,130
    
    
    
    24,317,021Inventories Raw materials
    
    
    1,393,470
    
    
    
    1,249,798Work in process
    
    
    33,670
    
    
    
    32,032Finished goods
    
    
    10,301,198
    
    
    
    12,090,921Deferred tax assets
    
    
    4,675,394
    
    
    
    4,675,394Prepaid expenses
    
    
    2,378,044
    
    
    
    1,972,670Total current assets
    
    
    48,792,913
    
    
    
    49,012,780Property, plant and equipment, net
    
    
    4,536,804
    
    
    
    4,519,099Goodwill, net
    
    
    10,583,287
    
    
    
    14,976,777Other intangible assets, net
    
    
    883,634
    
    
    
    817,535Deferred tax assets
    
    
    750,926
    
    
    
    761,292Other assets
    
    
    104,743
    
    
    
    122,261$
    65,652,307
    
    
    $
    70,209,744LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    5,363,850
    
    
    $
    7,049,168Note payable
    
    
    4,500,000
    
    
    
    4,100,000Accounts payable
    
    
    4,028,608
    
    
    
    3,799,021Accrued liabilities Payroll
    
    
    692,710
    
    
    
    271,368Commissions
    
    
    427,326
    
    
    
    406,456Income taxes
    
    
    2,725,341
    
    
    
    1,867,359Other
    
    
    4,476,675
    
    
    
    6,206,638Total current liabilities
    
    
    22,214,510
    
    
    
    23,700,010Long-Term Liabilities:Long-term debt
    
    
    1,217,268
    
    
    
    3,510,050Deferred tax liabilities
    
    
    675,885
    
    
    
    687,297Total liabilities
    
    
    24,107,663
    
    
    
    27,897,357Stockholders Equity:Common stock, $.10 par value; 30,000,000 shares authorized;
issued and outstanding 10,948,469 and 11,084,175 shares,
respectively
    
    
    1,094,847
    
    
    
    1,108,417Preferred stock, no par value; 5,000,000 shares authorized; none
issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    21,650,978
    
    
    
    22,029,428Accumulated other non-owner changes in equity
    
    
    1,870,183
    
    
    
    1,891,749Retained earnings
    
    
    16,928,636
    
    
    
    17,282,793Total stockholders equity
    
    
    41,544,644
    
    
    
    42,312,387$
    65,652,307
    
    
    $
    70,209,744


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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months EndedSeptember 302002
    
    2003Net sales and rental revenue
    
    $
    17,737,740
    
    
    $
    19,156,266Cost of sales and rentals
    
    
    5,447,427
    
    
    
    6,437,246Gross profit
    
    
    12,290,313
    
    
    
    12,719,020Operating expenses:Selling, general and administrative
    
    
    9,949,975
    
    
    
    11,403,242Research and development
    
    
    524,073
    
    
    
    628,477Total operating expenses
    
    
    10,474,048
    
    
    
    12,031,719Income from operations
    
    
    1,816,265
    
    
    
    687,301Other income (expense):Interest expense
    
    
    (112,468
    )
    
    
    (153,743
    )Other
    
    
    (2,790
    )
    
    
    55,599Income before income taxes
    
    
    1,701,007
    
    
    
    589,157Income tax provision
    
    
    714,000
    
    
    
    235,000Net income
    
    $
    987,007
    
    
    $
    354,157Net income per common and
common equivalent shareBasic
    
    $
    0.09
    
    
    $
    0.03Diluted
    
    $
    0.09
    
    
    $
    0.03Weighted average number of shares
outstandingBasic
    
    
    10,940,243
    
    
    
    11,025,140Diluted
    
    
    11,063,557
    
    
    
    11,800,286


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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months EndedSeptember 302002
    
    2003Operating Activities:Net income
    
    $
    987,007
    
    
    $
    354,157Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation and amortization
    
    
    399,508
    
    
    
    356,452Amortization of unearned compensation
    
    
    27,188
    
    
    
    0Change in deferred taxes
    
    
    (32
    )
    
    
    (1,690
    )Change
in current assets and liabilities, net of amounts acquired in
acquisitionReceivables
    
    
    1,402,515
    
    
    
    358,710Inventories
    
    
    170,073
    
    
    
    179,852Prepaid expenses
    
    
    960,739
    
    
    
    1,107,607Accounts payable
    
    
    (410,088
    )
    
    
    (1,275,277
    )Accrued liabilities
    
    
    (3,406,599
    )
    
    
    (762,456
    )Net cash provided by operating activities
    
    
    130,311
    
    
    
    317,355Investing Activities:Purchases of property and equipment
    
    
    (557,403
    )
    
    
    (130,679
    )Cash paid in asset acquisition, net of cash received
    
    
    
    
    
    
    (3,389,912
    )Change in other assets, net
    
    
    (12,793
    )
    
    
    (258,448
    )Net cash used in investing activities
    
    
    (570,196
    )
    
    
    (3,779,039
    )Financing Activities:Proceeds
from new Debt financing
    
    
    
    
    
    
    3,835,501Principal payments on long-term obligations
    
    
    (631,221
    )
    
    
    (645,054
    )Proceeds from (Payments on) line of credit, net
    
    
    1,000,000
    
    
    
    (400,000
    )Proceeds from exercise of stock options
    
    
    114,975
    
    
    
    295,603Proceeds from employee stock purchase plan
    
    
    20,909
    
    
    
    96,417Net cash provided by financing activities
    
    
    504,663
    
    
    
    3,182,467Effect of exchange rates on cash and cash equivalents
    
    
    30,470
    
    
    
    (101,846
    )Net increase(decrease) in cash and cash equivalents
    
    
    95,248
    
    
    
    (381,063
    )Cash and Cash Equivalents at Beginning of Period
    
    
    2,086,650
    
    
    
    5,056,007Cash and Cash Equivalents at End of Period
    
    $
    2,181,898
    
    
    $
    4,674,944Supplemental Cash Flow Information:Interest paid
    
    $
    107,788
    
    
    $
    153,743Income taxes paid
    
    $
    1,240,000
    
    
    $
    959,000


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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003

The Company used a new term loan and a credit line to finance a business
acquisition accounted for under the purchase method during the first quarter of
fiscal 2004. The fair value of the assets and liabilities of the acquired
company are presented as follows:

As ofSeptember 30, 2003Accounts Receivable
    
    $
    2,193,589Inventories
    
    
    1,775,876Prepaid Expenses
    
    
    681,888Property and equipment, net
    
    
    135,748Intangible assets
    
    
    4,103,298Other long-term assets
    
    
    39,821Accounts payable
    
    
    (1,007,062
    )Accrued liabilities
    
    
    (1,179,090
    )Liabilities
forgiven
    
    
    (2,563,870
    )Long-term liabilities
    
    
    (790,286
    )Net assets acquired
    
    $
    3,389,912


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COMPEX TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003

1. Accounting Policies

The amounts set forth in the preceding financial statements are unaudited as
of and for the periods ended September 30, 2003 and 2002 but, 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, 2003 included in the Companys Annual Report on Form
10-K.

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:

For the Three Months EndedSeptember 302002
    
    2003Net Income
    
    As reported
    
    $
    987,007
    
    
    $
    354,157Pro forma optionexpense, net of tax
    
    
    (100,476
    )
    
    
    (162,875
    )Pro forma
    
    $
    886,531
    
    
    $
    191,282Basic earnings per
    
    As reported
    
    $
    .09
    
    
    $
    .03share
    
    Pro forma
    
    
    .08
    
    
    
    .02Diluted earnings
    
    As reported
    
    
    .09
    
    
    
    .03per share
    
    Pro forma
    
    
    .08
    
    
    
    .02


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 2003 and 2004: dividend yield of 0%; expected
volatility of 57.6% and 57.7%; risk-free interest rate of 2.94% and 3.07%;
and expected lives of 5 years.

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2. Goodwill and Intangibles

The Company adopted the new rules on accounting for goodwill and other
intangible assets effective July 1, 2001. Amounts previously recorded as
separately identifiable intangibles for acquired work force and customer
list have been subsumed to goodwill in accordance with FAS 141, increasing
goodwill by $1.6 million as of the date of adoption. Effective with the
adoption of FAS 142, goodwill is no longer amortized but is instead subject
to an annual impairment test. Annual impairment tests conducted in
connection with the adoption of FAS 142 resulted in no required provision
for impairment.

Goodwill and other intangible assets resulting from acquisitions of business
and the formation of the Company consist of the following:

June 30, 2003
    
    September 30, 2003Goodwill
    
    $
    12,254,717
    
    
    $
    16,648,207Less accumulated amortization
    
    
    1,671,430
    
    
    
    1,671,430Net goodwill
    
    
    10,583,287
    
    
    
    14,976,777Other intangible assets:
    
    
    1,783,686
    
    
    
    1,783,686Less accumulated amortization
    
    
    900,052
    
    
    
    966,151Net other intangible assets
    
    
    883,634
    
    
    
    817,535Total intangible assets, net
    
    $
    11,466,921
    
    
    $
    15,794,312


3. Note Payable and Long Term Debt

The Company has a $20,000,000 U. S. credit facility which provides for both
term and revolving borrowings at varying rates based either on the banks
prime rate or LIBOR. As of September 30, 2003, there were borrowings
outstanding of $4,497,000 on the long-term note and $4,100,000 on the
revolving credit line. The Company currently has $900,000 available under
the facility. Borrowings under the U. S. credit facility are secured by
substantially all assets of the Company other than those pledged as
collateral on existing lease or mortgage obligations. The interest rate on
the term loan was 3.125% at September 30, 2003 and the weighted average rate
on borrowings under the revolving line of credit was 4.00%.

The Company was in compliance with all financial covenants in its U. S.
credit agreement as of September 30, 2003 and for the period then ended.

The Company has a $4,975,000 Swiss credit facility which provides for a
three-year term loan at varying rates. As of September 30, 2003, there were
borrowings outstanding of $3,495,300 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 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%.

The company was in compliance with all financial covenants in its Swiss
Credit agreement as of September 30, 2003 and for the period then ended.

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4. Business Acquisitions

A. Acquisition of the Assets of BMR Neurotech, Inc.:

On May 15, 2003, the Company acquired certain assets of BMR Neurotech, Inc.
for total consideration of approximately $3.6 million. The acquisition was
financed using the existing credit line. The acquisition was accounted for
using the purchase method of accounting with the purchase price allocated to
the fair value of the net assets acquired, which included accounts
receivable, inventory and fixed assets. The excess of the purchase price
over the fair value of the underlying assets acquired of $1,048,624 has been
allocated to goodwill and thus is not amortizable. Pro forma information
related to this acquisition is not included as the impact is not deemed to
be material.

B. Acquisition of Filsport Assistance S.r.l.:

On July 3, 2003, the Company acquired substantially all the assets of
Filsport Assistance S.r.l., an independent distributor of the Compex® brand
of consumer products in Italy. The transaction involved an exchange of
approximately $4.9 million in cash for stock and provides for additional
contingent consideration of up to 950,000 Euros if a certain performance
milestone is achieved following the transaction. The acquisition was
financed through a newly-established credit facility and with existing
funds. Prior to the acquisition, Filsport operated under an exclusive
distribution arrangement and accounted for 25% of Compex SA total sales (10%
of consolidated sales) in fiscal 2003. The purchase consideration exceeded
the net fair value of tangible assets by $4,103,298 and was assigned to
goodwill.

Pro forma operating results of the Company as if Filsport had been acquired
at the beginning of fiscal 2003 are as follows (unaudited):

For the Three Months EndedSeptember 30, 2002Net Sales
    
    $
    20,830,017Income before taxes
    
    
    1,887,886Net income
    
    $
    1,094,886Earnings per shareBasic
    
    $
    0.10Diluted
    
    
    0.10


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5. Segment Information



Compex Technologies, Inc. and its consolidated subsidiaries operate in one
reportable segment, manufacture and distribution of electrical stimulation
products for pain management, rehabilitation and fitness applications. The
Companys chief operating decision makers use consolidated results to make
operating and strategic decisions. Net revenue from the United States and
foreign sources (primarily Europe) are as follows:

For the Three Months EndedSeptember 302002
    
    2003U.S. revenue
    
    $
    11,768,035
    
    
    $
    12,476,444Foreign revenue
    
    
    5,969,705
    
    
    
    6,679,822$
    17,737,740
    
    
    $
    19,156,266


Net revenue by product line was as follows:

For the Three Months EndedSeptember 302002
    
    2003Rehabilitation products
    
    $
    3,488,619
    
    
    $
    4,097,950Pain management
    
    
    3,740,930
    
    
    
    3,849,073Consumer products
    
    
    4,332,369
    
    
    
    5,211,843Accessories and supplies
    
    
    6,175,822
    
    
    
    5,997,400$
    17,737,740
    
    
    $
    19,156,266


During the first three months of fiscal 2003, one customer accounted for
approximately 10% of consolidated revenue. This customer represented
approximately 5% of total accounts receivable at September 30, 2002.

6. Committments

We currently have a commitment to
purchase additional Slendertone inventory in Europe of approximately
$1.5 million. We plan to fund this with cash from operations. We
expect, however, to invest in sales and marketing, and in inventory
and infrastructure, over the next twelve months to introduce these
products and the Compex sport products to the United States markets.
We started this process during fiscal 2003 and intend to invest more
in fiscal 2004 based on our experience. We may also apply cash to
acquisitions during future periods.

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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, 2002 and June 30, 2003, our consolidated statements of
operations, statements of shareholders equity and statements of cash flows for
the three years ended June 30, 2003, 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, 2003.

Critical Accounting Policies

We prepare our financial statements in accordance with generally accepted
accounting principles as in effect in the United States. 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
U.S. direct distribution electrotherapy 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 or his/her insurance
provider. 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 reducing gross revenue by a portion of the invoiced amount and by
recording such amount as 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 can significantly
affect operating results in current periods. A change in the rates of our
collection can result from a number of factors, including turnover in
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. 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.

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Carrying Value of Inventory.We maintain a large balance of electrotherapy
products 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
many instances we forgo 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 $15.8 million at September 30, 2003, 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,
long-lived assets and related goodwill to the extent it may not be recoverable.
We annually assess the impairment of identifiable intangibles, long-lived
assets and related goodwill or whenever events or changes in circumstances
indicate the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment provision 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;
| | - |  | -------------------------------------------------



| |  |  | 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, long-lived assets and
related goodwill might not be recoverable based upon the existence of one or
more of the above indicators of impairment, we would measure any impairment
based on a projected discounted cash flow method using a discount rate we
determine to be commensurate with the risk inherent in our current business
model.

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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 EndedSeptember 30,2002
    
    2003Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    30.7
    
    
    
    33.6Gross profit
    
    
    69.3
    
    
    
    66.4Operating expensesSelling, general and administrative
    
    
    56.1
    
    
    
    59.6Research and development
    
    
    3.0
    
    
    
    3.2Total operating expenses
    
    
    59.1
    
    
    
    62.8Income from operations
    
    
    10.2
    
    
    
    3.6Other expense, net
    
    
    0.6
    
    
    
    0.5Income tax provision
    
    
    4.0
    
    
    
    1.2Net income
    
    
    5.6
    %
    
    
    1.9
    %


For the first quarter of fiscal year 2004 ended September 30, 2003, our revenue
was $19,157,000, an increase of $1,419,000, or 8%, from the $17,738,000 in the
first quarter of fiscal 2003. Increases in both our direct sales business in
the United States and in our consumer business in Europe accounted for 5% of
the increase with 3% due to favorable exchange rates.

Our direct sales business in the United States posted a revenue increase of 6%
during the quarter as compared to the comparable quarter last year. This
increase is primarily due to an increase in volumes of our direct unit sales
and rental business, partially offset by a decrease in our domestic accessories
and supplies. We continued to expand our direct unit sales and rental business
through the acquisition of BMR-Neurotech, which was included in our results of
operations for the quarter ended September 30, 2003, but not the quarter ended
September 30, 2002, as the acquisition occurred in May 2003.

Our European operations, conducted primarily under our Compex SA subsidiary,
posted a revenue increase of 12% during the quarter. A majority of this growth,
approximately 9%, was generated by a favorable impact of exchange rates
reflecting the strength of the Euro versus the Dollar. Revenue from the
addition of our Slendertone product line also contributed to the growth as the
quarter ended September 30, 2003, represents the first period that revenue from
the Slendertone product line was included. This increase in revenue was
partially offset by a decrease in volumes across all of Europe. We believe the
extreme heat wave Europe experienced during the summer was a major factor in
reducing consumer spending on Compex and Slendertone products during the
current period. Our largest retail customer in Spain reduced their order rates
and we continued with the management transition in Germany. We anticipate the
retail customer order patterns in Spain to stabilize in the second quarter of
fiscal 2004 and a general manager will be hired in Germany before the end of
the calendar year. In addition, on July 3, 2003 we acquired Filsport
Assistance S.r.l., an independent distributor of the Compex brand of consumer
products in Italy and the operations of Filsport have been included in our
consolidated operations since that date. In the quarter ended September 30,
2002, Filsport operated under an exclusive distribution arrangement and sales
to Filsport accounted for appropriately 30% of the total sales of our European
operations. For the quarter ended September 30, 2003, sales by Filsport (as our
subsidiary) accounted for 36% of our total sales from our European operations.
The increase in revenue from Filsport as compared to prior year reflects the margin
between Filsports former cost of goods from us, and the revenue it receives on
resale of our product.

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Our gross profit was $12,719,00 or 66% of revenue in the quarter ended
September 30, 2003 compared with $12,290,00 or 69% of revenue in the quarter
ended September 30, 2002. This is primarily due to a decrease in revenue from
our higher margin accessories and supplies which was lower in the first quarter
ended September 30, 2003 as compared to prior year. Cost of sales and gross
profit for the first quarter of fiscal year 2004 reflects a higher cost of
inventory recorded in connection with the Filsport acquisition. Filsports
inventory turns very rapidly, so a majority of the higher costed product flowed
through during the quarter ending September 30, 2003. Until all of the
inventory that was acquired as a part of the Filsport acquisition is sold,
which we anticipate to be in the second quarter, the margins will reflect those
of a distributor.

Selling, general and administrative expenses increased 15% to $11,403,000 in
the first quarter for fiscal year 2004 from $9,950,000 in the first quarter of
the fiscal 2003. Several factors contributed to this increase. Marketing
expenses associated with the introduction of our new consumer products in both
the US and in Europe contributed significantly to the increase during the first
quarter of the fiscal year 2004. Additionally, expenses incurred from
maintaining the office space in Phoenix after the BMR-Neurotech acquisition in
May 2003 contributed to the increase. This office was closed by the end of
September 2003 and we will incur minimal expenses for the rest of the fiscal
year 2004. Selling, general and administrative expenses associated with the
Filsport acquisition also contributed to the increase as well as the
unfavorable effects of exchange rates on expenses. We also have increased our
number of direct sales employees to 49 as of September 30, 2003 as compared to
32 as compared to the same period last year.

Our research and development expenses increased 20% to $628,000 in the first
quarter of fiscal 2004 from $524,000 in the first quarter of fiscal 2003. This
increase is primarily due to increased new product development expenses of our
fitness lines at Compex Europe, which we are conducting in Switzerland.
Approximately 8% of the increase is due to the effects of the foreign exchange
rates discussed earlier. We anticipate that research and development expenses
will continue to remain relatively constant in absolute dollars, but will
decrease as a percentage of revenue in future periods as our quarterly revenue
increases.

Interest expense increased 37% to $154,000 in the first quarter of fiscal year
2004 from $112,000 in the first quarter of fiscal year 2003. The increase was
due to balances outstanding under the newly established $3,300,000 credit
facility with a bank in Switzerland that we used to finance the acquisition of
Filsport on July 3, 2003.

The provision for income taxes was 40% for the first quarter of fiscal 2004 as
compared to 42% in fiscal 2003. We lowered the tax rate during fiscal 2003 from
42% to 40% after review of the tax rates in several of our European tax
jurisdictions. We believe that 40% is a reasonable estimate of the effective
rate for fiscal 2004 based on our most recent estimates of tax liabilities in
the U.S. and in the various European tax authorities.

As a result of the above activity, our net income decreased to $354,000 in the
first quarter of fiscal 2004 from $987,000 in the first quarter of fiscal 2003.
Diluted earnings per share decreased from $0.09 during the quarter ended
September 30, 2002 to $0.03 during the quarter ended September 30, 2003.

Liquidity and Capital Resources

On July 3, 2003, the Company acquired substantially all the assets of Filsport
Assistance S.r.l., an independent distributor of the Compex® brand of consumer
products in Italy. The transaction involved an exchange of approximately $4.9
million in cash for stock and provides for additional contingent consideration
if a certain performance milestone is achieved following the transaction. The
acquisition was financed through a newly-established credit facility and with
existing funds. Prior to the acquisition, Filsport operated under an exclusive
distribution arrangement and accounted for 25% of Compex SA total sales (10% of
consolidated sales) in fiscal 2003. The purchase consideration exceeded the net
fair value of tangible assets by $4,103,298 which was assigned to goodwill.

For the first three months ended September 30, 2003, our operating activities
provided cash of $317,000. This was primarily due to net income of $354,000,
depreciation and amortization expense of $356,000, accounts receivable
decreasing $359,000 as a result of higher collections in both the United States
and in Europe. This
was partially offset by the use of cash in accounts
payable and accrued liabilities related to year-end June 30, 2002 timing
differences and the payment of estimated income taxes.

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We used $131,000 in investing activities in the first three months of fiscal
2004 for net purchases of property and equipment, primarily clinical and rental
equipment. Net cash paid in the investment of Filsport Assistance totaled
$3,389,000.

Our financing activities provided $3,182,000 of cash during the first three
months of fiscal 2004, mainly from the borrowing of $3,836,000 under our Swiss
credit line to finance the Filsport Assistance acquisition. This was partially
offset by the repayment of $1,045,000 of long-term debt under our U. S. credit
facility. At September 30, 2003, a total of $8,597,000 remains outstanding
under the U. S. facility. Our U. S. credit facility has a maturity date of
June 30, 2004, and we expect that all or substantially all of the borrowings
under this credit facility will be repaid prior to the maturity date. If any
borrowings remain outstanding at maturity, we believe that the agreement could
be extended, with similar terms, with the current financial institution or
another facility could be put in place.

We currently have a commitment to purchase additional Slendertone inventory in
Europe of approximately $1.5 million. We plan to fund this with cash from
operations. We expect, however, to invest in sales and marketing, and in
inventory and infrastructure, over the next twelve months to introduce these
products and the Compex sport products to the United States markets. We
started this process during fiscal 2003 and intend to invest more in fiscal
2004 based on our experience. 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.







ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the quarter ended September 30, 2003, 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 2003, a 100 basis
point change in interest rates would not change interest expense by a material
amount.

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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.

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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 in this case has indicated
that they intend to submit an amended complain, but unless and until they do,
there is no pending suit in this matter.

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 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 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
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 September 30, 2003.

A Form 8-K, filed July 18, 2003 reporting the acquisition of
Filsport Assistance S.r.l.

A Form 8-K, filed September 17, 2003 furnishing (but not
filing) the earnings release for the year ended June 30, 2003
and the script for the conference call relating to such earning
release.

A Form 8-K, filed September 19, 2003 furnishing (but not
filing) transcript of conference call.

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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, INCNovember 14, 2003
    
    /s/ Dan W. GladneyDate
    
    Dan W. Gladney
President and Chief Executive OfficerNovember 14, 2003
    
    /s/ Scott P. YoungstromDate
    
    Scott P. Youngstrom
Vice President of Finance
(Principal Financial and Accounting Officer)


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