##### Table of Contents



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 March 31, 2005
 OR
 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
    
    41-0985318(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)1811 Old Highway 8New 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
 The number of shares outstanding of each of the issuers classes of
common stock as of May 3, 2005 was:  Common Stock, $.10 par value
    
    12,509,380 Shares




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TABLE OF CONTENTS  CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTSPART 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. EXHIBITSSIGNATURESCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906    Table of Contents  
 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Our Quarterly Report on Form 10-Q contains a number of forward-looking
statements where we indicate that we anticipate, believe, expect,
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 healthcare 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.  
    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 2




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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
responsible, may be required to recall products, may suffer a decrease in product reputation and goodwill in the 3




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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 34% of our revenue for the nine months ended March 31, 2005, was generated by Compex
SA, a subsidiary headquartered in Switzerland that does business primarily in Europe. There are
risks in doing business in international markets which could adversely affect our business,
including:  
    regulatory requirements;
    export restrictions and controls, tariffs and other trade barriers;
    difficulties in staffing and managing international operations;
    fluctuations in currency exchange rates;
    reduced protection for intellectual property rights;
    changes in political and economic conditions;
    seasonal reductions in business activity; and
    potentially adverse tax assessments.  
    Although our products were among the first products sold for muscle toning and conditioning in
Europe, the consumer markets for these products in some of the geographies have matured, and we have
increasingly become subject to competition from lower cost products. Although we believe that we
have maintained our reputation as the manufacturer of the highest quality products in these markets,
the introduction and sale of lower cost products has caused some erosion of our sales volumes in
these geographies and pressure on the price we charge for our products.  
    The revenue we have reported during the past 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 U.S.
currency is devalued, sales of the same number of products at the same prices in Europe will result
in our recording increasing sales revenue after conversion to U.S. currency. Conversely, if U.S.
currency increases in value relative to the Euro and other European currencies in the future, we
would report less revenue and potentially less income even at times when our operations in Europe
continued to perform at historical levels. A large or rapid increase in the value of the dollar
relative to the Euro could have a significant adverse impact on our reported revenue. 4




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Included herein is the following unaudited condensed financial information:Consolidated Balance Sheets as of March 31, 2005 and June 30, 2004Consolidated Statements of Operations for the three months and
nine months ended March 31, 2005 and 2004Consolidated Statements of Cash Flows for the nine months ended
March 31, 2005 and 2004Notes to Consolidated Financial Statements
 5




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS June 30,
    
    
    March 31,2004
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,198,832
    
    
    $
    2,479,792Receivables, less reserves of $17,665,865 and $17,896,364
    
    
    28,802,468
    
    
    
    34,828,547at June 30, 2004 and March 31, 2005, respectivelyInventories, net
    
    
    12,990,417
    
    
    
    13,498,814Deferred tax assets
    
    
    6,008,936
    
    
    
    6,008,936Prepaid expenses
    
    
    3,646,300
    
    
    
    2,571,294Total current assets
    
    
    54,646,953
    
    
    
    59,387,383Property, plant, and equipment, net
    
    
    4,798,656
    
    
    
    5,614,010Goodwill
    
    
    15,501,566
    
    
    
    15,783,643Other intangible assets, net
    
    
    908,841
    
    
    
    741,491Deferred tax assets
    
    
    224,679
    
    
    
    279,264Other assets
    
    
    128,701
    
    
    
    143,704Total assets
    
    $
    76,209,396
    
    
    $
    81,949,495LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    1,268,910
    
    
    $
    1,436,882Notes payable
    
    
    2,200,000
    
    
    
    7,300,000Accounts payable
    
    
    5,678,181
    
    
    
    4,672,234Accrued liabilities -Payroll
    
    
    1,990,591
    
    
    
    1,733,872Commissions
    
    
    917,068
    
    
    
    1,031,864Income taxes
    
    
    1,731,444
    
    
    
    1,159,532Other
    
    
    3,377,681
    
    
    
    4,535,661Total current liabilities
    
    
    17,163,875
    
    
    
    21,870,045LONG-TERM LIABILITIESLong-term debt
    
    
    2,436,200
    
    
    
    1,317,080Deferred tax liabilities
    
    
    278,286
    
    
    
    312,074Total liabilities
    
    
    19,878,361
    
    
    
    23,499,199STOCKHOLDERS EQUITYCommon stock, $.10 par value: 30,000,000 shares authorized;
    
    
    1,242,574
    
    
    
    1,250,938issued and outstanding 12,425,747 and 12,509,380 shares
at June 30, 2004 and March 31, 2005, respectivelyPreferred stock, no par value: 5,000,000 shares authorized;
    
    
    
    
    
    
    none issued and outstandingAdditional paid in capital
    
    
    32,887,912
    
    
    
    33,371,427Unearned compensation on restricted stock
    
    
    (119,370
    )
    
    
    (62,826
    )Accumulated other non-owner changes in equity
    
    
    2,340,916
    
    
    
    2,636,782Retained earnings
    
    
    19,979,003
    
    
    
    21,253,975Total stockholders equity
    
    
    56,331,035
    
    
    
    58,450,296Total liabilities and stockholders equity
    
    $
    76,209,396
    
    
    $
    81,949,495
 The accompanying notes are an integral part of these financial statements. 6




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended
    
    
    Nine Months EndedMarch 31
    
    
    March 31(unaudited)
    
    
    (unaudited)2004
    
    
    2005
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    $
    21,651,597
    
    
    $
    22,902,107
    
    
    $
    63,272,462
    
    
    $
    69,768,195Cost of sales and rentals
    
    
    7,080,552
    
    
    
    7,852,963
    
    
    
    20,678,305
    
    
    
    23,235,015Gross profit
    
    
    14,571,045
    
    
    
    15,049,144
    
    
    
    42,594,157
    
    
    
    46,533,180Operating expenses:Selling and marketing
    
    
    9,304,903
    
    
    
    10,535,737
    
    
    
    26,175,994
    
    
    
    30,732,612General and administrative
    
    
    3,700,466
    
    
    
    3,753,162
    
    
    
    10,721,783
    
    
    
    11,431,058Research and development
    
    
    779,634
    
    
    
    635,193
    
    
    
    2,054,784
    
    
    
    2,014,620Total operating expenses
    
    
    13,785,003
    
    
    
    14,924,092
    
    
    
    38,952,561
    
    
    
    44,178,290Income from operations
    
    
    786,042
    
    
    
    125,052
    
    
    
    3,641,596
    
    
    
    2,354,890Other income (expense):Interest expense
    
    
    (80,686
    )
    
    
    (130,946
    )
    
    
    (377,297
    )
    
    
    (314,763
    )Other
    
    
    9,379
    
    
    
    37,820
    
    
    
    87,176
    
    
    
    83,845Income before income taxes
    
    
    714,735
    
    
    
    31,926
    
    
    
    3,351,475
    
    
    
    2,123,972Income tax provision
    
    
    286,000
    
    
    
    14,000
    
    
    
    1,340,000
    
    
    
    849,000Net income
    
    $
    428,735
    
    
    $
    17,926
    
    
    $
    2,011,475
    
    
    $
    1,274,972Net income per common and common equivalent
shareBasic
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.17
    
    
    $
    0.10Diluted
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.16
    
    
    $
    0.10Weighted average number of shares outstandingBasic
    
    
    12,257,734
    
    
    
    12,498,235
    
    
    
    11,612,383
    
    
    
    12,468,821Diluted
    
    
    13,265,374
    
    
    
    12,891,519
    
    
    
    12,561,855
    
    
    
    12,939,656
 The accompanying notes are an integral part of these financial statements. 7




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months EndedMarch 31(unaudited)2004
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    2,011,475
    
    
    $
    1,274,972Adjustments to reconcile net income to net cash
used in operating activitiesDepreciation and amortization
    
    
    1,354,426
    
    
    
    1,174,388Non-cash equity related expense
    
    
    33,078
    
    
    
    139,800Change in deferred taxes
    
    
    (11,031
    )
    
    
    (8,835
    )Changes in current assets and liabilities  net of
amounts acquired in acquisitionReceivables
    
    
    (3,248,716
    )
    
    
    (5,464,655
    )Inventories
    
    
    (633,572
    )
    
    
    (205,264
    )Prepaid expenses
    
    
    1,221,013
    
    
    
    1,180,657Accounts payable
    
    
    (494,377
    )
    
    
    (1,258,250
    )Accrued liabilities
    
    
    (2,387,502
    )
    
    
    214,456Net cash used in operating activities
    
    
    (2,155,206
    )
    
    
    (2,952,731
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,129,738
    )
    
    
    (1,720,936
    )Cash paid in acquisition, net of cash received
    
    
    (3,389,912
    )
    
    
    Changes in other assets, net
    
    
    (236,504
    )
    
    
    (6,667
    )Net cash used in investing activities
    
    
    (4,756,154
    )
    
    
    (1,727,603
    )FINANCING ACTIVITIES:Proceeds from new debt financing
    
    
    3,835,501
    
    
    
    Principal payments on long-term obligations
    
    
    (7,267,549
    )
    
    
    (1,190,888
    )(Payments on) proceeds from line of credit, net
    
    
    (4,000,000
    )
    
    
    5,100,000Proceeds from stock offering
    
    
    10,545,795
    
    
    
    Proceeds from employee stock purchase plan
    
    
    398,493
    
    
    
    297,785Proceeds from exercise of stock options
    
    
    201,578
    
    
    
    110,838Net cash provided by financing activities
    
    
    3,713,818
    
    
    
    4,317,735Effect of exchange rates on cash and cash equivalents
    
    
    265,946
    
    
    
    (356,441
    )Net decrease in cash and cash equivalents
    
    
    (2,931,596
    )
    
    
    (719,040
    )Cash and cash equivalents at beginning of period
    
    
    5,056,007
    
    
    
    3,198,832Cash and cash equivalents at end of period
    
    $
    2,124,411
    
    
    $
    2,479,792Supplemental cash flow informationInterest paid
    
    $
    377,298
    
    
    $
    314,763Income taxes paid
    
    $
    2,382,723
    
    
    $
    1,290,850Non-cash transactionGoodwill adjustment
    
    $
    300,000
    
    
    $
    
 The accompanying notes are an integral part of these financial statements. 8




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COMPEX TECHNOLOGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended March 31, 2005 and 2004, but reflect 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. 2. Reclassification Certain prior year items have been reclassified to conform to the current
year presentation. 3. 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
    
    
    Nine Months EndedMarch 31
    
    

March 312004
    
    
    2005
    
    
    2004
    
    
    2005Net Income (loss)
    
    As reported
    
    $
    428,735
    
    
    $
    17,926
    
    
    $
    2,011,475
    
    
    $
    1,274,972Pro forma optionexpense, net of tax
    
    
    (214,351
    )
    
    
    (230,588
    )
    
    
    (607,006
    )
    
    
    (685,056
    )Pro forma
    
    $
    214,384
    
    
    $
    (212,662
    )
    
    $
    1,404,469
    
    
    $
    589,916Basic earnings (loss)
    
    As reported
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.17
    
    
    $
    0.10per share
    
    Pro forma
    
    
    0.02
    
    
    
    (0.02
    )
    
    
    0.12
    
    
    
    0.05Diluted earnings (loss)
    
    As reported
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.16
    
    
    $
    0.10per share
    
    Pro forma
    
    
    0.02
    
    
    
    (0.02
    )
    
    
    0.11
    
    
    
    0.05
 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 61.4% and 59.1%; risk-free interest rate of 2.91% 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 companies to expense the fair value of employee
stock options and other forms of stock-based compensation. The standard is
effective for the Companys 2006 fiscal year beginning July 1, 2005 and will
apply to the Companys employee stock 9




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option and stock purchase plans. The Company is currently evaluating the
impact of the adoption of FAS 123(R) and has not selected a transition method
or valuation model. As such, the Company is unable to estimate the expected
effect on the Companys financial statements, but believes it will have a
significant adverse impact on the Companys results from operations. 4. Inventory June 30, 2004
    
    
    March 31, 2005Inventories, netRaw materials
    
    $
    1,037,944
    
    
    $
    1,068,919Work in process
    
    
    10,765
    
    
    
    23,551Finished goods
    
    
    11,941,708
    
    
    
    12,406,344$
    12,990,417
    
    
    $
    13,498,814
 5. Fixed Assets June 30, 2004
    
    
    March 31, 2005Property, plant and equipment -Land
    
    $
    150,000
    
    
    $
    150,000Buildings
    
    
    1,683,614
    
    
    
    1,683,614Clinical and rental equipment
    
    
    1,401,842
    
    
    
    1,536,310Production equipment
    
    
    4,454,729
    
    
    
    1,533,004Office furniture and equipment
    
    
    10,594,573
    
    
    
    11,695,498$
    18,284,758
    
    
    $
    16,598,426Less accumulated depreciation
    
    
    (13,486,102
    )
    
    
    (10,984,416
    )Net property, plant and equipment
    
    $
    4,798,656
    
    
    $
    5,614,010
 Included in the Companys consolidated balance sheet at March 31, 2005 and June
30, 2004 are net property, plant and equipment of the Companys foreign
operations, which are located in Europe and which total $1,488,788 and
$1,274,130, respectively. During the nine months ended March 31, 2005 the Company disposed of
approximately $3.8 million of production and office equipment that was fully
depreciated and no longer in service. 6. 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. There were borrowings outstanding of $7,300,000 and $2,200,000 on the
revolving credit line as of March 31, 2005 and June 30, 2004, respectively.
The Company currently has $7,700,000 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 5.09%. The Company was in compliance with all financial covenants in its U. S. credit
agreement as of March 31, 2005 and for the period then ended. The Company has a $4,975,000 Swiss credit facility that provides for a
three-year term loan at varying rates. As of March 31, 2005 and June 30, 2004,
there were borrowings outstanding of $2,730,774 and $3,654,300 respectively,
under this credit facility. Borrowings under this credit facility were used to
fund the acquisition of 10




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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 credit facility called for
three advances, the first of which has already been paid. The second advance
bears interest at 4.09%, and the third and final advance due on June 30, 2006,
bears interest at 4.40%. The Company was in compliance with all financial covenants in its Swiss Credit
agreement as of March 31, 2005 and for the period then ended. 7. 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. The Companys 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 Nine Months EndedMarch 31
    
    
    March 312004
    
    
    2005
    
    
    2004
    
    
    2005NumeratorNet Income
    
    $
    428,735
    
    
    $
    17,926
    
    
    $
    2,011,475
    
    
    $
    1,274,972DenominatorDenominator for basic net
income per share  weighted
average shares outstanding
    
    
    12,257,734
    
    
    
    12,498,235
    
    
    
    11,612,383
    
    
    
    12,468,821Effect of dilutive stock options
    
    
    1,007,640
    
    
    
    393,284
    
    
    
    949,472
    
    
    
    470,835Denominator for diluted net
income per share  weighted
average shares outstanding
    
    
    13,265,374
    
    
    
    12,891,519
    
    
    
    12,561,855
    
    
    
    12,939,656Basic net income per share
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.17
    
    
    $
    0.10Diluted net income per share
    
    
    0.03
    
    
    
    
    
    
    
    0.16
    
    
    
    0.10
 Employee stock options of 440,498 and 408,527 for the three and nine months
ended March 31, 2005, have been excluded from the diluted net income per share
calculation because their effect would be anti-dilutive. For the three and nine
months ended March 31, 2004, employee options of 124,418 and 59,396 have been
excluded from the diluted net income per share calculation because their effect
would be anti-dilutive. 8. 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 nine months ended March 31, 2005 and March 31,
2004 consisted solely of gains on translation of foreign subsidiary financial
statements from the functional currency to U.S. dollars of $296,000 and
$762,000, respectively, resulting in total comprehensive income of $1,571,000
and $2,773,000, respectively. Adjustments to comprehensive income for the
three moths ended March 31, 2005 and March 31, 2004 consisted solely of losses
on translation of foreign subsidiary financial statements form the functional
currency to U.S. dollars of $(659,000) and $(299,000), respectively, resulting
in total comprehensive income (loss) of $(641,000) and $130,000, respectively. 11




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##### Table of Contents



9. Segment Information Since July 1, 2004, Compex Technologies, Inc. and its consolidated subsidiaries
have been 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 the Companys 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 measures 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 March 31, 2005U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    14,682,763
    
    
    $
    1,086,070
    
    
    $
    7,133,274
    
    
    $
    22,902,107Cost of sales and rentals
    
    
    4,001,248
    
    
    
    601,868
    
    
    
    3,249,847
    
    
    
    7,852,963Gross margin
    
    
    10,681,515
    
    
    
    484,202
    
    
    
    3,883,427
    
    
    
    15,049,144Percentage
    
    
    72.7
    %
    
    
    44.6
    %
    
    
    54.4
    %
    
    
    65.7
    %Selling and marketing expenses
    
    
    6,292,335
    
    
    
    1,796,324
    
    
    
    2,447,078
    
    
    
    10,535,737Segment profit (loss)
    
    $
    4,389,180
    
    
    $
    (1,312,122
    )
    
    $
    1,436,349
    
    
    $
    4,513,407
 For the Three Months Ended March 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    13,281,885
    
    
    $
    148,983
    
    
    $
    8,220,729
    
    
    $
    21,651,597Cost of sales and rentals
    
    
    3,735,314
    
    
    
    90,336
    
    
    
    3,254,902
    
    
    
    7,080,552Gross margin
    
    
    9,546,571
    
    
    
    58,647
    
    
    
    4,965,827
    
    
    
    14,571,045Percentage
    
    
    71.9
    %
    
    
    39.4
    %
    
    
    60.4
    %
    
    
    67.3
    %Selling and marketing expenses
    
    
    5,528,360
    
    
    
    1,208,667
    
    
    
    2,567,876
    
    
    
    9,304,903Segment profit (loss)
    
    $
    4,018,211
    
    
    $
    (1,150,020
    )
    
    $
    2,397,951
    
    
    $
    5,266,142
 12




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For the Nine Months Ended March 31, 2005U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    42,805,516
    
    
    $
    3,534,968
    
    
    $
    23,427,711
    
    
    $
    69,768,195Cost of sales and rentals
    
    
    11,446,845
    
    
    
    1,790,535
    
    
    
    9,997,635
    
    
    
    23,235,015Gross margin
    
    
    31,358,671
    
    
    
    1,744,433
    
    
    
    13,430,076
    
    
    
    46,533,180Percentage
    
    
    73.3
    %
    
    
    49.3
    %
    
    
    57.3
    %
    
    
    66.7
    %Selling and marketing expenses
    
    
    18,362,497
    
    
    
    5,120,184
    
    
    
    7,249,931
    
    
    
    30,732,612Segment profit (loss)
    
    $
    12,996,174
    
    
    $
    (3,375,751
    )
    
    $
    6,180,145
    
    
    $
    15,800,568
 For the Nine Months Ended March 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    39,018,520
    
    
    $
    417,892
    
    
    $
    23,836,050
    
    
    $
    63,272,462Cost of sales and rentals
    
    
    10,489,603
    
    
    
    176,751
    
    
    
    10,011,951
    
    
    
    20,678,305Gross margin
    
    
    28,528,917
    
    
    
    241,141
    
    
    
    13,824,099
    
    
    
    42,594,157Percentage
    
    
    73.1
    %
    
    
    57.7
    %
    
    
    58.0
    %
    
    
    67.3
    %Selling and marketing expenses
    
    
    16,666,307
    
    
    
    2,388,217
    
    
    
    7,121,470
    
    
    
    26,175,994Segment profit (loss)
    
    $
    11,862,610
    
    
    $
    (2,147,076
    )
    
    $
    6,702,629
    
    
    $
    16,418,163
 Reconciliation of segment profit to income from operations: For the Three Months Ended
    
    
    For the Nine Months EndedMarch 31
    
    
    March 312004
    
    
    2005
    
    
    2004
    
    
    2005Total profit from segments
    
    $
    5,266,142
    
    
    $
    4,513,407
    
    
    $
    16,418,163
    
    
    $
    15,800,568Unallocated corporate expenses:General and administrative
    
    
    3,700,466
    
    
    
    3,753,162
    
    
    
    10,721,783
    
    
    
    11,431,058Research and development
    
    
    779,634
    
    
    
    635,193
    
    
    
    2,054,784
    
    
    
    2,014,620Income from operations
    
    $
    786,042
    
    
    $
    125,052
    
    
    $
    3,641,596
    
    
    $
    2,354,890
 Net revenues by product lines are as follows: For the Three Months Ended
    
    
    For the Nine Months EndedMarch 31
    
    
    March 312004
    
    
    2005
    
    
    2004
    
    
    2005Rehabilitation products
    
    $
    4,434,210
    
    
    $
    4,030,399
    
    
    $
    13,484,038
    
    
    $
    12,146,005Pain management
    
    
    4,319,668
    
    
    
    5,435,373
    
    
    
    12,240,048
    
    
    
    15,512,028Consumer products
    
    
    6,453,564
    
    
    
    6,569,753
    
    
    
    18,466,046
    
    
    
    21,610,041Accessories and supplies
    
    
    6,444,155
    
    
    
    6,866,582
    
    
    
    19,082,330
    
    
    
    20,500,121$
    21,651,597
    
    
    $
    22,902,107
    
    
    $
    63,272,462
    
    
    $
    69,768,195
 The Company does not have a single customer that accounts for more than 5% of
consolidated revenue for the three and nine months ended March 31, 2005 and
2004 or more than 5% of total receivables as of March 31, 2005 and 2004. 13




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Assets by segment are as follows: U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalSegment assets at June 30, 2004
    
    $
    25,771,895
    
    
    $
    2,972,642
    
    
    $
    14,621,634
    
    
    $
    43,366,171Segment assets at March 31, 2005
    
    $
    31,593,578
    
    
    $
    4,281,290
    
    
    $
    14,422,805
    
    
    $
    50,297,673
 Reconciliation of segment assets to total assets: June 30, 2004
    
    
    March 31, 2005Assets from segments
    
    $
    43,366,171
    
    
    $
    50,297,673Unallocated corporate assets:
    
    
    32,843,225
    
    
    
    31,651,822Total assets
    
    $
    76,209,396
    
    
    $
    81,949,495
 10. Commitments The Company has approximately $200,000 that will become due to maintain
celebrity endorsements through June 30, 2005. 14




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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, 2003 and June 30, 2004, our consolidated statements of
operations, statements of shareholders equity and statements 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 in 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.
We derive revenue in the United States from medical products and accessories
(United States Medical) sales and rentals directly to patients and wholesalers.
We also derive revenue in the United States from the sales of consumer
products (United States Consumer) to distributors and directly to consumers.
In certain non-domestic markets (International), we derive revenue primarily
from the sales of consumer products to distributors and dealers. United States Medical
The direct medical business involves providing products to patients for rent or
purchase, the sale of accessories to patients for the ongoing use of such
products and billing of the patients insurance provider for the products and
accessories. The wholesale medical business involves the sale of devices and
medical supplies primarily to clinics and medical equipment distributors. We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No.
101, as amended by SAB No. 104, when each of the following four conditions are
met: 1) a contract or sales arrangement exists; 2) products have been shipped
and title has transferred or services have been rendered; 3) the price of the
products or services is fixed or determinable; and 4) collectibility is
reasonably assured. Accordingly, we recognize direct medical revenue, both
rental and purchase, when products have been dispensed to the patient and the
patients insurance has been verified. For medical products that are sold from
inventories consigned at clinic locations, we recognize revenue when we receive
notice that the product has been prescribed and dispensed to the patient and
the insurance has been verified or preauthorization has been obtained from the
insurance company, when required. We recognize wholesale medical revenue when
we ship our products to our wholesale customers. Revenue from the rental of products to patients accounts for approximately
17.6% and 19.6%, respectively, of the United States Medical revenue for the
nine month periods ended March 31, 2005 and March 31, 2004. Revenue from the
rental of products is recognized ratably based on the number of days remaining
in the month. Products on rental contracts are placed in fixed assets and
depreciated over their estimated useful life. All revenue is recognized net of
estimated sales allowances and returns. We have established reserves to account for sales allowances, product returns
and rental credits. Sales allowances generally result from agreements with
certain insurance providers that permit reimbursement to us in amounts that are
below the products invoice price. This reserve is provided for by reducing
gross revenue by a portion of the amount invoiced during the relevant period.
We estimate the amount of the reduction based upon historical experience and
consider the impact of new contract terms or modifications of existing 15




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##### Table of Contents



arrangements with insurance providers. For patient returns of products after
purchase, the amount previously recorded as revenue in a prior period is
provided for by reducing gross revenue in the current period. Rental credits
result when patients purchase products that they had previously rented. Many
insurance providers require patients to rent products for a period of one to
three months prior to purchase. If the patient has a long-term need for the
product, the insurance companies may authorize purchase of the product by these
patients. When the product is purchased, most insurance providers require that
rental payments previously made on the product be credited toward the purchase
price. These rental credits are processed at the same time the revenue is
recorded on the sale of the product. A change in the percentage of medical
sales made pursuant to such contracts or a change in the number or type of
products that are returned could cause the level of these reserves to vary in
the future. In addition to the reserves for sales allowances, returns and rental credits,
we provide for uncollectible accounts receivable. These uncollectible accounts
receivable are a result of non-payment from patients who have been direct
billed for co-payments or deductibles; lack of appropriate insurance coverage;
and disallowances of charges by third party providers. The reserve is based on
historical trends, current relationships with providers, and internal process
improvements. If there were a change to a material insurance provider
contract, a decline in the economic condition of patients or significant
turnover of company personnel, the current level of the reserve for
uncollectible accounts receivable may not be adequate and may result in an
increase of these levels in the future. United States Consumer
The United States consumer products business involves the sales of products to
distributors, sport shops and direct sales to consumers. Revenue is primarily
recognized at the time of shipment to distributors, sport shops and direct
sales to consumers. A portion of our inventory is out on consignment with
certain distributors and the revenue is not recognized until the distributor
sells the product to a consumer. All revenue is recognized net of estimated
sales allowances and returns. We have established reserves to account for sales allowances and product
returns. All consumer products are sold with a 30-day, money back guarantee
and we estimate the amount of the revenue reduction based upon historical
experience and consider the impact of new contract terms or modifications of
existing arrangements with distributors. In addition to the reserves for sales
allowances and product returns, we provide for uncollectible accounts
receivable. These uncollectible accounts receivable are a result of
non-payment from both distributors and direct customers. The reserve is based
primarily on historical trends and specific review. International
The international products business involves the sales to sports shops, retail
shops and healthcare providers. Revenue is recognized at the time of shipment
to dealers, distributors, sport shops and healthcare providers, direct sales to
consumers or upon notification from a healthcare provider that equipment has
been prescribed and provided to a patient and approved by the patient or
his/her insurance provider. All revenue is recognized net of estimated sales
allowances and product returns. We have established reserves to account for sales allowances, product returns
and rental credits. We estimate the amount of the revenue reduction based upon
historical experience and consider the impact of new contract terms or
modifications of existing arrangements with distributors. In addition to the
reserves for sales allowances and product returns, we provide for uncollectible
accounts receivable. These uncollectible accounts receivable are a result of
non-payment from both distributors and direct customers. The reserve is based
primarily on historical trends and specific review. 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 16




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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 receivable recorded in the income
statement has fluctuated and may continue to fluctuate significantly from
quarter to quarter as such trends change. Carrying Value of Inventory.
We maintain a large balance of electrical stimulation devices on consignment at
clinics and other healthcare 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 healthcare 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 $16.5 million at March
31, 2005, 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. 17




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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 Ended
    
    
    Nine Months EndedMarch 31
    
    
    March 312004
    
    
    2005
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    32.7
    
    
    
    34.3
    
    
    
    32.7
    
    
    
    33.3Gross profit
    
    
    67.3
    
    
    
    65.7
    
    
    
    67.3
    
    
    
    66.7Operating expenses:Selling and marketing
    
    
    43.0
    
    
    
    46.0
    
    
    
    41.4
    
    
    
    44.0General and administrative
    
    
    17.1
    
    
    
    16.4
    
    
    
    16.9
    
    
    
    16.4Research and development
    
    
    3.6
    
    
    
    2.8
    
    
    
    3.2
    
    
    
    2.9Total operating expenses
    
    
    63.7
    
    
    
    65.2
    
    
    
    61.5
    
    
    
    63.3Income from operations
    
    
    3.6
    
    
    
    0.5
    
    
    
    5.8
    
    
    
    3.4Other expense, net
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.4Income tax provision
    
    
    1.3
    
    
    
    0.1
    
    
    
    2.1
    
    
    
    1.2Net income
    
    
    2.0
    %
    
    
    
    %
    
    
    3.2
    %
    
    
    1.8
    %
 Our revenue increased $1.2 million, or 6%, to $22.9 million during the quarter
ended March 31, 2005 from $21.7 million during the quarter ended March 31,
2004, and increased $6.5 million, or 10%, to $69.8 million during the nine
months ended March 31, 2005 from $63.3 million during the nine months ended
March 31, 2004. Increases in both our domestic medical business and in our
domestic consumer business, accounted for an 11% increase for the quarter.
This was offset by a 5% decrease in our consumer business in Europe. For the
nine month period, increases in both domestic business segments accounted for
11% of the increase, partially offset by a 1% decrease in consumer business in
Europe. U.S. medical revenue for the quarter was $14.7 million, up 11% from the prior
years quarter of $13.3 million. U.S. medical revenue for
the nine month period
ended March 31, 2005, was $42.8 million, up 10% from the $39.0 million for the
comparable period last year. This increase is primarily due to an increase in
volumes of our direct device sales and rental business, and a slight increase
in our accessories and supplies. We also expanded our direct sales and rentals
by increasing our direct medical sales force, who increased the number of
rentals that are originated directly through physician offices. Our U.S. consumer division recorded revenue of $1.1 million and $3.5 million
for the quarter and nine month periods ended March 31, 2005, respectively. This
compares to $150,000 and $418,000, respectively, of revenue recorded for the
comparable periods last year. Our increased sales have been driven through
revenue from our infomercial and our current agreements with The Home Shopping
Network (HSN) and General Nutrition Centers (GNC). We will continue to focus
on landing additional major retail chains. Our international division posted revenue of $7.1 million for the quarter ended
March 31, 2005. This represents a decrease of 13% from the $8.2 million
recorded during the comparable quarter last year. Sales of our Compex line of
products accounted for 16% of the decrease, as unit sales fell 13% below prior
year amounts. This was partially offset by Slendertone product revenues that
were slightly above prior year and a 2% favorable impact of exchange rates,
reflecting the strength of the Euro versus the U.S. dollar. For the nine
months ended March 31, 2005, our international division posted revenue of $23.4
million or a 2% decrease from the $23.8 million for the comparable nine month
period last year. A 6% decrease in our Compex line of products and a 1%
decrease in our Slendertone product revenues 18




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were partially offset by a 5% favorable impact of exchange rates. The number
of Compex units sold for the nine month period was up 1% over unit sales from
the comparable period last year. Revenues in Spain and France are performing
above prior year for both the quarter and nine month periods. However, Italy
and Germany are performing below prior year revenue amounts. Revenue by product line during the quarter ended March 31, 2005 was roughly
$4.0 million in rehabilitation products, $5.4 million in pain management
products, $6.6 million in consumer products, and $6.9 million in accessories
and supplies. All revenue segments are above prior year amounts except
rehabilitation products. 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. As
physicians look for non-systemic methods of pain control, this will lead to
increased accessories and supplies from patients dealing with chronic pain.
 Consumer products, primarily Slendertone
product sales in the U.S., reflects the largest nominal increase. Our gross profit was $15.0 million or 65.7% of revenue during the quarter, and
$46.5 million or 66.7% of revenue during the nine months ended March 31, 2005.
This compares to gross profit of $14.6 million or 67.3% of revenue in the
quarter and $42.6 million or 67.3% of revenue during the nine months ended
March 31, 2004. 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 March 31, 2004 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 March 31, 2005, our selling expenses increased 13% to
$10.5 million or 46.0% of revenue, up from $9.3 million or 43.0% of revenue for
the comparable quarter last year. Selling expenses for the nine month period
ended March 31, 2005, increased 17% to $30.7 million or 44.0% of revenue, up
from $26.2 million, or 41.4% of revenue for the comparable nine month period
last year. Our U.S. medical divisions selling expenses increased as we have
increased our number of direct medical sales representatives and field support
specialists to 84 as of March 31, 2005, as compared to 68 as of March 31, 2004.
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 $2.8 million of the increase over the nine month period. General and administrative expenses for the quarter ended March 31, 2005,
totaled $3.8 million or 16.4% of revenue, representing a 2% increase over the
$3.7 million or 17.1% of revenue recorded for the quarter ended March 31, 2004.
General and administrative expenses for the nine month period ended March 31,
2005, was $11.4 million, or 16.4% of revenue, representing a 7% increase over
the $10.7 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 contributed to
the increase. General and administrative expenses for the current
period were also impacted
by a $250,000 charge related to personnel reductions in our European division.
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 March 31, 2005,
decreased 19% to $635,000 from $780,000 for the comparable quarter ended March
31, 2004. Research and development expenses for the nine month period ended
March 31, 2005, totaled $2.0 million, or 2.9% of revenue, representing a 2%
decrease over the $2.1 million, or 3.2% of revenue for the same period last
year. Research and development spending, in absolute dollars, has decreased
slightly. We continue to develop new products, such as our recently FDA
cleared IF3Wave product for the U.S. medical division and our Fitness Trainer
model that was introduced in our U.S. consumer division. We anticipate
research and 19




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development spending will grow slightly 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 increased to $131,000 for the quarter ended March 31, 2005
from $81,000 for the quarter ended March 31, 2004. Our average
outstanding borrowing level for the quarter was greater than prior
year as our domestic operations utilizes our credit facility to
support our investment in our domestic consumer product launch.
Interest expense decreased
to $315,000 for the nine month period ended March 31, 2005 from $377,000 for
the comparable period last year. Our average outstanding borrowing levels for
the nine month period ended March 31, 2005 were lower than the comparable
periods in 2004. The provision for income taxes was 40% for all periods in 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 $18,000 in the
third quarter of fiscal 2005 from $429,000 in the third quarter of fiscal 2004.
For the nine months ended March 31, 2005, net income decreased to $1.3 million
from $2.0 million during the same period in fiscal 2004. Diluted earnings per
share decreased from $0.03 during the quarter ended March 31, 2004 to $0.00
during the quarter ended March 31, 2005 and diluted earnings per share
decreased from $.16 to $.10 per share for the nine month period. Liquidity and Capital Resources Our operating activities used cash of $3.0 million during the nine months ended
March 31, 2005, as compared to $2.2 million used in operating activities during
the nine months ended March 31, 2004. Although we generated cash from
earnings, after adjustment for depreciation and amortization, of approximately
$2.4 million during the first nine months of fiscal 2005, we used over $5.5
million to finance increased receivables during fiscal 2005, as a result of
larger sales late in the period and an increase in our overall days sales
outstanding. Receivables also increased in fiscal 2004 by $3.2 million. A
decrease in prepaid expenses was offset by a decrease in our accounts payable.
Both decreases are primarily due to timing differences and tax payments.
Accrued liabilities  other have increased since year-end due
primarily to accruals
for customer rebates and an increase in our deferred rental revenue account. We used $1.7 million in investing activities in the first nine 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 $4.8 million of cash in the first nine 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 $4.3 million of cash
during the first nine months of fiscal 2005, mainly from $5.1 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 the
first nine months of 2004, we generated $3.7 million from financing activities,
as we generated $10.5 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 $11.3 million in debt. At March 31, 2005, we had a balance of $7.3 million outstanding under our US
credit facility and $2.7 million under our European credit facility. Based on
our credit agreement, we believe we could borrow up to approximately an
additional $7.7 million under our credit facility. In addition to approximately
$1.3 million of payments due under our debt agreements and lease obligations
during the following year, we have approximately $200,000 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. 20




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the quarter ended March 31, 2005, our revenue originating outside the
U.S. was 34% 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-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures means controls and other procedures of an
issuer that are designed to ensure that information required to be disclosed by
the issuer in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commissions rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in
the reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its principal executive and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. (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. 
 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. The California
Superior Court denied our motion to dismiss the case in the first quarter
of 2005 and we have filed to have an appeal of that decision reviewed.
The case will proceed with discovery at the trial court level until the
appeal is denied or heard. 21




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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 None 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. 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)
 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.May 10, 2005
    /s/ Dan W. GladneyDate
    Dan W. GladneyPresident and Chief Executive Officer May 10, 2005
    /s/ Scott P. YoungstromDate
    Scott P. YoungstromVice President of Finance
(Principal Financial and Accounting Officer) 23