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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly period Ended March 31, 2004ORo
    
    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. 0-9407COMPEX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)


Minnesota
    
    41-0985318(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)


1811 Old Highway 8
New Brighton, Minnesota 55112
(Address of principal executive offices)


(651) 631-0590
(Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.

Yes
o No þ

Indicate the number of shares outstanding of each of the issuers classes of
common stock as of May 3, 2004 was:

Common Stock, $.10 par
value
    
    12,392,349 Shares




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TABLE OF CONTENTS  CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTSPART I  FINANCIAL INFORMATIONITEM 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 3. DEFAULTS UPON SENIOR SECURITIES  NoneITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   NoneITEM 5. OTHER INFORMATION   NoneITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCertification of CEO - Section 302Certification of CFO - Section 302Certification of CEO - Section 906    Table of Contents  
 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,
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;
anticipated levels of expenditure 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:  
    
    The rates at which our United States medical products are reimbursed
varies with each third party payer, and also with each product we
sell. Further, the third party payers, including both private payers
such as HMOs and insurance companies, and governmental payers such as
Medicare and Medicaid, adjust their rates of payment from time to
time. We recognize revenue for sale of our products when we have
completed documentation based on the overall percentage of our quoted
historical experience. Because of the variation in payment, it is not
possible for us to estimate and record revenue based on what will be
paid by each third party payer for each product we sell. If the mix
of products we sell and the payers for the patients to whom we sell
products changes, the rate of payment we receive may change. These
changes may require an adjustment in our revenue recognition rates and
policies, resulting in lower revenue.  
    
    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 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.
Any write-off could both decrease our income currently, and increase
the rate at which we provide for additions to the reserve for
inventory losses in the future. This increase in the rate of
additions to the reserve could affect our income in future periods.  
    
    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. 2




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
    
    The products we sell in our United States medical products
business may only be sold on physician prescription and, for most of
those products where there is a government sponsored 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.  
    
    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 38% of our revenue for the nine months ended March 31, 2004, was generated by Compex SA, a subsidiary
headquartered in Switzerland that does business primarily in Europe. There are risks in doing business in international
markets which could adversely affect our business, including:  
    
    regulatory requirements;
    
    export restrictions and controls, tariffs and other trade barriers;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    reduced protection for intellectual property rights;
    
    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. 3




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
    
    We market and sell several products manufactured by third parties, including abdominal belts and other garment-based
consumer products purchased from a manufacturer in Ireland, iontophoresis products manufactured by a company in Utah,
traction devices manufactured by a company in Minnesota, and electrodes manufactured by a number of different companies.
We generally have less control over the quality and reliability of these third-party products. If the 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 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
    
    Our third party distribution contracts, including our contract for purchase from the manufacturer and sale of Slendertone
products, may be cancelled by the manufacturer if we do not meet certain sales quotas. 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. Cancellation of our distribution rights could have a significant adverse effect on our
revenue and profitability.   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, 2004 and June 30, 2003 Consolidated Statements of Operations for the three months and
nine months ended March 31, 2004 and 2003 Consolidated Statements of Cash Flows for the nine months ended
March 31, 2004 and 2003 Notes to Consolidated Financial Statements 5




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS June 30,
    
    March 31,ASSETS
    
    2003
    
    2004CURRENT ASSETSCash and cash equivalents
    
    $
    5,056,007
    
    
    $
    2,124,411Receivables, less reserves of $15,200,590
    
    
    24,955,130
    
    
    
    27,997,702and $16,569,767Inventories -Raw materials
    
    
    1,393,470
    
    
    
    1,181,061Work in process
    
    
    33,670
    
    
    
    29,024Finished goods
    
    
    10,301,198
    
    
    
    13,283,373Deferred tax assets
    
    
    4,675,394
    
    
    
    4,675,394Prepaid expenses
    
    
    2,378,044
    
    
    
    1,984,895Total current assets
    
    
    48,792,913
    
    
    
    51,275,860Property, plant, and equipment, net
    
    
    4,536,804
    
    
    
    4,723,149Goodwill
    
    
    10,583,287
    
    
    
    15,843,302Other intangible assets, net
    
    
    883,634
    
    
    
    684,682Deferred tax assets
    
    
    750,926
    
    
    
    805,084Other assets
    
    
    104,743
    
    
    
    135,764Total assets
    
    $
    65,652,307
    
    
    $
    73,467,841LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    5,363,850
    
    
    $
    1,739,654Notes payable
    
    
    4,500,000
    
    
    
    500,000Accounts payable
    
    
    4,028,608
    
    
    
    5,201,328Accrued liabilities -Payroll
    
    
    1,567,710
    
    
    
    1,772,223Commissions
    
    
    679,015
    
    
    
    925,912Income taxes
    
    
    2,725,341
    
    
    
    1,389,488Other
    
    
    3,349,986
    
    
    
    3,268,192Total current liabilities
    
    
    22,214,510
    
    
    
    14,796,797LONG-TERM LIABILITIESLong-term debt
    
    
    1,217,268
    
    
    
    2,458,400Deferred tax liabilities
    
    
    675,885
    
    
    
    715,360Total liabilities
    
    
    24,107,663
    
    
    
    17,970,557STOCKHOLDERS EQUITYCommon stock, $.10 par value: 30,000,000 shares authorized;
    
    
    1,094,847
    
    
    
    1,239,235issued and outstanding 10,948,469 and 12,392,349 shares,
respectivelyPreferred stock, no par value: 5,000,000 shares authorized;
    
    
    
    
    
    
    none issued and outstandingAdditional paid in capital
    
    
    21,650,978
    
    
    
    32,685,534Accumulated other non-owner changes in equity
    
    
    1,870,183
    
    
    
    2,632,404Retained earnings
    
    
    16,928,636
    
    
    
    18,940,111Total stockholders equity
    
    
    41,544,644
    
    
    
    55,497,284Total liabilities and stockholders equity
    
    $
    65,652,307
    
    
    $
    73,467,841
 6




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended
    
    Nine Months EndedMarch 31
    
    March 312003
    
    2004
    
    2003
    
    2004Net sales and rental revenue
    
    $
    19,143,348
    
    
    $
    21,651,597
    
    
    $
    55,616,168
    
    
    $
    63,272,462Cost of sales and rentals
    
    
    5,705,660
    
    
    
    7,080,552
    
    
    
    16,930,342
    
    
    
    20,678,305Gross profit
    
    
    13,437,688
    
    
    
    14,571,045
    
    
    
    38,685,826
    
    
    
    42,594,157Operating expenses:Selling, general and administrative
    
    
    10,647,803
    
    
    
    13,005,369
    
    
    
    31,358,340
    
    
    
    36,897,777Research and development
    
    
    572,396
    
    
    
    779,634
    
    
    
    1,613,972
    
    
    
    2,054,784Total operating expenses
    
    
    11,220,199
    
    
    
    13,785,003
    
    
    
    32,972,312
    
    
    
    38,952,561Income from operations
    
    
    2,217,489
    
    
    
    786,042
    
    
    
    5,713,514
    
    
    
    3,641,596Other income (expense):Interest expense
    
    
    (102,375
    )
    
    
    (80,686
    )
    
    
    (316,490
    )
    
    
    (377,297
    )Other
    
    
    34,328
    
    
    
    9,379
    
    
    
    77,677
    
    
    
    87,176Income before income taxes
    
    
    2,149,442
    
    
    
    714,735
    
    
    
    5,474,701
    
    
    
    3,351,475Income tax provision
    
    
    794,000
    
    
    
    286,000
    
    
    
    2,190,000
    
    
    
    1,340,000Net income
    
    $
    1,355,442
    
    
    $
    428,735
    
    
    
    3,284,701
    
    
    $
    2,011,475Net income per common and
common equivalent shareBasic
    
    $
    0.12
    
    
    
    0.03
    
    
    $
    0.30
    
    
    $
    0.17Diluted
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.30
    
    
    $
    0.16Weighted average number of
shares outstandingBasic
    
    
    10,934,858
    
    
    
    12,257,734
    
    
    
    10,945,773
    
    
    
    11,612,383Diluted
    
    
    10,973,212
    
    
    
    13,265,374
    
    
    
    11,027,183
    
    
    
    12,561,855
 7




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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months EndedMarch 312003
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    3,284,701
    
    
    $
    2,011,475Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation and amortization
    
    
    1,225,914
    
    
    
    1,354,426Amortization of unearned compensation
    
    
    77,813
    
    
    
    33,078Change in deferred taxes
    
    
    (3,464
    )
    
    
    (11,031
    )Changes in current assets and liabilities  net of
amounts acquired in acquisitionReceivables
    
    
    596,983
    
    
    
    (3,248,716
    )Inventories
    
    
    (1,000,709
    )
    
    
    (633,572
    )Prepaid expenses
    
    
    (122,079
    )
    
    
    1,221,013Accounts payable
    
    
    (783,220
    )
    
    
    (494,377
    )Accrued liabilities
    
    
    (1,751,994
    )
    
    
    (2,387,502
    )Net cash provided by (used in) operating activities
    
    
    1,523,945
    
    
    
    (2,155,206
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (762,470
    )
    
    
    (1,129,738
    )Cash paid in acquisition, net of cash received
    
    
    
    
    
    
    (3,389,912
    )Changes in other assets, net
    
    
    37,190
    
    
    
    (236,504
    )Net cash used in investing activities
    
    
    (725,280
    )
    
    
    (4,756,154
    )FINANCING ACTIVITIES:Proceeds from new debt financing
    
    
    
    
    
    
    3,835,501Principal payments on long-term obligations
    
    
    (1,903,600
    )
    
    
    (7,267,549
    )Proceeds from (payments on) line of credit, net
    
    
    2,800,000
    
    
    
    (4,000,000
    )Proceeds from stock offering
    
    
    
    
    
    
    10,545,795Proceeds from exercise of stock options
    
    
    52,527
    
    
    
    398,493Proceeds from employee stock purchase plan
    
    
    20,909
    
    
    
    201,578Net cash provided by financing activities
    
    
    969,836
    
    
    
    3,713,818Effect of exchange rates on cash and cash equivalents
    
    
    (235,538
    )
    
    
    265,946Net increase (decrease) in cash and cash equivalents
    
    
    1,532,963
    
    
    
    (2,931,596
    )Cash and cash equivalents at beginning of period
    
    
    2,086,650
    
    
    
    5,056,007Cash and cash equivalents at end of period
    
    $
    3,619,613
    
    
    $
    2,124,411Supplemental cash flow informationInterest paid
    
    $
    306,144
    
    
    $
    377,298Income taxes paid
    
    $
    2,170,149
    
    
    $
    2,382,723Non-cash TransactionGoodwill adjustment
    
    $
    
    
    
    $
    300,000
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COMPEX TECHNOLOGES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 1. Accounting Policies The amounts set forth in the preceding financial statements are unaudited as of
and for the periods ended March 31, 2004 and 2003 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. 2. Reclassification Certain prior year items have been reclassified to conform with 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 312003
    
    2004
    
    2003
    
    2004Net Income
    
    As reported
    
    $
    1,355,442
    
    
    $
    428,735
    
    
    $
    3,284,701
    
    
    $
    2,011,475Pro forma option
expense, net of tax
    
    
    (161,115
    )
    
    
    (214,351
    )
    
    
    (393,176
    )
    
    
    (607,006
    )Pro forma
    
    $
    1,194,327
    
    
    $
    214,384
    
    
    $
    2,891,525
    
    
    $
    1,404,469Basic earnings
    
    As reported
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.30
    
    
    $
    0.17per share
    
    Pro forma
    
    
    0.11
    
    
    
    0.02
    
    
    
    0.26
    
    
    
    0.12Diluted earnings
    
    As reported
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.30
    
    
    $
    0.16per share
    
    Pro forma
    
    
    0.11
    
    
    
    0.02
    
    
    
    0.26
    
    
    
    0.11
 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 61.4%; risk-free interest rate of 4.82% and 2.91%; and
expected lives of 5 years. 9




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4. Stock Offering Compex received net proceeds from the sale of common stock to certain
shareholders in a private placement, completed on November 20, 2003, of
approximately $8.3 million and approximately $2.3 million of additional
investment rights exercised on February 18, 2004. Compex has used these
proceeds to reduce indebtedness, and intends to use the balance of the proceeds
for marketing and other expenses incurred in expanding its consumer business,
and for other general working capital requirements. On December 4, 2003, the Company filed a registration statement on Form S-3 to
register the sale of 1,250,000 shares of common stock held by three
shareholders who purchased these securities in the previously mentioned private
placements plus exercising their additional investment rights. 5. Note Payable and Long Term Debt The Company has a $5,000,000 U. S. credit facility which provides for revolving
borrowings at varying rates based either on the banks prime rate or LIBOR. As
of March 31, 2004, there were borrowings outstanding of $500,000 on the
revolving credit line. The Company currently has $4,500,000 available under
the revolving credit line. 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 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 March 31, 2004 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, 2004, there were
borrowings outstanding of $4,126,901 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 March 31, 2004 and for the period then ended. 10




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6. Per Share Data Net income per share is calculated in accordance with Financial Accounting
Standards Board Statement No. 128, Earnings Per Share. Potential common
shares are included in the diluted net income per share calculation when
dilutive. Potential common shares consisting of common stock issuable upon
exercise of outstanding common stock options are computed using the treasury
stock method. Our basic net income per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period, increased to
include dilutive potential common shares issuable upon the exercise of stock
options that were outstanding during the period. The table below is a
reconciliation of the numerator and denominator in the basic and diluted net
income per share calculation. For the Three Months Ended
    
    For the Nine Months EndedMarch 31
    
    March 312003
    
    2004
    
    2003
    
    2004NumeratorNet Income
    
    $
    1,355,442
    
    
    $
    428,735
    
    
    $
    3,284,701
    
    
    $
    2,011,475DenominatorDenominator for basic net
income per share  weighted
average shares outstanding
    
    
    10,934,858
    
    
    
    12,257,734
    
    
    
    10,945,773
    
    
    
    11,612,383Effect of dilutive stock options
    
    
    38,354
    
    
    
    1,007,640
    
    
    
    81,410
    
    
    
    949,472Denominator for diluted net
income per share  weightedaverage shares outstanding
    
    
    10,973,212
    
    
    
    13,265,374
    
    
    
    11,027,183
    
    
    
    12,561,855Basic net income per share
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.30
    
    
    $
    0.17Diluted net income per share
    
    
    0.12
    
    
    
    0.03
    
    
    
    0.30
    
    
    
    0.16
 Employee stock options of 92,000 and 48,669 for the third quarter and nine
months ended March 31, 2004, have been excluded from the diluted net income per
share calculation because their effect would be anti-dilutive. For the third
quarter and nine months ended March 31, 2003, employee options of 1,499,500 and
1,031,967 have been excluded from the diluted net income per share calculation
because their effect would be anti-dilutive. 7. 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, 2004 and March 31,
2003 consisted solely of gains on translation of its foreign subsidiary
financial statements from the functional currency to US dollars of $762,000 and
$706,000, respectively, resulting in total comprehensive income of $2,773,000
and $3,991,000, respectively. 11




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8. Business Acquisition Acquisition of Filsport Assistance S.r.l.: On July 3, 2003, the Company acquired substantially all the capital stock 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. As of March 31, 2004, these
performance milestones were not achieved and if current trends continue, the
additional consideration will not have to be provided. 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 $4,511,888 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
    
    For the Nine MonthsEnded
    
    EndedMarch 31, 2003
    
    March 31, 2003Net Sales
    
    $
    22,354,286
    
    
    $
    65,076,215Income before taxes
    
    
    2,367,471
    
    
    
    5,827,690Net Income
    
    
    1,465,634
    
    
    
    3,463,102Earnings per shareBasic
    
    $
    0.13
    
    
    $
    0.32Diluted
    
    
    0.13
    
    
    
    0.31
 The Company used a new term loan and a credit line to finance this business
acquisition. The fair value of the assets and liabilities of the acquired
company are presented as follows: As ofMarch 31, 2004Accounts Receivable
    
    $
    2,193,589Inventories
    
    
    1,775,876Prepaid Expenses
    
    
    681,888Property and equipment, net
    
    
    135,748Goodwill
    
    
    4,511,888Other long-term assets
    
    
    39,821Accounts payable
    
    
    (1,415,652
    )Accrued liabilities
    
    
    (1,179,090
    )Liabilities forgiven
    
    
    (2,563,870
    )Long-term liabilities
    
    
    (790,286
    )Net assets acquired
    
    $
    3,389,912
 12




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9. 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 Nine Months EndedMarch 312003
    
    2004U.S. revenue
    
    $
    36,178,747
    
    
    $
    39,211,495Foreign revenue
    
    
    19,437,421
    
    
    
    24,060,967$
    55,616,168
    
    
    $
    63,272,462
 Net revenue by product line was as follows: For the Nine Months EndedMarch 312003
    
    2004Rehabilitation products
    
    $
    11,307,660
    
    
    $
    13,484,038Pain management
    
    
    11,500,920
    
    
    
    12,240,048Consumer products
    
    
    14,059,371
    
    
    
    18,466,046Accessories and supplies
    
    
    18,748,217
    
    
    
    19,082,330$
    55,616,168
    
    
    $
    63,272,462
 During the first nine months of fiscal 2003, one customer accounted for
approximately 10% of consolidated revenue. This customer represented
approximately 5% of total accounts receivable at March 31, 2003. 10. Commitments The Company expects 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. The Company started this
process during fiscal 2003 and continues to invest more in fiscal 2004 based on
our experience. The Company may also apply cash to acquisitions during future
periods. 13




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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. 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 14




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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, 2004, most of which constituted
goodwill and the value of acquired technology from several acquisitions. We are
required to charge-off the carrying value of identifiable intangibles,
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. 15




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Results of Operations Although our revenues continued to grow during the third fiscal quarter at a
rate that met our expectations, a large component of that growth was
represented by favorable exchange rates that impact the European revenue we
report. Although these exchange rates caused increases in our recorded revenue
from European operations, they caused corresponding increases in expense from
European operations, impacting our profitability for the quarter. Without
giving effect to exchange rates, our European operations performed poorly
during the quarter, reflecting both a very poor economic environment for
consumer goods in Europe and continued difficulty in managing operations in
several geographies. Our United States medical products business performed very well during the
quarter, showing both increased revenue and profitability, with some pressure
on margins because of a change in product mix. We also made progress in our
United States consumer business during the quarter, executing a celebrity
endorsement contract and devoting considerable resources to market the
business. Nevertheless, because it has taken us longer than anticipated to
commence this marketing process, our revenues from the United States consumer
business have lagged behind and did not contribute substantially to revenue for
the quarter. The combination of favorable exchange rates that increased reported revenue but
also expense, with increased expenditure in consumer products marketing that
has not yet been matched with revenue from consumer products, caused us to meet
our revenue expectations, but to substantially miss our expectations for income
for the quarter. 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 312003
    
    2004
    
    2003
    
    2004Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    29.8
    
    
    
    32.7
    
    
    
    30.4
    
    
    
    32.7Gross profit
    
    
    70.2
    
    
    
    67.3
    
    
    
    69.6
    
    
    
    67.3Operating expensesSelling, general and administrative
    
    
    55.6
    
    
    
    60.1
    
    
    
    56.4
    
    
    
    58.4Research and development
    
    
    3.0
    
    
    
    3.6
    
    
    
    2.9
    
    
    
    3.2Total operating expenses
    
    
    58.6
    
    
    
    63.7
    
    
    
    59.3
    
    
    
    61.6Income from operations
    
    
    11.6
    
    
    
    3.6
    
    
    
    10.3
    
    
    
    5.8Other expense, net
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.5Income tax provision
    
    
    4.1
    
    
    
    1.3
    
    
    
    3.9
    
    
    
    2.1Net Income
    
    
    7.1
    
    
    
    2.0
    
    
    
    5.9
    
    
    
    3.2
 Our revenue increased by 13% to $21,652,000 during the quarter ended March 31,
2004 from $19,143,000 during the quarter ended March 31, 2003, and increased
14% to $63,272,000 during the nine months ended March 31, 2004 from $55,616,000
during the nine months ended March 31, 2003. Increases in both our domestic
medical business and in our consumer business in Europe, accounted for 7% of
the increase with 6% of the increase a result of favorable exchange rates. For
the nine-month period, increases in both business segments accounted for 8% of
the increase with 6% due to favorable exchange rates. 16




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U.S. revenue for the quarter was $13.4 million, up 11% from the prior years
quarter of $12.1 million. U.S. revenue for the nine-month period ended March
31, 2004, was $39.2 million, up 8% from the $36.2 million for the comparable
period last year. On a sequential basis, U.S. revenue was relatively unchanged
versus the fiscal second quarter. Our direct sales business in the United
States posted a revenue increase of 10% for the quarter and 7% for the
nine-month period ended March 31, 2004, as compared to the comparable periods
last year. This increase is primarily due to an increase in sales and rentals
of medical devices, reflecting our ongoing expansion of our direct selling
efforts to the physician markets. This is partially offset by a 1.5% increase
in our sales credit reserve as compared to our reserve percentage in comparable
prior periods. This increase in credit reserve reflects a modest shift in our
revenue mix from the higher reimbursement workers compensation/personal injury
segment to the group contract insurance segment. The company monitors the
reserve balances quarterly and makes adjustments to the reserve as deemed
necessary. 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 period ended March 31, 2004, but not the period ended March
31, 2003, as the acquisition occurred in May 2003. Our consumer business in the U.S. has seen a very modest, but steady, ramp in
sales. We began actively promoting the Slendertone line in October 2003,
received favorable publicity in December 2003 and January 2004 in two fitness
magazine articles, and obtained very favorable results from a sports study
conducted at the University of Wisconsin  La Crosse in January 2004. We feel
we have to overcome what could be conceived as a negative image for abdominal
belt products and do not expect to generate substantial sales of these products
until we have secured sales arrangements with major retail chains. We recently
signed an endorsement contract with Sarah Ferguson, Duchess of York, whose
assistance may help overcome the market image of these products. Our European operations posted a revenue increase of 20% for the quarter.
Approximately 17% was generated by a favorable impact of exchange rates,
reflecting the strength of the euro versus the dollar. The acquisition of
Filsport in Italy accounted for 12% and revenue from the addition of
Slendertone products contributed 4% to our European revenue increase. This
increase was partially offset by a 13% decrease in sales of our Compex line of
products. The actual number of Compex units sold are down 6% when compared to
prior year unit sales. Additionally, the product mix shifted toward our newly
introduced lower-priced models. We recently introduced the Energy line of
products targeted at the health and wellness markets, which is an entirely new
market opportunity for us. The price points for this market are below our
higher priced models for competitive athletes. Revenue by product line during the quarter ended March 31, 2004 was roughly
$4.4 million in rehabilitation products, $4.3 million in pain management
products, $6.4 million in consumer products, and $6.5 million in accessories
and supplies. All revenue segments, except accessories and supplies, were
above prior year amounts with consumer products reflecting the largest nominal
increase. Our increase in consumer products revenue is primarily attributable
to our Italian acquisition and Slendertone product sales in Europe. Revenue
from accessories and supplies is below prior year amounts due primarily to the
slowdown of our European consumer business discussed earlier, and a slight
reduction in our average selling prices for our domestic medical supplies due
to pricing competition. Our gross profit was $14,571,000 or 67.3% of revenue during the quarter, and
$42,594,000 or 67.3% of revenue during the nine months ended March 31, 2004.
This compares to gross profit of $13,438,000 or 70.2% of revenue in the quarter
and $38,686,000 or 69.6% of revenue during the nine months ended March 31,
2003. The overall decrease in margin percentage is primarily due to a decrease
in our higher margin accessories and supplies as a percentage of total revenue
in both the three months and the nine months ended March 31, 2004 as compared
to prior year and lower average selling prices in Europe due to the
introduction of our fitness line of Compex products.. We anticipate gross
profit to stabilize in the lower 60% range as our domestic consumer business
becomes a greater percentage of our revenue and as we enter the health and
wellness markets in Europe. 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, the majority of the inventory that
was acquired as a part of the Filsport acquisition has been sold. In the
future, our margin in Italy is expected to be consistent with the margin in our
other European countries. For the quarter ended March 31, 2004, our selling, general and administrative
expenses increased 22% to $13,005,000 or 60.1% of revenue, from $10,648,000 or
55.6% of revenue for the same quarter last year. Our selling, general and
administrative expenses increased 18% to $36,898,000 or 58.3% of revenue during
the 17




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nine months ended March 31, 2004, compared to $31,358,000 or 56.4% of revenue
during the nine months ended March 31, 2003. Selling, general and
administrative expenses associated with the July 2003 acquisition of Filsport
and the marketing expenses for our new consumer products both domestically and
in Europe contributed significantly to the increases in 2004. We have also
increased the number of our direct sales employees to 58 as of March 31, 2004
as compared to 40 for the same period last year. This reflects our commitment
to a direct physician selling model. Additionally, foreign currency exchange
rates, which effectively increase our expenses from our European operations,
contributed approximately 4% of the increase of general and administrative
expenses for the quarter. We have finalized contracts with several individuals
who have expressed an interest in endorsing our products that require specific
payments as part of these expenditures. We will continue to devote substantial
resources to marketing our consumer products during the reminder of fiscal 2004
and currently expect to increase our promotion and advertising expenditures for
both Slendertone and Compex as these products require a continuous marketing
push. We will also incur additional administrative expense as we work to
complete the documentation of internal controls to meet the requirements of
Sarbanes Oxley. We started this process in the second fiscal quarter.
Although our timeline for compliance has been deferred by one year, we plan to
continue to devote resources to this process through this fiscal year. In
future periods, internal control compliance expenses will become an ongoing
part of our selling, general, and administrative expenditures. Accordingly, we
expect the rate of selling, general, and administrative expenditures to
increase slightly during the fourth quarter of this year. Our research and development expenses increased 36% to $780,000 in the third
quarter of fiscal 2004 from $572,000 in the third quarter of fiscal 2003. For
the nine months ended March 31, 2004, research and development costs increased
27% to $2,055,000 from $1,614,000 for the same period ended March 31, 2003.
Approximately 16% and 17% of the increases, respectively, are due to the
effects of foreign exchange rates. We anticipate the R&D spending will
increase slightly in absolute dollars as we continue to pursue new
complementary products, such as our IFII medical device, our Energy and Body
line of consumer products in Europe, and our Fitness Trainer model to be
introduced in the domestic consumer market. Our R&D spending will decrease as
a percentage of revenue in future periods as our quarterly revenue from
consumer products increases. Interest expense decreased 21% to $81,000 in the third quarter of fiscal year
2004 from $102,000 in the third quarter of fiscal year 2003. Interest expense
increased 19% to $377,000 from $316,000 for the comparable nine-month periods.
The increase for the nine-month period 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
decrease for the quarter was due to repayments under our US credit facility. We
anticipate reduced interest expense in coming quarters as long as our debt
levels remain comparable to current levels. The provision for income taxes was 40% for the fiscal 2004 and 40% in fiscal
2003. The tax rate was lowered in the third quarter of fiscal 2003 from 42% to
40% after a preliminary 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. We anticipate our final
review of our consolidated tax provision to be completed prior to our year-end. As a result of the above activity, our net income decreased to $429,000 in the
third quarter of fiscal 2004 from $1,355,000 in the third quarter of fiscal
2003. For the nine months ended March 31, 2004, net income decreased to
$2,011,000 from $3,285,000 during the same period in fiscal 2003. Diluted
earnings per share decreased from $0.12 during the quarter ended March 31, 2003
to $0.03 during the quarter ended March 31, 2004 and diluted earnings per share
decreased from $.30 to $.16 per share for the nine-month period. Liquidity and Capital Resources On July 3, 2003, we acquired all the capital stock 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 requires that we pay 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 $4,511,888 that was assigned to goodwill. 18




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On November 19, 2003, we entered into definitive agreements with three
independent institutional accredited investors for the private placement of
1,000,000 units of our securities at a purchase price of $8.9072 per unit.
Each unit consisted of one share of our common stock, $.10 par value per share,
and an additional right to purchase a quarter of a share of our common stock at
$9.3526 per share. The additional investment rights were exercised on February
18, 2004. The net proceeds, including the proceeds from the exercise of the
additional investor rights, were approximately $10.5 million. We have used a
majority of the proceeds to reduce borrowings under our long-term and
short-term credit facilities. For the nine months ended March 31, 2004, our operating activities used cash of
$1,855,o The $3,365,901 that we generated during the period through net
income, after adjustment for non-cash depreciation and amortization, was offset
by a $3,249,000 increase in accounts receivable, a $634,000 increase in
inventory and a $2,882,000 decrease in accounts payable and accrued
liabilities. The increase in receivables was primarily a result of increased
revenue, the translation effect when converting our European receivables to
U.S. dollars, slower collections in Europe as a result of the slow economy and
a slight change in revenue mix in our U.S. medical product sales. Our reserve
for uncollectible receivables increased by approximately $1.4 million during
the nine months ended March 31, 2004, but decreased as a percentage of
receivables from 38% to 37%. The reserve will continue to decrease as a
percentage of total receivables as our consumer business continues to grow as a
percentage of our overall revenue. The increase in inventory is primarily due
to additional purchases of Slendertone inventory in Europe. The decrease in
accounts payable and accrued liabilities related to year-end June 30, 2003
timing differences and the payment of estimated income taxes during the 2004
fiscal year. We used $5,056,000 in investing activities in the first nine months of fiscal
2004, including $3,390,000 to fund the net cash purchase price of Filsport
Assistance S.r.l. and $1,130,000 for net purchases of property and equipment,
primarily clinical and rental equipment. Our financing activities generated $3,714,000 of cash during the nine months
ended March 31, 2004. We raised $10,546,000 through the private placement of
1,250,000 shares of the companys common stock described above and an
additional $3,836,000 through borrowings under our Swiss credit line to finance
the Filsport Assistance acquisition. We used $11,268,000 to repay borrowings
under our U. S. credit facility and to pay-off other long-term debt. At March
31, 2004, a total of $500,000 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 of the borrowings under this credit facility will be repaid prior to the
maturity date. We believe that the agreement could be extended, with similar
terms, with the current financial institution and another facility could be put
in place. We currently expect 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 have engaged several celebrities who have endorsed our consumer products to
act as our spokespersons in promoting those products and have agreed to pay
them for their services in appearing in advertisements and for use of their
names. We have contractual commitments under these agreements totaling
approximately $175,000 for the remainder of the 2004 fiscal year, totaling
approximately $800,000 for the year ending June 30, 2005, and totaling
approximately $900,000 for the year ending June 30, 2006. 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 March 31, 2004, our revenue originating outside the
U.S. was 38% 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. 19




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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. 
 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. 
 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. 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 complaint, but unless and until they do, there is no
pending suit in this matter. Plaintiff then filed an appeal with respect
to other defendants, and the appeal was dismissed. The case is being
remitted to the trial court. From time to time, we have also been a party to claims, legal actions and
complaints arising in the ordinary course of our business. We do not
believe that the resolution of such matters has had or will have a
material impact on our results of operations or financial position. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF
EQUITY SECURITIES (f) Securities Sold without registration under the Securities Act
of 1933. On November 20, 2003, and in accordance with a purchase agreement we
signed on November 19, 2003, we privately placed a total of 1,000,000
units of our equity securities at a purchase price of $8.9072 20




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per unit. Each unit consisted of one share of our common stock, $.10 par
value per share, and an additional right to purchase a quarter of a share
of our common stock at $9.3526 per share. On February 17 and 18, 2004,
the three purchasers of the units exercised the additional investment
rights, purchasing 250,000 shares of our common stock for aggregate
payments to the Company of $2,338,150. We paid Credit Lyonnais
Securities (USA) Inc., which acted as our selling agent in connection
with the sale of the units, commissions of $134,443.63 on exercise of the
additional investment rights. In offering and selling the units, and the common stock on exercise of
the additional investment rights, we relied on the exemptions from
registration contained in Section 4(2) of the Securities Act of 1933, and
in Rule 506 of the Securities and Exchange Commission. We did not, and
our agent represented that it did not, use any form of public
solicitation in locating the purchasers. Each of the purchasers
represented to us that they were an accredited investor, that they were
purchasing for investment, and they understood that the units could not
be resold without registration or an exemption from registration. We
placed legends on the common stock certificates and the additional
investment rights noting these restrictions. We filed a registration
statement relating to resale of the common stock included in the units,
and the common stock issued upon exercise of the additional investment
rights, on December 4, 2003 and the registration statement was declared
effective on December 12, 2003. We used the $2.2 million of net proceeds from the sale of the common
stock on exercise of the additional investment rights to repay borrowings
under our credit facilities and other long-term debt. 
 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 AND REPORTS ON FORM 8-K (a) Exhibits31.1

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
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Furnished but not filed)(b) Reports on Form 8-K. The following reports on Form 8-K were
filed during the quarter ended December 31, 2003.A Form 8-K, filed February 12, 2004 furnishing (but not filing)
the earnings release for the quarter ended December 31, 2003.
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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 14, 2004
    
    /s/ Dan W. GladneyDate
    
    Dan W. Gladney
President and Chief Executive OfficerMay 14, 2004
    
    /s/ Scott P. YoungstromDate
    
    Scott P. Youngstrom
Vice President of Finance
(Principal Financial and Accounting Officer)
 22