##### 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 December 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 8
New Brighton, Minnesota 55112
 (651) 631-0590
 o þ
  o þ o
 o þ
  Common Stock, $.10 par value
    
    12,721,619 Shares




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 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. EXHIBITSSIGNATURESAmendment to Employment Agreement - Scott YoungstromAmendment to Employment Agreement - Gary GoodpasterAmendment to Amended/Restated Employment Agreement - Marshall T. MaskoAmendment to Employment Agreement - Dan GladneyAmendment to Amended Severance Pay Agreement - Wayne ChrystalCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906    Table of Contents  CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
  
    
    We executed an Agreement and Plan of Merger with Encore Medical Corporation and
Encore-Snow Acquisition Corp. on November 14, 2005 that provides for the acquisition of
Compex by Encore Medical and the issuance to all of our shareholders of shares of Encore
Medical common stock in exchange for their shares of Compex common stock. This acquisition
is contingent upon a number of conditions, including approval by our shareholders at a
special meeting we have called at 10:00 on February 23, 2006. As is common in such
transactions, the market price of our common stock has been influenced primarily by the
market price of Encore common stock multiplied by the exchange ratio. If any of the
conditions to the acquisition were not satisfied, or the acquisition was cancelled for any
other reason, the trading range for our common stock would be adversely affected. Further,
if the acquisition were delayed or cancelled, it could impact our ongoing operations. You
should review the risks with respect to completion of the acquisition contained in the
joint proxy/prospectus included as part of the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission by Encore on January 23, 2006.
    
    We maintain a reserve against the revenue we record for sales allowances on the
contracted or negotiated sales and rental prices. Many third party reimbursement entities
maintain schedules of the amount of sales and rental rates for our medical products that
they will reimburse. Because it is difficult to collect from patients the excess of our
contract price over these scheduled rates, and because our acceptance of the payment from
the reimbursement entity in some cases constitutes acceptance of that rate for our sales or
rental price, we normally do not pursue collection of the excess. The rate schedules from
the various reimbursement entities vary and we do not know in advance the rates of
reimbursement for all of our products from all of the reimbursement entities that may cover
the patients that use our products. When we record revenue upon billing of a patient or
health care provider, we offset the sales and rental prices, before recording it as
revenue, with an allowance based on our historical experience of a blended average rate
schedule of the reimbursement entities, weighting our current experience with known rates
from larger entities. Nevertheless, to the extent there is a shift in the reimbursement
entities that pay for sales or rentals of our products, or to the extent the reimbursement
rate schedules of third party reimbursement entities change, our allowance may be
inaccurate and we may be required to record additional allowances, resulting in a
corresponding reduction in net revenue and income.
    
    Like many medical device companies that rely on third party reimbursement entities for
payment, we have a large balance of uncollected accounts receivable. We also have a
reserve for the portion of those receivables that we estimate will not be collected based
on our historical experience. If we cannot collect an amount of receivables that is
consistent with historical collection rates, we might be required to increase our reserve
and charge off the portion of receivables we cannot collect. This additional provision
for uncollectible accounts could significantly impact our operating results.
    
    In the United States, our products are subject to reimbursement by private and public
healthcare reimbursement entities that generally impose strict rules on applications for
reimbursement. Changes in eligibility or requirements for reimbursement, or failure to
comply with reimbursement requirements, could cause a reduction in our income from
operations.
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
    
    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, 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 (FDA). Although we believe our
manufacturing facilities and operations comply with these regulations, a failure to comply
could result in our inability to manufacture, refurbish, and sell products until compliance
is achieved.
    
    The marketing of our consumer products is subject to regulations and oversight by both
the FDA and the Federal Trade Commission (FTC). 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 intend to devote significant resources to continue to market consumer products for
health and fitness applications in the U.S. 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:
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
    
    our ability to obtain clearance from the FDA and other regulatory authorities to
market the products for all relevant consumer applications;
    
    our ability to maintain distribution rights with, and to obtain adequate quantities
of product from, the manufacturers of consumer products for which we serve as
distributors;
    
    our ability to establish consumer demand with a limited marketing budget;
    
    our ability to secure shelf space in the United States with significant retailers; and,
    
    the effectiveness of our products for their intended applications.
 
    
    We market and sell several products manufactured by a number of different companies,
including abdominal belts and other garment-based consumer products, iontophoresis
products, traction devices, bone growth stimulation products, other orthopedic durable
medical equipment (DME) products, and electrodes. We generally have less control over the
quality and reliability of these third party products. If these products do not comply with
their specifications or otherwise fail to 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.
    
    The terms of our third party distribution contracts, including our contracts for
Slendertone products, may be altered if we do not meet the contract requirements. Although
we believe we are currently in compliance with those contracts, we cannot be certain that
we will be able to continue to sell product at the rates these contracts require. To
concentrate our resources on our core products in Europe, we have elected to discontinue
distribution of Slendertone product in those markets. In the United States, our contract
for the sale of Slendertone product in the United States currently calls for minimum
purchases which we have budgeted for in the coming year. Although we believe that we will
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 23% of our revenue for the six months ended December 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 current year and, to a lesser extent the income
we have reported, has been affected from the increasing value of the dollar in Europe,
where Compex SA operates. 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. Conversely, if
U.S. currency decreases in value relative to the Euro and other European currencies in the
future, we would report more revenue and potentially more income, even at times when our
operations in Europe have failed to
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perform at historical levels. 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.
 
    
    We have entered into a contract to perform private label, original equipment
manufacturing (OEM) for a certain customer. The contract contains some minimum purchase
requirements for the customer. If this customer does not meet any more than the minimum
purchase requirements, it may result in lower than projected revenues and earnings in
fiscal year 2006.
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PART I  FINANCIAL INFORMATION
 
 ITEM
1. FINANCIAL STATEMENTS
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2005
    
    
    2005(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    3,044,158
    
    
    $
    3,963,420Receivables, less reserves of $19,250,165 and $20,811,395
at June 30, 2005 and December 31, 2005, respectively
    
    
    37,268,582
    
    
    
    43,859,809Inventories, net
    
    
    15,353,472
    
    
    
    16,738,344Deferred tax assets
    
    
    6,108,627
    
    
    
    6,105,622Prepaid expenses
    
    
    3,217,406
    
    
    
    2,616,194Total current assets
    
    
    64,992,245
    
    
    
    73,283,389Property, plant, and equipment, net
    
    
    5,902,780
    
    
    
    6,609,959Goodwill
    
    
    16,630,871
    
    
    
    16,538,988Other intangible assets, net
    
    
    1,636,682
    
    
    
    1,364,124Deferred tax assets
    
    
    13,396
    
    
    
    Other assets
    
    
    142,617
    
    
    
    139,395Total assets
    
    $
    89,318,591
    
    
    $
    97,935,855LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    1,614,596
    
    
    $
    2,913,963Notes payable
    
    
    7,500,000
    
    
    
    14,000,000Accounts payable
    
    
    7,421,609
    
    
    
    7,668,319Accrued liabilities -Payroll
    
    
    2,719,545
    
    
    
    1,446,062Commissions
    
    
    1,073,365
    
    
    
    1,486,681Income taxes
    
    
    1,368,679
    
    
    
    223,621Other
    
    
    4,735,831
    
    
    
    5,032,919Total current liabilities
    
    
    26,433,625
    
    
    
    32,771,565LONG-TERM LIABILITIESLong-term debt
    
    
    4,127,019
    
    
    
    2,727,661Deferred tax liabilities
    
    
    438,734
    
    
    
    510,183Total liabilities
    
    
    30,999,378
    
    
    
    36,009,409STOCKHOLDERS EQUITYCommon
stock, $.10 par value: 30,000,000 shares authorized; issued and outstanding 12,526,880 and 12,659,143 shares
at June 30, 2005 and December 31, 2005, respectively
    
    
    1,252,688
    
    
    
    1,265,914Preferred
stock, no par value: 5,000,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Additional paid in capital
    
    
    33,440,966
    
    
    
    34,428,853Unearned compensation on restricted stock
    
    
    (47,329
    )
    
    
    Accumulated other non-owner changes in equity
    
    
    1,142,604
    
    
    
    1,115,526Retained earnings
    
    
    22,530,284
    
    
    
    25,116,153Total stockholders equity
    
    
    58,319,213
    
    
    
    61,926,446Total liabilities and stockholders equity
    
    $
    89,318,591
    
    
    $
    97,935,855
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 31(unaudited)
    
    
    (unaudited)2004
    
    
    2005
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    $
    25,212,349
    
    
    $
    29,537,585
    
    
    $
    46,866,088
    
    
    $
    57,181,573Cost of sales and rentals
    
    
    8,467,434
    
    
    
    10,157,093
    
    
    
    15,382,052
    
    
    
    19,294,899Gross profit
    
    
    16,744,915
    
    
    
    19,380,492
    
    
    
    31,484,036
    
    
    
    37,886,674Operating expenses:Selling and marketing
    
    
    10,353,246
    
    
    
    12,366,427
    
    
    
    20,196,876
    
    
    
    23,716,157General and administrative
    
    
    3,933,364
    
    
    
    3,962,379
    
    
    
    7,677,895
    
    
    
    7,982,259Research and development
    
    
    656,892
    
    
    
    577,629
    
    
    
    1,379,427
    
    
    
    1,117,413Total operating expenses
    
    
    14,943,502
    
    
    
    16,906,435
    
    
    
    29,254,198
    
    
    
    32,815,829Income from operations
    
    
    1,801,413
    
    
    
    2,474,057
    
    
    
    2,229,838
    
    
    
    5,070,845Other income (expense):Interest expense
    
    
    (104,232
    )
    
    
    (302,646
    )
    
    
    (183,817
    )
    
    
    (533,506
    )Other
    
    
    15,142
    
    
    
    2,709
    
    
    
    46,025
    
    
    
    6,530Income before income taxes
    
    
    1,712,323
    
    
    
    2,174,120
    
    
    
    2,092,046
    
    
    
    4,543,869Income tax provision
    
    
    684,000
    
    
    
    940,000
    
    
    
    835,000
    
    
    
    1,958,000Net income
    
    $
    1,028,323
    
    
    $
    1,234,120
    
    
    $
    1,257,046
    
    
    $
    2,585,869Net income per common and common equivalent
shareBasic
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.21Diluted
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.20Weighted average number of shares outstandingBasic
    
    
    12,454,759
    
    
    
    12,634,016
    
    
    
    12,454,433
    
    
    
    12,613,171Diluted
    
    
    12,912,695
    
    
    
    12,984,520
    
    
    
    12,968,667
    
    
    
    12,757,927
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COMPEX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedDecember 31(unaudited)2004
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    1,257,046
    
    
    $
    2,585,869Adjustments to reconcile net income to net cash
used in operating activitiesDepreciation
    
    
    661,962
    
    
    
    771,116Amortization
    
    
    162,505
    
    
    
    267,861Stock-based compensation
    
    
    120,952
    
    
    
    601,874Change in deferred taxes
    
    
    (6,511
    )
    
    
    89,043Changes in current assets and liabilities -
net of amounts acquired in acquisitionReceivables
    
    
    (4,924,129
    )
    
    
    (6,763,177
    )Inventories
    
    
    (603,521
    )
    
    
    (1,500,531
    )Prepaid expenses
    
    
    410,792
    
    
    
    565,682Accounts payable
    
    
    177,589
    
    
    
    343,759Accrued liabilities
    
    
    243,744
    
    
    
    (1,608,418
    )Net cash used in operating activities
    
    
    (2,499,571
    )
    
    
    (4,646,922
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,328,069
    )
    
    
    (1,506,991
    )Changes in other assets, net
    
    
    (6,300
    )
    
    
    372Net cash used in investing activities
    
    
    (1,334,369
    )
    
    
    (1,506,619
    )FINANCING ACTIVITIES:Principal payments on long-term obligations, net
    
    
    (956,072
    )
    
    
    (48,591
    )Proceeds from line of credit, net
    
    
    4,300,000
    
    
    
    6,500,000Proceeds from employee stock purchase plan
    
    
    131,720
    
    
    
    100,794Proceeds from exercise of stock options
    
    
    47,395
    
    
    
    345,774Net cash provided by financing
activities
    
    
    3,523,043
    
    
    
    6,897,977Effect of exchange rates on cash and cash
equivalents
    
    
    (165,729
    )
    
    
    174,826Net (decrease) increase in cash and cash
equivalents
    
    
    (476,626
    )
    
    
    919,262Cash and cash equivalents at beginning of period
    
    
    3,198,832
    
    
    
    3,044,158Cash and cash equivalents at end of period
    
    $
    2,722,206
    
    
    $
    3,963,420Supplemental cash flow informationInterest paid
    
    $
    183,817
    
    
    $
    445,097Income taxes paid
    
    $
    1,251,124
    
    
    $
    3,094,000
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COMPEX TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 312004
    
    
    2004Net IncomeAs reported
    
    $
    1,028,323
    
    
    $
    1,257,046Stock-based compensation
on restricted stock
    
    $
    18,848
    
    
    $
    37,696Pro forma option
expense, net of tax
    
    $
    (246,305
    )
    
    $
    (492,164
    )Pro forma option
    
    $
    800,866
    
    
    $
    802,528Basic earnings per shareAs reported
    
    $
    0.08
    
    
    $
    0.10Pro forma
    
    
    0.06
    
    
    
    0.06Diluted earnings per shareAs reported
    
    $
    0.08
    
    
    $
    0.10Pro forma
    
    
    0.06
    
    
    
    0.06
  10




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Stock Options
  Weighted AverageExercise Price
    
    
    Number of SharesBalance outstanding at June 30, 2005
    
    $
    4.49
    
    
    
    2,128,748Granted
    
    
    4.68
    
    
    
    35,000Exercised
    
    
    3.33
    
    
    
    (103,950
    )Canceled
    
    
    3.66
    
    
    
    (27,500
    )Balance outstanding at December 31, 2005
    
    $
    4.56
    
    
    
    2,032,298Exercisable at December 31, 2005
    
    $
    4.33
    
    
    
    1,360,636Available for grant at December 31, 2005
    
    
    
    
    
    
    176,884
 Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted Average
    
    
    Weighted Average
    
    
    
    
    
    
    Weighted AverageRemaining
    
    
    Exercise Price Per
    
    
    
    
    
    
    Exercise Price PerRange of Exercise Price
    
    Shares
    
    
    Contractual Life
    
    
    Share
    
    
    Shares
    
    
    Share$2.25 to
$  2.94
    
    
    102,800
    
    
    1.8 Years
    
    $
    2.58
    
    
    
    102,800
    
    
    $
    2.58$3.30 to
$  3.85
    
    
    1,075,250
    
    
    4.7 Years
    
    
    3.62
    
    
    
    800,500
    
    
    
    3.62$3.87 to
$  5.92
    
    
    514,500
    
    
    5.7 Years
    
    
    4.50
    
    
    
    297,375
    
    
    
    4.48$6.13 to $10.75
    
    
    339,748
    
    
    4.6 Years
    
    
    8.22
    
    
    
    159,961
    
    
    
    8.702,032,298
    
    
    
    
    
    
    
    
    
    
    
    1,360,636
 tock Purchase Plan
  Restricted Stock Grants
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June 30, 2005
    
    
    December 31, 2005InventoriesRaw materials
    
    $
    1,280,370
    
    
    $
    1,681,443Work in process
    
    
    417,090
    
    
    
    601,183Finished goods
    
    
    13,656,012
    
    
    
    14,455,718Inventories, net
    
    $
    15,353,472
    
    
    $
    16,738,344
  June 30, 2005
    
    
    December 31, 2005Property, plant and equipment -Land
    
    $
    150,000
    
    
    $
    150,000Buildings
    
    
    1,683,614
    
    
    
    1,683,614Clinical and rental equipment
    
    
    1,744,193
    
    
    
    1,881,893Production equipment
    
    
    3,547,785
    
    
    
    4,309,120Office furniture and equipment
    
    
    9,931,107
    
    
    
    10,392,386$
    17,056,699
    
    
    $
    18,417,013Less accumulated depreciation
    
    
    (11,153,919
    )
    
    
    (11,807,054
    )Property, plant and equipment, net
    
    $
    5,902,780
    
    
    $
    6,609,959
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For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312004
    
    
    2005
    
    
    2004
    
    
    2005NumeratorNet Income
    
    $
    1,028,323
    
    
    $
    1,234,120
    
    
    $
    1,257,046
    
    
    $
    2,585,869DenominatorDenominator for basic net
income per share  weighted
average shares outstanding
    
    
    12,454,759
    
    
    
    12,634,016
    
    
    
    12,454,433
    
    
    
    12,613,171Effect of dilutive stock options
    
    
    457,936
    
    
    
    350,504
    
    
    
    514,234
    
    
    
    144,756Denominator for diluted net
income per share  weighted
average shares outstanding
    
    
    12,912,695
    
    
    
    12,984,520
    
    
    
    12,968,667
    
    
    
    12,757,927Basic net income per share
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.21Diluted net income per share
    
    
    0.08
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.20
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For the Three Months Ended December 31, 2005U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    18,264,303
    
    
    $
    4,275,859
    
    
    $
    6,997,423
    
    
    $
    29,537,585Cost of sales and rentals
    
    
    5,106,123
    
    
    
    2,344,110
    
    
    
    2,706,860
    
    
    
    10,157,093Gross profit
    
    
    13,158,180
    
    
    
    1,931,749
    
    
    
    4,290,563
    
    
    
    19,380,492Margin
    
    
    72.0
    %
    
    
    45.2
    %
    
    
    61.3
    %
    
    
    65.6
    %Selling and marketing expenses
    
    
    7,760,277
    
    
    
    1,801,606
    
    
    
    2,804,544
    
    
    
    12,366,427Segment profit
    
    $
    5,397,903
    
    
    $
    130,143
    
    
    $
    1,486,019
    
    
    $
    7,014,065
 For the Three Months Ended December 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    14,923,642
    
    
    $
    1,523,880
    
    
    $
    8,764,827
    
    
    $
    25,212,349Cost of sales and rentals
    
    
    4,127,797
    
    
    
    759,125
    
    
    
    3,580,512
    
    
    
    8,467,434Gross profit
    
    
    10,795,845
    
    
    
    764,755
    
    
    
    5,184,315
    
    
    
    16,744,915Margin
    
    
    72.3
    %
    
    
    50.2
    %
    
    
    59.1
    %
    
    
    66.4
    %Selling and marketing expenses
    
    
    6,325,004
    
    
    
    1,308,595
    
    
    
    2,719,647
    
    
    
    10,353,246Segment profit (loss)
    
    $
    4,470,841
    
    
    $
    (543,840
    )
    
    $
    2,464,668
    
    
    $
    6,391,669
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##### Table of Contents



For the Six Months Ended December 31, 2005U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    36,302,660
    
    
    $
    7,788,223
    
    
    $
    13,090,690
    
    
    $
    57,181,573Cost of sales and rentals
    
    
    10,093,054
    
    
    
    3,999,876
    
    
    
    5,201,969
    
    
    
    19,294,899Gross profit
    
    
    26,209,606
    
    
    
    3,788,347
    
    
    
    7,888,721
    
    
    
    37,886,674Margin
    
    
    72.2
    %
    
    
    48.6
    %
    
    
    60.3
    %
    
    
    66.3
    %Selling and marketing expenses
    
    
    15,276,987
    
    
    
    3,827,109
    
    
    
    4,612,061
    
    
    
    23,716,157Segment profit (loss)
    
    $
    10,932,619
    
    
    $
    (38,762
    )
    
    $
    3,276,660
    
    
    $
    14,170,517
 For the Six Months Ended December 31, 2004U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalRevenue
    
    $
    28,122,753
    
    
    $
    2,448,898
    
    
    $
    16,294,437
    
    
    $
    46,866,088Cost of sales and rentals
    
    
    7,445,597
    
    
    
    1,188,667
    
    
    
    6,747,788
    
    
    
    15,382,052Gross profit
    
    
    20,677,156
    
    
    
    1,260,231
    
    
    
    9,546,649
    
    
    
    31,484,036Margin
    
    
    73.5
    %
    
    
    51.5
    %
    
    
    58.6
    %
    
    
    67.2
    %Selling and marketing expenses
    
    
    12,070,162
    
    
    
    3,323,860
    
    
    
    4,802,854
    
    
    
    20,196,876Segment profit (loss)
    
    $
    8,606,994
    
    
    $
    (2,063,629
    )
    
    $
    4,743,795
    
    
    $
    11,287,160
  For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312004
    
    
    2005
    
    
    2004
    
    
    2005Total profit from segments
    
    $
    6,391,669
    
    
    $
    7,014,065
    
    
    $
    11,287,160
    
    
    $
    14,170,517Unallocated corporate expenses:General and administrative
    
    
    3,933,364
    
    
    
    3,962,379
    
    
    
    7,677,895
    
    
    
    7,982,259Research and development
    
    
    656,892
    
    
    
    577,629
    
    
    
    1,379,427
    
    
    
    1,117,413Income from operations
    
    $
    1,801,413
    
    
    $
    2,474,057
    
    
    $
    2,229,838
    
    
    $
    5,070,845
  For the Three Months Ended
    
    
    For the Six Months EndedDecember 31
    
    
    December 312004
    
    
    2005
    
    
    2004
    
    
    2005Rehabilitation products
    
    $
    4,474,345
    
    
    $
    5,560,668
    
    
    $
    8,115,606
    
    
    $
    11,301,606Pain management
    
    
    5,412,750
    
    
    
    7,177,973
    
    
    
    10,076,655
    
    
    
    14,084,000Consumer products
    
    
    8,236,387
    
    
    
    9,726,147
    
    
    
    15,040,288
    
    
    
    18,028,144Accessories and supplies
    
    
    7,088,867
    
    
    
    7,072,797
    
    
    
    13,633,539
    
    
    
    13,767,823$
    25,212,349
    
    
    $
    29,537,585
    
    
    $
    46,866,088
    
    
    $
    57,181,573
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U.S. Medical
    
    
    U.S. Consumer
    
    
    International
    
    
    TotalSegment assets at June 30, 2005
    
    $
    37,857,601
    
    
    $
    2,113,933
    
    
    $
    14,350,201
    
    
    $
    54,321,735Segment assets at December 31, 2005
    
    $
    44,137,793
    
    
    $
    6,689,495
    
    
    $
    11,718,313
    
    
    $
    62,545,601
  June 30, 2005
    
    
    December 31, 2005Assets from segments
    
    $
    54,321,735
    
    
    $
    62,545,601Unallocated corporate assets:
    
    
    34,996,856
    
    
    
    35,390,254Total assets
    
    $
    89,318,591
    
    
    $
    97,935,855
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ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Overview
  Critical Accounting Policies
  Revenue Recognition and Provisions for Credit Allowances and Returns
   19




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Reserve for Uncollectible Accounts Receivable.
 Carrying Value of Inventory.
 20




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Carrying Value of Intangible Assets.
 
    
    significant under-performance relative to expected historical or projected future operating results;
    
    significant changes in the manner of use of the acquired assets or our overall business strategy;
    
    significant negative industry or economic trends; and
    
    significant decline in our stock price for a sustained period and our market
capitalization relative to net book value.
  Income Taxes.
 21




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Results of Operations
   Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 312004
    
    
    2005
    
    
    2004
    
    
    2005Net sales and rental revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and rentals
    
    
    33.6
    
    
    
    34.4
    
    
    
    32.8
    
    
    
    33.7Gross profit
    
    
    66.4
    
    
    
    65.6
    
    
    
    67.2
    
    
    
    66.3Operating expensesSelling
    
    
    41.1
    
    
    
    41.9
    
    
    
    43.1
    
    
    
    41.5General and administrative
    
    
    15.6
    
    
    
    13.3
    
    
    
    16.4
    
    
    
    13.9Research and development
    
    
    2.6
    
    
    
    2.0
    
    
    
    2.9
    
    
    
    2.0Total operating expenses
    
    
    59.3
    
    
    
    57.2
    
    
    
    62.4
    
    
    
    57.4Income from operations
    
    
    7.1
    
    
    
    8.4
    
    
    
    4.8
    
    
    
    8.9Other expense, net
    
    
    0.3
    
    
    
    1.0
    
    
    
    0.3
    
    
    
    1.0Income tax provision
    
    
    2.7
    
    
    
    3.2
    
    
    
    1.8
    
    
    
    3.4Net Income
    
    
    4.1
    %
    
    
    4.2
    %
    
    
    2.7
    %
    
    
    4.5
    %
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Liquidity and Capital Resources
  24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A . RISK FACTORS .
  
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10.1
    
    Amendment No 1 effective as of October 14, 2005 to Employment Agreement dated
December 2, 2002 between Scott Youngstrom and Compex10.2
    
    Amendment No 1 effective as of October 14, 2005 to Employment Agreement dated
September 1, 2003 between Gary (Mike) Goodpaster and Compex
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10.3
    
    Amendment No 1 effective as of October 14, 2005 to Amended and Restated
Employment Agreement dated May 14, 2005 between Marshall T. Masko and Compex10.4
    
    Amendment No 2 effective as of January 31, 2006 to Employment Agreement dated
April 12, 2002 as amended February 3, 2003, between Dan Gladney and Compex10.5
    
    Amendment No 3 effective as of October 12, 2005 to Amended Severance Pay
Agreement dated April 7, 1999, as amended May 8, 2001, between Wayne Chrystal and
Compex31.1
    
    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 15 d-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)
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SIGNATURES
  COMPEX TECHNOLOGIES, INC.February 8, 2006

Date
    
    /s/ Dan W. Gladney

Dan W. GladneyPresident and Chief Executive OfficerFebruary 8, 2006

Date
    
    /s/ Scott P. Youngstrom

Scott P. YoungstromVice President of Finance(Principal Financial and Accounting Officer)
 29