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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended            June 30, 2004 Commission file number             0-10691 DELPHAX TECHNOLOGIES INC.  Minnesota
    
    41-1392000(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)12500 Whitewater DriveMinnetonka, Minnesota
(Address of principal executive offices)
    
    55343-9420
(Zip Code)
 (952) 939-9000   Not Applicable    Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past
90 days.               Yes x   
No oIndicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange
Act).               
Yes o    No xIndicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practical date.As of August 9, 2004, there were 6,271,047 shares outstanding of Common
Stock.




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INDEX DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed consolidated balance sheets  June 30, 2004 and September 30, 2003Condensed consolidated statements of operations  Three and nine months ended June 30,
2004 and 2003Condensed consolidated statements of cash flows  Nine months ended June 30, 2004 and 2003Notes to condensed consolidated financial statementsItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 3. Quantitative and Qualitative Disclosure of Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 2. Recent Sales of Unregistered SecuritiesItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESCERTIFICATIONSCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS June 30,
    
    September 30,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,441,476
    
    
    $
    2,669,763Short-term investments
    
    
    
    
    
    
    41,608Accounts receivable, less allowance for doubtful
accounts of $803,914 and $737,018 as of June 30,
2004 and September 30, 2003, respectively
    
    
    9,762,556
    
    
    
    11,037,583Current portion of notes receivable from customers
    
    
    8,675
    
    
    
    105,377Inventory:Raw materials and component parts
    
    
    12,050,224
    
    
    
    11,321,554Work-in-progress
    
    
    967,176
    
    
    
    1,057,264Finished goods
    
    
    7,886,784
    
    
    
    5,479,88220,904,184
    
    
    
    17,858,700Other current assets
    
    
    2,179,800
    
    
    
    1,283,604TOTAL CURRENT ASSETS
    
    
    34,296,691
    
    
    
    32,996,635Long-term portion of notes receivable from customers
    
    
    41,239
    
    
    
    614,408EQUIPMENT AND FIXTURESMachinery and equipment
    
    
    4,605,854
    
    
    
    4,569,678Furniture and fixtures
    
    
    4,147,993
    
    
    
    3,748,663Leasehold improvements
    
    
    2,356,582
    
    
    
    2,342,68211,110,429
    
    
    
    10,661,023Less accumulated depreciation and amortization
    
    
    8,397,863
    
    
    
    7,199,8182,712,566
    
    
    
    3,461,205TOTAL ASSETS
    
    $
    37,050,496
    
    
    $
    37,072,248
 See notes to condensed consolidated financial statements. 3




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30,
    
    September 30,2004
    
    2003(Unaudited)LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    5,254,286
    
    
    $
    3,422,082Accrued expenses
    
    
    3,771,481
    
    
    
    3,356,644Income taxes payable
    
    
    148,552
    
    
    
    375,444Current portion of bank credit facility
    
    
    2,361,959
    
    
    
    13,900,000Current portion of capital leases
    
    
    17,026
    
    
    
    44,289Deferred revenue
    
    
    584,270
    
    
    
    505,480TOTAL CURRENT LIABILITIES
    
    
    12,137,574
    
    
    
    21,603,939Long-term portion of bank credit facilities
and subordinated convertible debt
    
    
    7,704,316
    
    
    
    Long-term portion of deferred revenues
    
    
    
    
    
    
    614,408Long-term portion of capital leases
    
    
    20,308
    
    
    
    33,566TOTAL LIABILITIES
    
    
    19,862,198
    
    
    
    22,251,913SHAREHOLDERS EQUITYCommon stock  par value $.10 per share  authorized
50,000,000 shares; issued and outstanding: 6,250,641 and 6,214,873 as of June 30, 2004 and
September 30, 2003, respectively
    
    
    625,064
    
    
    
    621,487Additional paid-in capital
    
    
    18,687,424
    
    
    
    17,151,389Accumulated other comprehensive loss
    
    
    (632,807
    )
    
    
    (1,172,165
    )Accumulated deficit
    
    
    (1,491,383
    )
    
    
    (1,780,376
    )TOTAL SHAREHOLDERS EQUITY
    
    
    17,188,298
    
    
    
    14,820,335TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    37,050,496
    
    
    $
    37,072,248
 See notes to condensed consolidated financial statements. 4




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Sales:Maintenance, spares and supplies
    
    $
    11,981,323
    
    
    $
    12,243,799
    
    
    $
    36,401,332
    
    
    $
    36,637,123Printing equipment
    
    
    600,013
    
    
    
    2,560,897
    
    
    
    5,096,414
    
    
    
    7,873,071NET SALES
    
    
    12,581,336
    
    
    
    14,804,696
    
    
    
    41,497,746
    
    
    
    44,510,194Costs and Expenses:Cost of sales
    
    
    5,275,384
    
    
    
    7,106,386
    
    
    
    18,106,119
    
    
    
    21,247,471Selling, general and administrative
    
    
    6,324,163
    
    
    
    6,274,385
    
    
    
    18,595,508
    
    
    
    18,838,300Research and development
    
    
    1,228,368
    
    
    
    1,223,025
    
    
    
    3,689,338
    
    
    
    3,538,965Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185,00012,827,915
    
    
    
    14,603,796
    
    
    
    40,390,965
    
    
    
    44,809,736(LOSS) INCOME FROM SYSTEM SALES AND SERVICE
    
    
    (246,579
    )
    
    
    200,900
    
    
    
    1,106,781
    
    
    
    (299,542
    )Net interest expense
    
    
    235,743
    
    
    
    145,467
    
    
    
    623,075
    
    
    
    581,215Net realized exchange (gain) loss
    
    
    (70,245
    )
    
    
    154,244
    
    
    
    (57,042
    )
    
    
    163,318Net unrealized exchange loss
    
    
    20,183
    
    
    
    5,880
    
    
    
    81,755
    
    
    
    207,235(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (432,260
    )
    
    
    (104,691
    )
    
    
    458,993
    
    
    
    (1,251,310
    )Income tax expense
    
    
    19,000
    
    
    
    
    
    
    
    170,000
    
    
    
    NET (LOSS) INCOME
    
    $
    (451,260
    )
    
    $
    (104,691
    )
    
    $
    288,993
    
    
    $
    (1,251,310
    )Basic and diluted (loss) earnings per common share:
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.20
    )Weighted average number of shares outstanding
during the period:Basic
    
    
    6,250,226
    
    
    
    6,190,765
    
    
    
    6,227,268
    
    
    
    6,180,854Diluted
    
    
    6,250,226
    
    
    
    6,190,765
    
    
    
    6,361,222
    
    
    
    6,180,854
 See notes to condensed consolidated financial statements. 5




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months EndedJune 30,2004
    
    2003OPERATING ACTIVITIESNet income (loss)
    
    $
    288,993
    
    
    $
    (1,251,310
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,022,011
    
    
    
    1,376,050Loss on disposal of equipment and fixtures
    
    
    137,250
    
    
    
    Non-cash interest on 7% convertible subordinated notes
    
    
    259,349
    
    
    
    Other
    
    
    55,724
    
    
    
    74,192Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,504,571
    
    
    
    (1,567,214
    )Inventory
    
    
    (2,797,298
    )
    
    
    2,882,636Other current assets
    
    
    (861,555
    )
    
    
    (703,399
    )Notes receivable from customers
    
    
    669,870
    
    
    
    (105,377
    )Accounts payable and accrued expenses
    
    
    1,895,266
    
    
    
    648,204Deferred revenue
    
    
    (538,272
    )
    
    
    563,113NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,635,909
    
    
    
    1,916,895INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (406,173
    )
    
    
    (472,447
    )Sale of short-term investments
    
    
    43,742
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (362,431
    )
    
    
    (472,447
    )FINANCING ACTIVITIESIssuance of 7% convertible subordinated notes
    
    
    3,000,000
    
    
    
    Issuance of common stock
    
    
    79,199
    
    
    
    112,968Repayment on bank credit facilities, net
    
    
    (5,615,363
    )
    
    
    (2,130,000
    )Principal payments on capital lease obligations
    
    
    (40,522
    )
    
    
    (24,337
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (2,576,686
    )
    
    
    (2,041,369
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    74,921
    
    
    
    77,410DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,228,287
    )
    
    
    (519,511
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,669,763
    
    
    
    1,717,973CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,441,476
    
    
    $
    1,198,462
 See notes to condensed consolidated financial statements. 6




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A  Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by the accounting principles generally
accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys annual report on Form 10-K for the
year ended September 30, 2003. Reclassifications have been made in the prior year to conform to
classifications in the current year. NOTE B  Earnings per Share The following table sets forth the computation of basic and diluted loss and
earnings per share: For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Numerator:Numerator for basic earnings per share,Net (loss) income
    
    $
    (451,260
    )
    
    $
    (104,691
    )
    
    $
    288,993
    
    
    $
    (1,251,310
    )Dilutive potential (loss) income
Convertible debt interest expense
    
    
    
    a
    
    
    
    
    
    
    
    a
    
    
    Numerator for diluted (loss) earnings
per share
    
    $
    (451,260
    )
    
    $
    (104,691
    )
    
    $
    288,993
    
    
    $
    (1,251,310
    )Denominator:Denominator for basic earnings per share,
weighted average shares
    
    
    6,250,226
    
    
    
    6,190,765
    
    
    
    6,227,268
    
    
    
    6,180,854Dilutive potential common shares:Employee stock options
    
    
    
    
    
    
    
    
    
    
    89,392
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    44,562
    
    
    
    Convertible debt
    
    
    
    
    
    
    
    
    
    
    
    a
    
    
    
    a
    
    
    
    a
    
    
    133,954
    
    
    
    
    aDenominator for diluted (loss) earnings
per share
    
    
    6,250,226
    
    
    
    6,190,765
    
    
    
    6,361,222
    
    
    
    6,180,854(Loss) earnings per common share
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.20
    )(Loss) earnings per common share,
assuming dilution
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.20
    )
 a  Excluded because the impact would be antidilutive. 7




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NOTE C  Comprehensive Income The components of comprehensive loss and income, net of related tax, for the
three and nine months ended June 30, 2004 and 2003 were as follows: For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    $
    (451,260
    )
    
    $
    (104,691
    )
    
    $
    288,993
    
    
    $
    (1,251,310
    )Foreign currency translation adjustment
    
    
    2,895
    
    
    
    510,189
    
    
    
    539,358
    
    
    
    712,291Comprehensive (loss) income
    
    $
    (448,365
    )
    
    $
    405,498
    
    
    $
    828,351
    
    
    $
    (539,019
    )
 NOTE D  Accounting for Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB
25), and related interpretations. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation(SFAS 123) as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure(SFAS 148). Pro forma net loss and income, and loss
and earnings per share, determined as if the Company had accounted for its
employee stock options under the fair value method of those Statements, for the
three and nine months ended June 30, 2004 and 2003 were as follows: For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income, as reported
    
    $
    (451,260
    )
    
    $
    (104,691
    )
    
    $
    288,993
    
    
    $
    (1,251,310
    )Stock-based compensation determined under
fair value based method for all awards
    
    
    (46,552
    )
    
    
    (23,725
    )
    
    
    (150,537
    )
    
    
    (127,023
    )Adjusted net (loss) income, assuming fair value
method for all stock-based awards
    
    $
    (497,812
    )
    
    $
    (128,416
    )
    
    $
    138,456
    
    
    $
    (1,378,333
    )Basic (loss) earnings per share, as reported
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.20
    )Diluted (loss) earnings per share, as reported
    
    
    (0.07
    )
    
    
    (0.02
    )
    
    
    0.05
    
    
    
    (0.20
    )Basic (loss) earnings per share, pro forma
    
    
    (0.08
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.22
    )Diluted (loss) earnings per share, pro forma
    
    
    (0.08
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.22
    )
 NOTE E  Senior Credit Facilities and Convertible Subordinated Debt Effective December 20, 2001, the Company entered into a bank credit agreement,
secured by substantially all the assets of the Company. The credit facility,
under the agreement as amended over its course, expired December 31, 2003, at
which time payment was due in full for the balance outstanding of $11.9
million. At that date, the Company had not yet completed its negotiations for
replacement financing and, as a result, did not repay the loan when due. On
February 5, 2004, the Company refinanced its indebtedness to its prior lender
by: (i) issuing at par $3.0 million of convertible subordinated notes that were
accompanied by warrants to purchase Company Common Stock, and (ii) entering
into new senior credit agreements between the Company and a new senior lender
and between the Companys Canadian subsidiary and a Canadian affiliate of the
new lender to the Company. 8




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The subordinated debt financing consisted of a private placement to an
accredited investor of $3.0 million in 7% convertible subordinated notes (the
Convertible Notes) and accompanying four-year warrants to purchase 515,625
shares of Company Common Stock at an exercise price of $3.51 per share (the
Warrants). The Convertible Notes are immediately convertible to Company Common
Stock at a conversion price of $3.20 per share, which would result in 937,500
shares being issued if all $3.0 million in principal of the Convertible Notes
were converted at that conversion price. The Convertible Notes are junior to
the senior credit facilities described below, bear interest at the rate of 7%
per annum, payable quarterly in shares of Common Stock, and principal is due
and payable in one lump sum in four years on February 4, 2008, unless earlier
paid or converted. The number of shares of Common Stock to be issued in
payment of interest is determined by dividing the monetary value of the accrued
interest by the initial conversion price of $3.20 per common share, or 16,406
shares per quarter. Interest expense is recorded quarterly based on the fair
value of the common shares issued. Accordingly, interest expense may fluctuate
from quarter to quarter. The Convertible Notes are unsecured. The Warrants
issued in connection with the Convertible Notes are exercisable anytime after
August 5, 2004 and expire on February 4, 2008. The conversion price of the
Convertible Notes and the exercise price of the Warrants are subject to
adjustment in the event of stock splits, dividends and in certain other
circumstances affecting the capitalization of the Company. The relative fair
value of the Warrants on February 5, 2004 was estimated to be approximately
$562,000. Furthermore, the Convertible Notes contained a beneficial conversion
feature representing an effective initial conversion price that was less than
the fair value of the underlying Common Stock on February 5, 2004. The fair
value of the beneficial conversion feature was estimated to be approximately
$853,000. Both the relative fair value of the Warrants and the fair value of
the beneficial conversion feature were recorded as an increase in additional
paid-in capital and as original issue discount on the underlying debt. The
total original issue discount of approximately $1.4 million will be amortized
to interest expense over the four-year life of the Convertible Notes. Anytime
after February 4, 2006, if the average closing price of the Companys Common
Stock has been above $7.00 per share for the preceding 15 trading days and
certain other conditions are met, the Company may issue a notice to redeem the
Convertible Notes. Holders of the Convertible Notes would then be required to
either convert the Convertible Notes to Common Stock or accept payment of 120%
of the outstanding unpaid principal. As a part of the subordinated debt financing, the Company agreed to file a
registration statement with the Securities and Exchange Commission covering the
resale from time to time of the shares of Common Stock issuable as interest on
the Convertible Notes, or upon the conversion of the Convertible Notes or
exercise of the Warrants. The Company also amended its shareholder rights plan
to permit the subordinated debt investors to beneficially own up to 25% of the
Companys Common Stock without being considered an acquiring person and
triggering the distribution and exercisability of the rights afforded under the
rights plan. The Companys senior debt financing had both a U.S. and Canadian component.
The credit facility for the Company consisted of a secured three-year term loan
of $114,000 and a secured three-year revolving credit facility of up to $8.5
million, subject to a borrowing base of accounts receivable and inventory and
certain financial covenants. The related senior loan to the Companys Canadian
subsidiary consisted of a secured, three-year term loan of $1,042,000 and a
secured three-year revolving credit facility of up to $4.0 million, subject to
a borrowing base of inventory and certain financial covenants. The senior
credit facilities total approximately $13.7 million, of which the Company and
its Canadian subsidiary used about $8.1 million at the closing. These proceeds
and proceeds from the issuance of the Convertible Notes were used to pay off
all indebtedness to the prior lender and to pay expenses related to the new
senior and subordinated debt. Availability under the senior credit facilities is based primarily on the
Companys accounts receivable and inventory levels, but also on compliance with
certain covenants, one of which is a tangible net worth covenant requiring
improved tangible net worth at specific measurement dates. The Company
believes that the tangible net worth covenant is the most restrictive covenant
due to its reliance on the improvement in the Companys net income over the
course of the fiscal year. It is the Companys intent to meet this and all the
covenants of the agreements, and the Company monitors prospective compliance
with the bank covenants. If the Company determined that revenue shortfalls or
other operating results indicate it may not meet the tangible net worth
covenant or any other covenant, the Company will initiate expense reduction
plans to achieve compliance with the covenants. The Company has developed
specific plans to reduce certain expenses in the event of covenant
non-compliance, and the plans include, but may not be limited to, reductions in
research and development costs and personnel costs. The Company believes 9




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that its plans to reduce expenses, if required to do so, will be sufficient in
order to meet the covenants at all scheduled measurement dates through
September 30, 2004. As of June 30, 2004, the Company is in compliance with all
the covenants of the credit agreements. As of June 30, 2004, indebtedness under the bank credit facilities was $8.1
million, outstanding at an estimated average annual interest rate of 4.3%. The
weighted average interest rate on all of the Companys debt was approximately
9% which gives effect to the bank credit facilities and the $3.0 million of 7%
Convertible Notes. The interest expense on all debt includes both the
amortization of the original issue discount of approximately $1.4 million over
the four-year term of the Convertible Notes and the value of the Companys
Common Stock issued at the average market price of the stock over the interest
period. Note F  Restructuring Initiatives In April 2002, the Company effected a workforce reduction, eliminating
approximately 40 positions in the Canadian subsidiary. The total estimated
cost of the restructuring of $875,000, comprised entirely of employee severance
costs, was accounted for as a cost of acquisition in accordance with SFAS 141.
The restructuring was completed by September 30, 2003, at approximately the
original cost estimate. In December 2002, the Company announced plans to consolidate its North American
manufacturing and engineering operations at its Canadian subsidiary. The
Company incurred approximately $1.1 million in restructuring expenses over the
course of the consolidation, originally estimated at $1.2 million. These
restructuring expenses were wholly comprised of employee severance costs
unrelated to the acquisition of the Canadian subsidiary and, therefore, were
properly charged to operating expense in fiscal 2003. As of December 31, 2003,
all benefits under the restructuring had been paid. 
 Item 2.Managements Discussion and Analysis of Results of Operations and
Financial Condition Overview The Companys business is the design, manufacture, sale and servicing of
advanced digital print production equipment based on its patented electron beam
imaging (EBI) technology. The Companys digital printing equipment includes
both: (i) roll-fed or web equipment (the CR Series and RS Series) where
the paper input is on rolls, and (ii) cut-sheet or sheet-fed printers and
presses (the state-of-the art Imaggia II systemand the Checktroniclegacy
system) that use pre-cut sheets of paper or base stock. The Companys EBI
technology allows extremely high speed production at high print quality. The Companys business has improved in fiscal 2004 compared with fiscal 2003.
Although the Company was not profitable in the third quarter of fiscal 2004
(the three months ended June 30, 2004), it was profitable for the first nine
months of the fiscal year. The third quarter loss was primarily driven by
lower equipment sales, down by approximately 75% from equipment sales for each
of the first and second quarters of the fiscal year. The Company attributes
weak third quarter equipment sales to postponed purchase decisions, due in part
to the Companys introduction of its new CR2000digital press at the Drupa 2004
trade show in Germany in May of this year. The CR2000runs 50% faster than the
CR1300model, with superior print quality, and will be available for sale in
the latter part of fourth quarter, fiscal 2004. Although the Companys CR1300
and CR900are fully field upgradeable to a CR2000, with respect to both speed
and print quality, the Company believes that prospects deferred their purchase
decisions until the new model is available. Critical Accounting Policies Managements Discussion and Analysis of Results of Operations and Financial
Condition discusses the Condensed Consolidated Financial Statements of the
Company, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the 10




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disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and assumptions, including those related to
inventory, income taxes, revenue recognition and restructuring initiatives.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its Condensed Consolidated Financial Statements. Inventory The Company reduces the stated value of its inventory for obsolescence or
impairment in an amount equal to the difference between the cost of the
inventory and the estimated market value, based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional reductions in
stated value may be required. Income Taxes In determining the carrying value of the Companys net deferred tax assets, the
Company must assess the likelihood of sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions, to realize the
benefit of these assets. The Company has fully reserved its net deferred tax
assets, totaling $2.9 million and $3.0 million as of June 30, 2004 and
September 30, 2003, respectively, recognizing that the Company has incurred
losses in four of the last five fiscal years, and there is no assurance that
future years will be profitable. If these estimates and assumptions change in
the future, the Company may record a reduction in the valuation allowance,
resulting in an income tax benefit in the Companys Consolidated Statements of
Operations. Management evaluates the realizability of the deferred tax assets
and assesses the valuation allowance quarterly. Revenue Recognition Systems are tested at the Companys facility prior to shipment, and revenue
related to orders shipped under standard performance conditions is recognized
when systems are shipped. Systems shipped subject to non-standard contractual
performance conditions, such as financing approval, are recognized as revenue
upon completion or attainment of the specified condition. Service revenue is
recognized as services are rendered. For spare parts, supplies and consumable
items stored at customer sites, revenue is recognized when the customer uses
the inventory. Amounts billed to customers under maintenance contracts are
recorded as deferred revenue and recognized in income over the term of the
maintenance agreement. Revenue on equipment manufactured by others is recorded
on a gross basis. Freight revenue is recorded on a gross basis and recognized
upon shipment. The related freight costs are recorded as a cost of sales. Restructuring Initiatives In April 2002, the Company effected a workforce reduction, eliminating
approximately 40 positions in the Canadian subsidiary. In December 2002, the
Company announced plans to consolidate its North American manufacturing and
engineering operations at its Canadian subsidiary. As of December 31, 2003,
the Companys restructuring initiatives had been completed. See Note F to the
Condensed Consolidated Financial Statements. 11




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Results of Operations The following table sets forth the Companys Statements of Operations as a
percentage of net sales and should be read in connection with the Condensed
Consolidated Financial Statements and notes thereto presented elsewhere in this
report. For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Sales:Maintenance, spares and supplies
    
    
    95.2
    %
    
    
    82.7
    %
    
    
    87.7
    %
    
    
    82.3
    %Printing equipment
    
    
    4.8
    
    
    
    17.3
    
    
    
    12.3
    
    
    
    17.7NET SALES
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales
    
    
    41.9
    
    
    
    48.0
    
    
    
    43.6
    
    
    
    47.7Selling, general and administrative
    
    
    50.3
    
    
    
    42.3
    
    
    
    44.8
    
    
    
    42.3Research and development
    
    
    9.8
    
    
    
    8.3
    
    
    
    8.9
    
    
    
    8.0Restructuring costs
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.7102.0
    
    
    
    98.6
    
    
    
    97.3
    
    
    
    100.7(LOSS) INCOME FROM SYSTEM SALES AND SERVICE
    
    
    (2.0
    )
    
    
    1.4
    
    
    
    2.7
    
    
    
    (0.7
    )Net interest expense
    
    
    1.8
    
    
    
    1.0
    
    
    
    1.5
    
    
    
    1.2Net realized exchange (gain) loss
    
    
    (0.6
    )
    
    
    1.1
    
    
    
    (0.1
    )
    
    
    0.4Net unrealized exchange loss
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.5(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (3.4
    )
    
    
    (0.7
    )
    
    
    1.1
    
    
    
    (2.8
    )Income tax expense
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.0NET (LOSS) INCOME
    
    
    (3.6
    )%
    
    
    (0.7
    )%
    
    
    0.7
    %
    
    
    (2.8
    )%
 Net Sales. The Companys net sales consist of revenues from: (i) maintenance
contracts, spare parts, supplies and consumable items, and (ii) sales of
printing systems and related equipment. For the three-month period ended June
30, 2004 (third quarter of fiscal 2004), net sales were $12.6 million, down 15%
from $14.8 million for the three-month period ended June 30, 2003 (third
quarter of fiscal 2003). For the nine months ended June 30, 2004, net sales
were $41.5 million, down 7% from $44.5 million for the same period a year ago.
The reduction in net sales for both the three- and nine-month periods was
primarily due to lower sales of printing equipment in the third fiscal quarter. Revenues from maintenance contracts, spare parts, supplies and consumable items
were $12.0 million for the third quarter of fiscal 2004, compared with $12.2
million for the same quarter in fiscal 2003, down 2%. For the nine months ended
June 30, 2004, revenues from maintenance contracts, spare parts, supplies and
consumable items were $36.4 million, down 1% from $36.6 million for the year
earlier period. Quarterly revenues from maintenance contracts, spare parts,
supplies and consumable items for fiscal 2004 have ranged between $12.3 million
and $12.0 million. The Company does not anticipate that fourth quarter
revenues from maintenance contracts, spare parts, supplies and consumable will
diverge significantly from previous levels. The Companys printing systems primarily consist of the CR Series, the RS
Series, the Imaggia,the Checktronicand the Foliotronicproduct lines. The CR
Seriesand RS Seriesproducts are the Companys roll-fed duplex digital
presses. The Imaggiais the Companys cut-sheet simplex digital press. The
Checktronicand Foliotronicare the Companys legacy products. The
Checktronicis now sold principally as a system upgrade or refurbished product
in 12




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Latin America, Asia and Africa. The Foliotronicis still actively marketed to
customers with folio production applications. Revenues from the sale of printing equipment were $600,000 for the third
quarter of fiscal 2004, down 77% from $2.6 million for the third quarter of
fiscal 2003. For the first nine months of fiscal 2004, revenues from the
sale of printing equipment were $5.1 million, down 35% from printing equipment
revenues of $7.9 million for the same period in fiscal 2003. The decrease in
revenues from printing equipment for the third quarter of fiscal 2004, compared
with the third quarter of fiscal 2003, was due to lower sales of all products.
For the nine months ended June 30, 2004, compared with the nine months ended
June 30, 2003, significantly lower sales of legacy products and Imaggia, were
partially offset by higher sales of roll-fed products. Gross Margin.The Companys gross margin percentages for the three and nine
months ended June 30, 2004 were 58% and 56%, respectively, compared with 52%
for the three and nine months ended June 30, 2003. The gross margins for the
three- and nine-month periods ended June 30, 2004 were higher than for the year
earlier periods primarily due to lower sales of printing equipment. In
addition, margins for the three and nine months ended June 30, 2003 were
negatively affected by costs associated with discontinuing the manufacturing
operation in Minnetonka and consolidation of the manufacturing functions in
Mississauga. Partially offsetting these shutdown costs, the Company sold
certain inventory acquired in the December 2001 Canadian acquisition at values
in excess of those originally assigned in the final purchase accounting for the
acquisition. As noted above under Critical Accounting Policies  Inventory,
actual future demand or market conditions for inventory may be more or less
favorable than projected by management, resulting in more or less favorable
margins than projected. The sale of acquired inventory also favorably affected
margins in fiscal 2004, but to a much lesser extent than in fiscal 2003. The
higher margins in the fiscal 2004 periods were achieved more from improved
pricing and cost reduction efforts than from the sale of acquired inventory.
In general, the Company anticipates that its gross margin percentage for fiscal
2004 as a whole will be higher than in fiscal 2003 but lower than for the nine
months ended June 30, 2004, as the Company expects fourth quarter fiscal 2004
revenues to be derived from a higher proportion of printing equipment revenues
at lower margins. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the third quarter were $6.3 million in fiscal 2004
and fiscal 2003, and as a percentage of net sales were 50% and 42%,
respectively. For the first nine months of fiscal 2004, selling, general and
administrative expenses of $18.6 million were 1% lower than for the first nine
months of fiscal 2003 when selling, general and administrative expenses were
$18.8 million. This decrease was primarily due to the effects of the
restructuring initiatives and cost control measures, partially offset by higher
selling, general and administrative expenses in the second quarter of fiscal
2004 as a result of costs incurred to refinance the Companys debt. Research and Development Expenses. Research and development expenses for the
third quarters of fiscal 2004 and fiscal 2003 were flat at $1.2 million, 10%
and 8% of net sales for the quarters, respectively. For the first nine months
of fiscal 2004, research and development expenses were $3.7 million, up
slightly from $3.5 million for the first nine months of fiscal 2003, 9% and 8%
of net sales, respectively. These expenses for the nine months ended June 30,
2004, compared with the same period in 2003, though only slightly higher were
the result of project costs for product speed and print quality improvements,
partially offset by cost savings from the restructuring initiatives. Net Interest Expense. Net interest expenses for the three months ended June
30, 2004 and 2003 were $236,000 and $145,000, respectively. For the first nine
months of fiscal 2004, net interest expense was $623,000, compared with
$581,000 for the same period in fiscal 2003. The increase during both the
three- and nine-month periods was primarily due to non-cash interest expense
related to the Convertible Notes issued by the Company in February 2004, which
was partially offset by lower average levels of bank debt in the fiscal 2004
periods compared with the fiscal 2003 periods. Foreign Exchange Gains and Losses. The Company incurs realized and unrealized
transactional foreign exchange gains and losses on currency conversion
transactions that are reflected on the Companys Statements of Operations.
Realized and unrealized transactional exchange gains and losses reflect actual
and anticipated, respectively, gains or losses recognized as the result of
transactions between entities with different functional currencies. The net 13




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transactional exchange gain or loss for the three and nine months ended June
30, 2004 was a gain of $50,000 for the quarter and a loss of $25,000 for the
first nine months of fiscal 2004. For the three and nine months ended June 30,
2003, net transactional exchange losses were $160,000 and $371,000,
respectively. The Company experiences translational foreign currency gains and
losses, which are reflected in the Companys equity, with gains due to the
weakening, and losses due to the strengthening, of the U.S. dollar against the
currencies of the Companys foreign subsidiaries and the resulting effect of
currency translation on the valuation of the intercompany accounts and certain
assets of the subsidiaries, which are denominated in U.S. dollars. The
functional currency of the Companys Canadian subsidiary is the U.S. dollar.
The Company anticipates that it will continue to have transactional and
translational foreign currency gains and losses from foreign operations in the
future, although strategies to reduce the magnitude of the gains and losses
will be reviewed and implemented whenever economical and practical. Income Taxes. For the three and nine months ended June 30, 2004, income tax
expenses of $19,000 and $170,000, respectively, were recognized based on
projected profitable European operations for the fiscal year. For the first
nine months of fiscal 2003, no income tax benefit was recognized on the loss
before income taxes. As of June 30, 2004 and September 30, 2003 the Company
had fully reserved deferred tax assets of $2.9 million and $3.0 million,
respectively, arising primarily from net operating loss carryforwards. The
deferred tax assets have been reserved because the Company has incurred losses
in four of the last five fiscal years and there is no assurance that future
years will be profitable. Loss or Earnings per Share.For the third quarter of fiscal 2004, the
Companys basic and diluted loss per share was $0.07, compared with basic and
diluted loss per share of $0.02 per share for the third quarter of fiscal 2003.
The decrease in earnings between periods was primarily attributable to lower
equipment sales. For the first nine months of fiscal 2004, basic and diluted
earnings per share were $0.05, compared with basic and diluted loss per share
of $0.20 for the first nine months of fiscal 2003. The increase in earnings
per share between periods was primarily due to higher gross margins in the
first nine months of fiscal 2004 compared with the first nine months of fiscal
2003, and lower expenses in fiscal 2004 because a $1.2 million charge for the
North American restructuring initiative was recognized in the first quarter of
fiscal 2003. Restructuring Initiatives.On April 23, 2002, the Company effected a workforce
reduction, eliminating approximately 40 positions in the Canadian subsidiary.
The cost of terminating the employees in these positions, estimated at
approximately $875,000, was included in the cost of the acquisition in
accordance with SFAS 141 and included in accrued expenses in the consolidated
balance sheets This initiative was completed by September 30, 2003 at
approximately the original cost estimate. By taking this action, the Company
estimated resulting annual operating expense reductions of approximately $1.3
million without affecting its ability to fulfill current or future orders. On December 4, 2002, the Company announced plans to consolidate its North
American manufacturing and engineering operations at its Canadian subsidiary.
The Company expected to incur approximately $1.2 million in restructuring
expenses over the course of the consolidation, but paid out the last of the
benefits payable for the restructuring in the first quarter of fiscal 2004,
completing the restructuring at the slightly lower cost of $1.1 million. By
taking this action, the Company estimated resulting annual operating expense
reductions of $1.6 million while improving the Companys ability to provide
customer service and fulfill current and future orders. The expense reductions realized and anticipated from the restructuring actions
taken are not directly accretive to results of operations, as reductions in
certain expenses may be reinvested in other endeavors, such as marketing or
research and development. Market Risk The Company has foreign subsidiaries located in Canada, the United Kingdom and
France, does business in more than 60 countries and generates approximately 28%
of its revenues from outside North America. The Companys ability to sell its
products in foreign markets may be affected by changes in economic, political
or market conditions in the foreign markets in which it does business. 14




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The Companys net investment in its foreign subsidiaries was $7.9 million and
$7.2 million at June 30, 2004 and September 30, 2003, respectively, translated
into U.S. dollars at the closing exchange rates. The potential loss based on
end-of-period balances and prevailing exchange rates resulting from a
hypothetical 10% strengthening of the U.S. dollar against foreign currencies
was not material in the quarter ended June 30, 2004. The functional currency
of the Canadian subsidiary is the U.S. dollar. From time to time, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In the first nine months
of fiscal 2004 and fiscal 2003, the Company did not enter into any foreign
exchange contracts and does not anticipate entering into any such contracts in
the near future, although strategies to reduce the magnitude of the Companys
foreign exchange gains and losses will be reviewed and implemented whenever
economical and practical. Interest Rate Risk Substantially all of the Companys bank debt and the associated interest
expense are sensitive to changes in the level of interest rates. A
hypothetical 100 basis point increase in interest rates would result in
incremental interest expense for the three-month periods ended June 30, 2004
and 2003 of approximately $19,000 and $33,000, respectively, and for the
nine-month periods then ended of approximately $76,000 and $103,000,
respectively. Interest on the convertible notes is determined by dividing the monetary value
of the accrued interest at a fixed 7% rate by the initial conversion price of
$3.20 per common share, or 16,406 shares per quarter. Interest expense on the
convertible notes is recorded quarterly based on the fair value of the common
shares issued measured as the average closing price of the common stock over
the period multiplied times the number of common shares issued. Accordingly,
interest expense on the Convertible Notes may fluctuate from quarter to quarter
but is not subject to interest rate risk. Factors Affecting Results of Operations The Companys revenues are subject to fluctuations, which may be material. The
Companys net sales and operating results may fluctuate from quarter to quarter
because: (i) the Companys sales cycle is relatively long, (ii) the size of
orders may vary significantly, (iii) the availability of financing for
customers in some countries is variable, (iv) customers may postpone or cancel
orders, and (v) economic, political and market conditions in some markets
change with minimal notice and affect the timing and size of orders. Because
the Companys operating expenses are based on anticipated revenue levels and a
high percentage of the Companys operating costs are relatively fixed,
variations in the timing of revenue recognition will result in significant
fluctuations in operating results from period to period. The Company has two significant customers that accounted for 23% and 21% of net
sales in the third quarter of fiscal 2004 and 17% and 26% of net sales in the
third quarter of fiscal 2003. For the nine-month period ended June 30, 2004,
net sales from these customers were 20% and 19% of net sales, and 11% and 21%
of net sales for the nine months ended June 30, 2003. The Company anticipates,
but cannot assure, that these customers will continue to be significant in the
fourth quarter of fiscal 2004 and beyond. However, the loss of, or significant
decrease in sales to, either of these customers could have a material adverse
effect on the Company. The Company is dependent on its credit facilities to fund its operations. The
Companys ability to maintain working capital depends on its compliance with
the credit agreements. The Companys credit facilities are discussed below
under the heading Liquidity and Capital Resources. Liquidity and Capital Resources Working capital was $22.2 million at June 30, 2004, compared with $11.4 million
at September 30, 2003. This increase in working capital was primarily the
result of refinancing the Companys debt, whereby $13.9 million of current debt
as of September 30, 2003 was refinanced over three to four years. Accounts
receivable were down from $11.0 million at September 30, 2003, to $9.8 million
at June 30, 2004, primarily due to lower sales in the third quarter of fiscal
2004 than in the fourth quarter of fiscal 2003. Inventory increased from $17.9
million at September 15




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30, 2003, to $20.9 million at June 30, 2004, due to replenishment of printing
equipment and other inventory. A long-term note receivable from a customer of
approximately $650,000 was foreclosed during the third quarter of fiscal 2004
resulting in notes receivable from customers and deferred revenue lower at June
30, 2004 compared with September 30, 2003 Accounts payable and accrued
expenses increased $2.2 million from $6.8 million at September 30, 2003, to
$9.0 million at June 30, 2004. The increase was primarily due to increased
inventory purchases and timing of payments. The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at June 30, 2004, the
Company had no material commitments for capital expenditures. Short-term
investments are purchased as cash is available and sold as they mature. On February 5, 2004, the Company refinanced its debt by: (i) issuing at par
$3.0 million of 7% convertible subordinated notes that were accompanied by
warrants to purchase Company Common Stock, and (ii) entering into new senior
credit agreements between the Company and a new senior lender and between the
Companys Canadian subsidiary and a Canadian affiliate of the new lender to the
Company. (See Note E to the Condensed Consolidated Financial Statements for
details.) The Company believes that its current financial arrangements and
anticipated level of internally generated funds will be sufficient to fund its
working capital requirements throughout fiscal 2004. Cautionary Statement Statements included in this Managements Discussion and Analysis of Results of
Operations and Financial Condition, the Companys Annual Report, the Companys
Form 10-K, in other filings with the Securities and Exchange Commission, in the
Companys press releases and in oral statements made to securities market
analysts and shareholders, which are not historical or current facts, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties that could cause the Companys actual
results to differ materially from historical earnings and those presently
anticipated or projected. The factors mentioned under the subheading Factors Affecting Results of
Operations are among those that in some cases have affected, and in the future
could affect, the Companys actual results, and could cause the Companys
actual financial performance to differ materially from that expressed in any
forward-looking statement. 
 Item 3.Quantitative and Qualitative Disclosure of Market Risk The information called for by this item is provided under the caption Market
Risk under Item 2.  Managements Discussion and Analysis of Results of
Operations and Financial Condition. 
 Item 4.Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Companys Chairman and Chief Executive Officer, Jay A. Herman, and
Vice President and Chief Financial Officer, Jeffrey S. Mathiesen, have reviewed
the Companys disclosure controls and procedures at the end of the quarter.
Based upon this review, these officers believe that the Companys disclosure
controls and procedures are effective in ensuring that material information
related to the Company is made known to them by others within the Company. (b) Changes in Internal Controls. There were no significant changes in the Companys internal controls over
financial reporting that occurred during the fiscal quarter covered by this
report that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. 16




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 2.Recent Sales of Unregistered Securities On April 1, 2004, the Company issued 10,068 shares of Company Common Stock in
payment of $44,000 of accrued interest as of March 31, 2004 on the Companys
Convertible Notes. As of June 30, 2004, interest of $81,000 on the Convertible
Notes was accrued related to the 16,406 shares issued on July 1, 2004. The
Convertible Notes provide for 7% interest in the form of shares of Company
Common Stock, issued on the first business day of each calendar quarter,
computed based on the initial conversion price of $3.20 per share. The
Convertible Notes and accompanying warrants issued on February 5, and the
shares issued on April 1 and July 1, were issued in reliance on the exemption
afforded by Section 4(2) of the Securities Act of 1933, as amended. No
underwriting discounts or commissions were paid. 
 Item 5.Other Information Effective March 25, 2004, Robert Barniskis resigned as the Companys Chief
Financial Officer to take a position with another company. Throughout the
quarter ended June 30, 2004, the Companys Chief Executive Officer and
Controller performed the functions typically performed by the Chief Financial
Officer. Effective July 12, 2004, Jeffrey Mathiesen joined the Company as Vice
President and Chief Financial Officer. 
 Item 6.Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act). 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act). 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. § 1350). 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. § 1350). (b) The following report
on Form 8-K was filed during the three months ended
June 30, 2004: May 5, 2004  Form 8-K: Item 12. Disclosure of Results of
Operations and Financial Condition  Earnings release issued May 5,
2004 for the quarter ended March 31, 2004. 17




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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. DELPHAX TECHNOLOGIES INC.RegistrantDate
    
    August 11, 2004
    
    /s/ Jay A. Herman
Jay A. Herman
Chairman and Chief Executive OfficerDate
    
    August 11, 2004
    
    /s/ Jeffrey S. Mathiesen
Jeffrey S. Mathiesen
Vice President and Chief Financial Officer
 18