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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 March 31, 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 Drive
Minnetonka, Minnesota
    
    55343-9420(Address of principal executive offices)
    
    (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 [  ]Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]
No [X]Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practical date.As of May 7, 2004, there were 6,249,941 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  March 31, 2004 and September 30, 2003Condensed consolidated statements of operations  Three and six months ended March 31, 2004 and 2003Condensed consolidated statements of cash flows  Six months ended March 31, 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 4.
    
    Submission of Matters to a Vote of Security HoldersItem 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 March 31,
    
    September 30,2004
    
    2003(Unaudited)ASSETS
CURRENT ASSETSCash and cash equivalents
    
    $
    1,846,688
    
    
    $
    2,669,763Short-term investments
    
    
    
    
    
    
    41,608Accounts receivable, less allowance for doubtful
accounts of $772,751 and $737,018 as of March
31,
2004 and September 30, 2003, respectively
    
    
    10,611,959
    
    
    
    11,037,583Current portion of notes receivable from customers
    
    
    115,457
    
    
    
    105,377Inventory:Raw materials and component parts
    
    
    11,650,525
    
    
    
    11,321,554Work-in-progress
    
    
    1,204,285
    
    
    
    1,057,264Finished goods
    
    
    6,476,962
    
    
    
    5,479,88219,331,772
    
    
    
    17,858,700Other current assets
    
    
    1,831,744
    
    
    
    1,283,604TOTAL CURRENT ASSETS
    
    
    33,737,620
    
    
    
    32,996,635Long-term portion of notes receivable from customers
    
    
    603,386
    
    
    
    614,408
EQUIPMENT AND FIXTURESMachinery and equipment
    
    
    4,563,398
    
    
    
    4,569,678Furniture and fixtures
    
    
    4,111,164
    
    
    
    3,748,663Leasehold improvements
    
    
    2,356,482
    
    
    
    2,342,68211,031,044
    
    
    
    10,661,023Less accumulated depreciation and amortization
    
    
    8,072,935
    
    
    
    7,199,8182,958,109
    
    
    
    3,461,205TOTAL ASSETS
    
    $
    37,299,115
    
    
    $
    37,072,248
 See notes to condensed consolidated financial statements. 3




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    September 30,2004
    
    2003(Unaudited)LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIESAccounts payable
    
    $
    5,401,323
    
    
    $
    3,422,082Accrued expenses
    
    
    3,533,927
    
    
    
    3,356,644Income taxes payable
    
    
    491,121
    
    
    
    375,444Current portion of bank credit facility
    
    
    1,284,633
    
    
    
    13,900,000Current portion of capital leases
    
    
    30,893
    
    
    
    44,289Deferred revenue
    
    
    697,416
    
    
    
    505,480TOTAL CURRENT LIABILITIES
    
    
    11,439,313
    
    
    
    21,603,939Long-term portion of bank credit facilities
and subordinated convertible debt
    
    
    7,685,590
    
    
    
    Long-term portion of deferred revenues
    
    
    558,896
    
    
    
    614,408Long-term portion of capital leases
    
    
    25,371
    
    
    
    33,566TOTAL LIABILITIES
    
    
    19,709,170
    
    
    
    22,251,913SHAREHOLDERS EQUITYCommon stock  par value $.10 per share  authorized
50,000,000 shares; issued and outstanding: 6,239,873 and 6,214,873 as of March 31, 2004 and
September 30, 2003, respectively
    
    
    623,987
    
    
    
    621,487Additional paid-in capital
    
    
    18,641,783
    
    
    
    17,151,389Accumulated other comprehensive loss
    
    
    (635,702
    )
    
    
    (1,172,165
    )Accumulated deficit
    
    
    (1,040,123
    )
    
    
    (1,780,376
    )TOTAL SHAREHOLDERS EQUITY
    
    
    17,589,945
    
    
    
    14,820,335TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    37,299,115
    
    
    $
    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 Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Sales:Maintenance, spares and supplies
    
    $
    12,296,439
    
    
    $
    12,132,000
    
    
    $
    24,420,009
    
    
    $
    24,393,324Printing equipment
    
    
    2,377,246
    
    
    
    2,098,602
    
    
    
    4,496,401
    
    
    
    5,312,174NET SALES
    
    
    14,673,685
    
    
    
    14,230,602
    
    
    
    28,916,410
    
    
    
    29,705,498
Costs and Expenses:Cost of sales
    
    
    6,119,763
    
    
    
    6,325,001
    
    
    
    12,830,735
    
    
    
    14,141,085Selling, general and administrative
    
    
    6,701,232
    
    
    
    6,345,018
    
    
    
    12,271,345
    
    
    
    12,563,915Research and development
    
    
    1,206,585
    
    
    
    1,200,247
    
    
    
    2,460,970
    
    
    
    2,315,940Restructuring costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185,00014,027,580
    
    
    
    13,870,266
    
    
    
    27,563,050
    
    
    
    30,205,940INCOME (LOSS) FROM SYSTEM SALES AND SERVICE
    
    
    646,105
    
    
    
    360,336
    
    
    
    1,353,360
    
    
    
    (500,442
    )
Net interest expense
    
    
    192,094
    
    
    
    219,935
    
    
    
    387,332
    
    
    
    435,748Net realized exchange (gain) loss
    
    
    (42,305
    )
    
    
    32,634
    
    
    
    13,203
    
    
    
    9,074Net unrealized exchange loss
    
    
    40,156
    
    
    
    117,044
    
    
    
    61,572
    
    
    
    201,355INCOME (LOSS) BEFORE INCOME TAXES
    
    
    456,160
    
    
    
    (9,277
    )
    
    
    891,253
    
    
    
    (1,146,619
    )
Income tax expense
    
    
    76,000
    
    
    
    
    
    
    
    151,000
    
    
    
    NET INCOME (LOSS)
    
    $
    380,160
    
    
    $
    (9,277
    )
    
    $
    740,253
    
    
    $
    (1,146,619
    )Basic and diluted earnings (loss) per common share:Basic and diluted
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.12
    
    
    $
    (0.19
    )Weighted average number of shares outstanding
during the period:Basic
    
    
    6,216,842
    
    
    
    6,175,898
    
    
    
    6,215,852
    
    
    
    6,175,898Diluted
    
    
    6,401,250
    
    
    
    6,175,898
    
    
    
    6,332,361
    
    
    
    6,175,898
 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 Six Months EndedMarch 31,2004
    
    2003OPERATING ACTIVITIESNet income (loss)
    
    $
    740,253
    
    
    $
    (1,146,619
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    695,486
    
    
    
    917,585Loss on disposal of equipment and fixtures
    
    
    137,250
    
    
    
    Non-cash interest on 7% convertible subordinated notes
    
    
    43,745
    
    
    
    Other
    
    
    (202,084
    )
    
    
    55,099Changes in operating assets and liabilities:Accounts receivable, net
    
    
    683,482
    
    
    
    (489,553
    )Inventory
    
    
    (994,638
    )
    
    
    2,207,727Other current assets
    
    
    (376,007
    )
    
    
    64,168Notes receivable from customers
    
    
    (115,457
    )
    
    
    Accounts payable and accrued expenses
    
    
    2,123,453
    
    
    
    440,269Deferred revenue
    
    
    130,674
    
    
    
    104,668NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    2,866,157
    
    
    
    2,153,344INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (325,038
    )
    
    
    (353,857
    )Sale of short-term investments
    
    
    44,410
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (280,628
    )
    
    
    (353,857
    )FINANCING ACTIVITIESIssuance of 7% convertible subordinated notes
    
    
    3,000,000
    
    
    
    Issuance of common stock
    
    
    79,199
    
    
    
    Repayment on bank credit facilities, net
    
    
    (6,569,673
    )
    
    
    (1,880,000
    )Principal payments on capital lease obligations
    
    
    (21,592
    )
    
    
    (15,784
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (3,512,066
    )
    
    
    (1,895,784
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    103,462
    
    
    
    1,152DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (823,075
    )
    
    
    (95,145
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,669,763
    
    
    
    1,717,973CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,846,688
    
    
    $
    1,622,828
 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 earnings
and loss per share: For the Three Months Ended
    
    For the Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Numerator:Net income (loss)
    
    $
    380,160
    
    
    $
    (9,277
    )
    
    $
    740,253
    
    
    $
    (1,146,619
    )Numerator for basic and diluted earnings
per share  income (loss) applicable to
common shareholders
    
    $
    380,160
    
    
    $
    (9,277
    )
    
    $
    740,253
    
    
    $
    (1,146,619
    )
Denominator:Denominator for basic earnings per share,
weighted average shares
    
    
    6,216,842
    
    
    
    6,175,898
    
    
    
    6,215,852
    
    
    
    6,175,898
Dilutive potential common shares:Employee stock options
    
    
    154,620
    
    
    
    
    
    
    
    101,997
    
    
    
    Warrants
    
    
    29,788
    
    
    
    
    
    
    
    14,512
    
    
    
    184,408
    
    
    
    
    a
    
    
    116,509
    
    
    
    
    aDenominator for diluted earnings per share,
adjusted weighted average shares
    
    
    6,401,250
    
    
    
    6,175,898
    
    
    
    6,332,361
    
    
    
    6,175,898
Earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.12
    
    
    $
    (0.19
    )
Earnings (loss) per common share,
assuming dilution
    
    
    0.06
    
    
    
    (0.00
    )
    
    
    0.12
    
    
    
    (0.19
    )
 a  No incremental shares related to options are included because the impact
would be antidilutive. 7




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NOTE C  Comprehensive Income The components of comprehensive income and loss, net of related tax, for the
three and six months ended March 31, 2004 and 2003 were as follows: For the Three Months Ended
    
    For the Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    380,160
    
    
    $
    (9,277
    )
    
    $
    740,253
    
    
    $
    (1,146,619
    )Foreign currency translation adjustment
    
    
    118,814
    
    
    
    83,096
    
    
    
    536,463
    
    
    
    202,102Comprehensive income (loss)
    
    $
    498,974
    
    
    $
    73,819
    
    
    $
    1,276,716
    
    
    $
    (944,517
    )
 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 income and loss, and
earnings and loss 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 six months ended March 31, 2004 and 2003 were as follows: For the Three Months Ended
    
    For the Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    380,160
    
    
    $
    (9,277
    )
    
    $
    740,253
    
    
    $
    (1,146,619
    )Stock-based compensation determined under
fair value based method for all awards
    
    
    (51,993
    )
    
    
    (49,661
    )
    
    
    (103,985
    )
    
    
    (103,298
    )Adjusted net income (loss), assuming fair value
method for all stock-based awards
    
    $
    328,167
    
    
    $
    (58,938
    )
    
    $
    636,268
    
    
    $
    (1,249,917
    )Basic earnings (loss) per share, as reported
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    0.12
    
    
    $
    (0.19
    )Diluted earnings (loss) per share, as reported
    
    
    0.06
    
    
    
    (0.00
    )
    
    
    0.12
    
    
    
    (0.19
    )Basic earnings (loss) per share, pro forma
    
    
    0.05
    
    
    
    (0.01
    )
    
    
    0.10
    
    
    
    (0.20
    )Diluted earnings (loss) per share, pro forma
    
    
    0.05
    
    
    
    (0.01
    )
    
    
    0.10
    
    
    
    (0.20
    )
 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 $144,000 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 that 9




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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 March 31, 2004, the Company is in compliance will all the
covenants of the credit agreements. As of March 31, 2004, indebtedness
under the bank credit facilities was $7.4 million, outstanding at an estimated
average annual interest rate of 4.5%. The weighted average interest rate on all of the Company's debt is approximately 9.0% which gives effect to the bank credit facilities
and the $3.0 million in 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 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) 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, and (ii) roll-fed or web equipment
(the CR Series and RS Series) where the paper input is on rolls. The Companys
EBI technology allows extremely high speed production at high print quality. The
Companys business has improved in fiscal 2004 with two profitable quarters.
For the second quarter of fiscal 2004 (the three months ended March 31, 2004)
compared with the same quarter in fiscal 2003, total revenues were up 3%. The
number of CR Seriespresses in the installed base increased from eight systems
at the end of fiscal 2003 to 13 systems as of March 31, 2004, with three
systems sold in the second quarter, indicative of growing acceptance of the
Companys roll-fed products. The Company continues to pursue opportunities to
capitalize on its EBI technology through direct sales and OEM channels. 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 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. 10




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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 $2.7 million and $3.0 million as of March 31, 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 Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Sales:Maintenance, spares and supplies
    
    
    83.8
    %
    
    
    85.3
    %
    
    
    84.5
    %
    
    
    82.1
    %Printing equipment
    
    
    16.2
    
    
    
    14.7
    
    
    
    15.5
    
    
    
    17.9NET SALES
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales
    
    
    41.7
    
    
    
    44.4
    
    
    
    44.4
    
    
    
    47.6Selling, general and administrative
    
    
    45.6
    
    
    
    44.7
    
    
    
    42.4
    
    
    
    42.3Research and development
    
    
    8.2
    
    
    
    8.4
    
    
    
    8.5
    
    
    
    7.8Restructuring costs
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    4.095.5
    
    
    
    97.5
    
    
    
    95.3
    
    
    
    101.7INCOME (LOSS) FROM SYSTEM SALES AND
SERVICE
    
    
    4.5
    
    
    
    2.5
    
    
    
    4.7
    
    
    
    (1.7
    )Net interest expense
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.4
    
    
    
    1.5Net realized exchange (gain) loss
    
    
    (0.3
    )
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.0Net unrealized exchange loss
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.2
    
    
    
    0.7INCOME (LOSS) BEFORE INCOME TAXES
    
    
    3.1
    
    
    
    (0.1
    )
    
    
    3.1
    
    
    
    (3.9
    )Income tax expense
    
    
    0.5
    
    
    
    0.0
    
    
    
    0.5
    
    
    
    0.0NET INCOME (LOSS)
    
    
    2.6
    %
    
    
    (0.1
    )%
    
    
    2.6
    %
    
    
    (3.9
    )%
 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 March
31, 2004 (second quarter of fiscal 2004), net sales were $14.7 million, up 3%
from $14.2 million for the three-month period ended March 31, 2003 (second
quarter of fiscal 2003). For the six months ended March 31, 2004, net sales
were $28.9 million, down 3% from $29.7 million for the same period a year ago. Revenues from maintenance contracts, spare parts, supplies and consumable items
were flat for the three and six months ended March 31, 2004 compared with the
same periods in fiscal 2003, with revenues of $12.3 million and $12.1 million
for the second quarter of fiscal 2004 and fiscal 2003, respectively, and $24.4 million
for each of the six-month periods ended March 31, 2004 and 2003. The Company
expects revenues from maintenance contracts, spare parts, supplies and
consumable items to continue throughout fiscal 2004 at levels slightly higher
than in fiscal 2003 as a result of adding several roll-fed units to the
installed base. The Companys
printing systems primarily consist of the Imaggia,the CR Series, the RS
Series, the Checktronicand the Foliotronicproduct lines. The Imaggiais the
Companys cut-sheet simplex digital press. The CR Seriesand RS Series
products are the Companys roll-fed duplex digital presses. The Checktronic
and Foliotronicare the Companys legacy products. The Checktronicis now
sold principally as a system upgrade or refurbished product in Latin America, Asia and Africa. The Foliotronicis
still actively marketed to customers with folio production applications. Revenues from the sale of printing equipment were $2.4 million for the second
quarter of fiscal 2004, up 13% from $2.1 million for the second quarter of
fiscal 2003. For the first six months of fiscal 2004, revenues from the sale
of printing equipment were $4.5 million, down 15% from printing equipment
revenues for the same period in fiscal 2003 of $5.3 million. 12




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The
increase in revenues from printing equipment for the second quarter of fiscal
2004, compared with the second quarter of fiscal 2003, was due to significantly
higher sales of the roll-fed products. For the six months ended March 31,
2004, compared with the six months ended March 31, 2003, significantly higher
sales of roll-fed products were more than offset by significantly lower legacy
product and Imaggiasales. Gross Margin.The Companys gross margin percentage for the second quarter of
fiscal 2004 was 58%, compared with 56% for the second quarter of fiscal 2003.
For the fiscal-year-to-date periods, the gross margin percentages were 56% and
52%, respectively, for fiscal 2004 and fiscal 2003. The gross margins for the
three- and six-month periods ended March 31, 2004 and March 31, 2003 were
positively affected by the sale of 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 cited 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 favorably affected margins in fiscal 2003 more than in fiscal 2004.
However, cost of sales for the three and six months ended March 31, 2003 were
unfavorably affected by the costs associated with consolidating the Companys
manufacturing operation in Canada and discontinuing those functions in the
Minnetonka facility. 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 in fiscal 2004 as a whole will be approximately the same as
in fiscal 2003, as the Company expects full-year 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 second quarter increased 6%, from $6.3 million
in fiscal 2003, to $6.7 million in fiscal 2004, and as a percentage of net
sales were 45% and 46%, respectively. The increase was primarily due to
accounting, legal and consulting costs associated with the refinance of the
Companys debt and the filing of our amended Form 10-K, but also reflected
increases in health insurance premiums, unemployment taxes and other operating
expenses. For the first six months of fiscal 2004, selling, general and
administrative expenses of $12.3 million were 2% lower than for the first six
months of fiscal 2003 when selling, general and administrative expenses were
$12.6 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. Research and Development Expenses. Research and development expenses for the
second quarters of fiscal 2004 and fiscal 2003 were flat at $1.2 million and 8%
of net sales in both quarters. For the first half of fiscal 2004, research and
development expenses were $2.5 million, up 6% from $2.3 million for the first
half of fiscal 2003, or 9% and 8% of net sales, respectively. These expenses
for the six months ended March 31, 2004, compared with the same period in 2003
were higher as a 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 March
31, 2004 and 2003 were $192,000 and $220,000, respectively. For the first six
months of fiscal 2004, net interest expense was $387,000, compared with
$436,000 for the same period in fiscal 2003. The decrease in net interest
expense between periods was primarily due to the lower average debt levels of
the Company in the first half of fiscal 2004 compared with the first half of
fiscal 2003. 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
transactional exchange gain or loss for the three and six months ended March
31, 2004 was a gain of $2,000 for the quarter and a loss of $75,000 for the
first six months of fiscal 2004. For the three and six months ended March 31,
2003, net transactional exchange losses were $150,000 and $210,000,
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 13




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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 six months ended March 31, 2004, income tax
expenses of $76,000 and $151,000, respectively, were recognized based on
projected profitable European operations for the fiscal year. For the first
half of fiscal 2003, no income tax benefit was recognized on the loss before
income taxes. As of March 31, 2004 and September 30, 2003 the Company had
fully reserved deferred tax assets of $2.7 million and $3.0 million,
respectively, arising primarily from net operating loss
carryforwards. The deferred tax assets have been reserved 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. Earnings or Loss per Share.For the second quarter of fiscal 2004, the
Companys basic and diluted earnings per share were $0.06, compared with basic
and diluted loss per share of zero cents per share for the second quarter of
fiscal 2003. The increase in earnings between periods was primarily
attributable to higher equipment sales and margins. For the first six months
of fiscal 2004, basic and diluted earnings per share were $0.12, compared with
basic and diluted loss per share of $0.19 for the first half of fiscal 2003.
The increase in earnings per share between periods was primarily due to higher
margins in the first half of fiscal 2004 compared with the first half of fiscal
2003, and lower expenses as a charge of $1.2 million 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 30%
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. The
Companys net investment in its foreign subsidiaries was $7.9 million and
$7.2 million at March 31, 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 March 31, 2004. The functional currency
of the Canadian subsidiary is the U.S. dollar. 14




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From time to time, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In the first six months
of fiscal 2004, 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 in the three-month periods ended March 31, 2004
and 2003 of approximately $33,000, and for the six-month periods then ended of
$70,000 and $65,000, 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 effect 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 20% and 19% of net
sales in the second quarter of fiscal 2004 and 8% and 21% of net sales in the
second quarter of fiscal 2003. For the six-month periods ended March 31, 2004,
net sales from these customers were 19% and 18%, respectively of net sales and
8% and 19% of net sales for the six months ended March 31, 2003. The Company
anticipates, but cannot assure, that these customers will continue to be
significant throughout fiscal 2004. 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 $22.3 million at March 31, 2004, compared with $11.4
million at September 30, 2003. This increase in working capital was primarily
the result of the refinance of 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 slightly from $11.0 million at September 30,
2003, to $10.6 million at March 31, 2004. Inventory increased from $17.9
million at September 30, 2003, to $19.3 million at March 31, 2004, with
increases in all inventory categories due to replenishment of printing
equipment and other inventory. In addition, finished goods inventory was up
due to an additional demonstration unit in the field. Accounts payable and
accrued expenses increased $2.1 million from $6.8 million at September 30,
2003, to $8.9 million at March 31, 2004. The increase was primarily due to increased
inventory purchases and timing of payments. 15




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The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at March 31, 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
Controller, Karen M. Caughey, have reviewed the Companys disclosure controls
and procedures within 90 days prior to the filing of this report. 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 February 5, 2004 the Company issued to a single accredited investor: (i)
$3.0 million in 7% convertible subordinated notes that are convertible into
shares of Company Common Stock at an initial conversion price of $3.20 per
share, and (ii) warrants to purchase an additional 515,625 shares of Company
Common Stock at an exercise price of $3.51 per share (subject to certain
adjustments). The total consideration paid to the Company for the Convertible
Notes and warrants was $3.0 million in cash. No underwriting discounts or
commissions were paid. The Convertible Notes provide for payment of 7% interest in the form of shares
of Company Common Stock on the first business day of each calendar quarter.
Accordingly, no shares were issued in payment of interest during the period
ended March 31, 2004, but 10,068 shares of Company Common Stock were issued on
April 1, 2004 in payment of $44,000 of accrued interest. The number of shares
was computed as provided in the Convertible Notes on the basis of 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, were issued in
reliance on the exemption afforded by Section 4(2) of the Securities Act of
1933, as amended. 
 Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on March 18, 2004. At the
Annual Meeting, the shareholders re-elected R. Stephen Armstrong and Gary R.
Holland to serve through the 2007 Annual meeting. Mr. Armstrongs re-election
was by a vote of 5,547,379 shares in favor, 200,786 shares withholding
authority and a broker non-vote of zero shares. Mr. Hollands re-election was
by a vote of 5,677,349 shares in favor, 70,816 shares withholding authority and
a broker non-vote of zero shares. Shareholders also approved the selection of
Ernst & Young LLP as the Companys independent public auditors for fiscal 2004
by a vote of 5,729,232 shares in favor, 18,333 shares against, 600 shares
abstaining and a broker non-vote of zero shares. 
 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. The Company is
conducting a search for a new Chief Financial Officer, and in the interim, the
Companys Chief Executive Officer and Controller are performing the functions
typically performed by the 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 reports on Form 8-K were filed during the three months ended
March 31, 2004: February 5, 2004  Form 8-K: Item 5. Other Events and Reg FD Disclosure
 Delphax Technologies Inc. refinanced its indebtedness to it prior
lender by: (i) issuing at par $3 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. 17




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February 17, 2004  Form 8-K: Item 12. Disclosure of Results of
Operations and Financial Condition  Earnings release issued
February 17, 2004 for the quarter ended December 31, 2003. 18




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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 May 11, 2004
    
    /s/ Jay A. HermanJay A. HermanChairman and Chief Executive OfficerDate May 11, 2004
    
    /s/ Karen M. CaugheyKaren M. CaugheyController
 19