##### Table of Contents



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, 2005 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
    
    55343-9420(Address of principal executive offices)
    
    (Zip Code)
 (952) 939-9000 
 Registrants telephone number, including area code Not Applicable 
 Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practical date. As of May 2, 2005, there were 6,323,000 shares outstanding of Common Stock.




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DELPHAX TECHNOLOGIES INC.
INDEX PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed consolidated balance sheets  March 31, 2005 and September 30, 2004Condensed consolidated statements of operations  Three and six months ended March 31, 2005 and 2004Condensed consolidated statements of cash flows  Three and six months ended March 31, 2005 and 2004Notes 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. 
 CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    September 30,2005
    
    
    2004(In thousands)(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,066
    
    
    $
    1,314Accounts receivable, less allowance for doubtful accounts of $205 and
$247 as of March 31, 2005 and September 30, 2004, respectively
    
    
    8,925
    
    
    
    7,897Inventory
    
    
    19,812
    
    
    
    21,710Other current assets
    
    
    1,838
    
    
    
    2,203TOTAL CURRENT ASSETS
    
    
    31,641
    
    
    
    33,124Equipment and fixtures, net
    
    
    1,941
    
    
    
    2,368TOTAL ASSETS
    
    $
    33,582
    
    
    $
    35,492LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIESAccounts payable
    
    $
    2,664
    
    
    $
    5,609Accrued compensation
    
    
    1,978
    
    
    
    2,025Other accrued expenses
    
    
    985
    
    
    
    813Income taxes payable
    
    
    
    
    
    
    78Current portion of bank credit facilities
    
    
    1,154
    
    
    
    1,266Current portion of capital leases
    
    
    105
    
    
    
    99Customer deposits
    
    
    1,450
    
    
    
    696Deferred revenue
    
    
    520
    
    
    
    468TOTAL CURRENT LIABILITIES
    
    
    8,856
    
    
    
    11,054Long-term portion of bank credit facilities and 7% convertible
subordinated notes
    
    
    7,810
    
    
    
    7,738Long-term portion of capital leases
    
    
    126
    
    
    
    179TOTAL LIABILITIES
    
    
    16,792
    
    
    
    18,971SHAREHOLDERS EQUITYCommon stock  par value $0.10 per share  authorized 50,000 shares;
issued and outstanding: 6,306 and 6,271 as of March 31, 2005
and September 30, 2004, respectively
    
    
    631
    
    
    
    627Additional paid-in capital
    
    
    18,906
    
    
    
    18,774Accumulated other comprehensive loss
    
    
    (321
    )
    
    
    (711
    )Accumulated deficit
    
    
    (2,426
    )
    
    
    (2,169
    )TOTAL SHAREHOLDERS EQUITY
    
    
    16,790
    
    
    
    16,521TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    33,582
    
    
    $
    35,492
 See notes to unaudited condensed consolidated financial statements. 3




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DELPHAX TECHNOLOGIES INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)(Unaudited)Sales:Maintenance, spares and supplies
    
    $
    11,260
    
    
    $
    12,296
    
    
    $
    22,848
    
    
    $
    24,420Printing equipment
    
    
    1,587
    
    
    
    2,377
    
    
    
    2,969
    
    
    
    4,496NET SALES
    
    
    12,847
    
    
    
    14,673
    
    
    
    25,817
    
    
    
    28,916Cost of sales
    
    
    5,669
    
    
    
    6,120
    
    
    
    11,956
    
    
    
    12,831GROSS PROFIT
    
    
    7,178
    
    
    
    8,553
    
    
    
    13,861
    
    
    
    16,085Operating Expenses:Selling, general and administrative
    
    
    5,697
    
    
    
    6,701
    
    
    
    11,443
    
    
    
    12,271Research and development
    
    
    1,013
    
    
    
    1,207
    
    
    
    2,082
    
    
    
    2,4616,710
    
    
    
    7,908
    
    
    
    13,525
    
    
    
    14,732INCOME FROM OPERATIONS
    
    
    468
    
    
    
    645
    
    
    
    336
    
    
    
    1,353Net interest expense
    
    
    269
    
    
    
    192
    
    
    
    528
    
    
    
    387Net realized exchange (gain) loss
    
    
    (54
    )
    
    
    (43
    )
    
    
    117
    
    
    
    13Net unrealized exchange (gain) loss
    
    
    (21
    )
    
    
    40
    
    
    
    (76
    )
    
    
    62INCOME (LOSS) BEFORE INCOME TAXES
    
    
    274
    
    
    
    456
    
    
    
    (233
    )
    
    
    891Income tax expense
    
    
    12
    
    
    
    76
    
    
    
    24
    
    
    
    151NET INCOME (LOSS)
    
    $
    262
    
    
    $
    380
    
    
    $
    (257
    )
    
    $
    740Basic and diluted earnings (loss) per common share
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    0.12Weighted average number of shares outstanding
during the period:Basic
    
    
    6,306
    
    
    
    6,217
    
    
    
    6,296
    
    
    
    6,216Diluted
    
    
    6,366
    
    
    
    6,401
    
    
    
    6,296
    
    
    
    6,332
 See notes to unaudited condensed consolidated financial statements. 4




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DELPHAX TECHNOLOGIES INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months EndedMarch 31,2005
    
    
    2004(In thousands)(Unaudited)OPERATING ACTIVITIESNet (loss) income
    
    $
    (257
    )
    
    $
    740Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    564
    
    
    
    695Non-cash
interest on 7% convertible subordinated notes
    
    
    287
    
    
    
    97Loss on disposal of equipment and fixtures
    
    
    
    
    
    
    137Other
    
    
    38
    
    
    
    (202
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (765
    )
    
    
    684Inventory
    
    
    2,105
    
    
    
    (995
    )Other current assets
    
    
    606
    
    
    
    (491
    )Accounts payable, accrued expenses and deposits
    
    
    (2,420
    )
    
    
    2,124Deferred revenue
    
    
    41
    
    
    
    131NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    199
    
    
    
    2,920INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (135
    )
    
    
    (325
    )Proceeds from sale of short-term investments
    
    
    
    
    
    
    44NET CASH USED IN INVESTING ACTIVITIES
    
    
    (135
    )
    
    
    (281
    )FINANCING ACTIVITIESIssuance of 7% convertible subordinated notes
    
    
    
    
    
    
    3,000Issuance of common stock:For interest paid on 7% convertible subordinated notes
    
    
    128
    
    
    
    On exercise of stock options
    
    
    7
    
    
    
    79Repayment on bank credit facilities, net
    
    
    (445
    )
    
    
    (6,623
    )Principal payments on capital lease obligations
    
    
    (47
    )
    
    
    (22
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (357
    )
    
    
    (3,566
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    45
    
    
    
    104DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (248
    )
    
    
    (823
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,314
    
    
    
    2,670CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,066
    
    
    $
    1,847
 See notes to unaudited condensed consolidated financial statements. 5




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DELPHAX TECHNOLOGIES INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) 1. Interim Financial Statements We have prepared the accompanying unaudited condensed consolidated financial statements 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 our opinion, all adjustments considered
necessary for a fair presentation, consisting of normal recurring accruals, have been included. Interim unaudited financial results should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for
the year ended September 30, 2004. Reclassifications have been made in the prior year to conform
to classifications in the current year. The results of operation for the three and six months ended March 31, 2005 are not necessarily
indicative of the operating results to be expected for the full fiscal year. Preparation of the Companys consolidated financial statements requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities and related
revenues and expenses. Actual results could differ from those estimates. 2. Inventory As of March 31, 2005 and September 30, 2004, inventory was comprised as follows: March 31,
    
    
    September 30,2005
    
    
    2004(In thousands)Raw materials and component parts
    
    $
    10,633
    
    
    $
    11,093Work-in-progress
    
    
    1,074
    
    
    
    1,156Finished goods
    
    
    8,105
    
    
    
    9,461$
    19,812
    
    
    $
    21,710
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3. Earnings per Share The following table sets forth the computation of basic and diluted earnings and loss per share: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)Numerator:Numerator for basic earnings (loss) per share
    
    $
    262
    
    
    $
    380
    
    
    $
    (257
    )
    
    $
    740Dilutive potential loss, Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Numerator for diluted earnings (loss) per share
    
    $
    262
    
    
    $
    380
    
    
    $
    (257
    )
    
    $
    740Denominator:Denominator for basic earnings and loss per
share, weighted average shares
    
    
    6,306
    
    
    
    6,217
    
    
    
    6,296
    
    
    
    6,216Dilutive potential common shares:Employee stock options
    
    
    47
    
    
    
    154
    
    
    
    
    
    
    
    102Warrants
    
    
    13
    
    
    
    30
    
    
    
    
    
    
    
    14Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive potential common shares
    
    
    60
    
    
    
    184
    
    
    
    
    
    
    
    116Denominator for diluted earnings and loss per
share, weighted average shares
    
    
    6,366
    
    
    
    6,401
    
    
    
    6,296
    
    
    
    6,332Earnings (loss) per common share  basic
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    0.12Earnings (loss) per common share  diluted
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    0.12
 Dilutive potential losses related to Convertible Notes were excluded from calculation of the
numerator because the effect would be antidilutive. The amounts excluded for the three and six
months ended March 31, 2005, and the three and six months ended March 31, 2004, respectively, were
$141,000, $287,000, $97,000 and $97,000. Similarly, dilutive potential common shares were excluded
from calculation of the denominator because the effect would be antidilutive. Shares therefore
excluded were 56,000 related to employee stock options and 15,000 related to warrants for the six
months ended March 31, 2005. In all periods, 938,000 shares related to the Convertible Notes were
excluded from calculation of the denominator because of their antidilutive effect. 4. Comprehensive Income The components of comprehensive income, net of related tax, for the three and six months
ended March 31, 2005 and 2004 were as follows: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Net income (loss)
    
    $
    262
    
    
    $
    380
    
    
    $
    (257
    )
    
    $
    740Foreign currency translation adjustment
    
    
    21
    
    
    
    119
    
    
    
    390
    
    
    
    537Comprehensive income
    
    $
    283
    
    
    $
    499
    
    
    $
    133
    
    
    $
    1,277
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5. Accounting for Stock-Based Compensation We account for stock-based compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25), and related interpretations. We have
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 we had accounted
for employee stock options under the fair value method of those Statements, for the three and six
months ended March 31, 2005 and 2004 were as follows: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)Net income (loss), as reported
    
    $
    262
    
    
    $
    380
    
    
    $
    (257
    )
    
    $
    740Stock-based compensation determined under fair
value based method for all awards
    
    
    52
    
    
    
    59
    
    
    
    105
    
    
    
    118Pro forma net income (loss), assuming fair value
method for all stock-based awards
    
    $
    210
    
    
    $
    321
    
    
    $
    (362
    )
    
    $
    622Basic earnings (loss) per share, as reported
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    0.12Diluted earnings (loss) per share, as reported
    
    
    0.04
    
    
    
    0.06
    
    
    
    (0.04
    )
    
    
    0.12Basic earnings (loss) per share, pro forma
    
    
    0.03
    
    
    
    0.05
    
    
    
    (0.06
    )
    
    
    0.10Diluted earnings (loss) per share, pro forma

    
    
    0.03
    
    
    
    0.05
    
    
    
    (0.06
    )
    
    
    0.10
 New Pronouncement The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payments(SFAS 123(R)), on December 16, 2004. This statement
requires compensation cost relating to share-based payment transactions to be recognized in a
companys financial statements. The cost will be measured based on the fair value of the equity or
liability instruments on the date they are issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements, including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. We will be required to adopt SFAS 123(R) in the fiscal year beginning after June 15, 2005, our
fiscal 2006. We have not completed our evaluation of SFAS 123(R), but the adoption of this new
standard may have a significant impact on our financial results due to use of stock options as
employee incentives. 6. Senior Credit Facilities, Line of Credit and Convertible Subordinated Debt Our debt primarily consists of senior credit facilities totaling approximately $13.7 million and
$3.0 million in 7% convertible subordinated notes (the Convertible Notes). The senior credit
facilities are secured by substantially all of the Companys assets. The Convertible Notes are
unsecured and junior to the senior credit facilities, with interest payable in the form of 16,406
shares of Common Stock per quarter, which is expensed based on the average market price of the
Common Stock over the interest period. Original issue discount on the Convertible Notes,
approximately $1.4 million at issue, is being amortized to interest expense over the four-year life
of the Convertible Notes. A line of credit has also been established in France, with a balance
outstanding of $746,000 and $541,000 as of March 31, 2005 and September 30, 2004, respectively. The senior credit agreements were amended in February 2005, revising the debt service coverage
ratio and interest coverage ratio requirements as of December 31, 2004, through March 31, 2005 and
providing for interest rates 8




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ranging from prime plus 0.25% to prime plus 1% depending on the
calculated debt service coverage ratio. As of March 31, 2005, the interest rates applicable to
our revolving and term loans were 6.5% and 6.75%, respectively. The availability of revolving credit under the senior credit facilities is based primarily on our
accounts receivable and inventory levels, but also on compliance with certain covenants, one of
which is a tangible net worth covenant. It is our intent to meet this and all the covenants of the
agreements, and we monitor prospective compliance with the bank covenants. If we determine that
revenue shortfalls or other operating results indicate that we may not meet the tangible net worth
covenant or any other covenant, we will initiate expense reduction plans to achieve compliance with
the covenants. We have 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. We believe that our plans to reduce expenses will be
sufficient in order to meet the covenants at all scheduled measurement dates throughout fiscal
2005. As of March 31, 2005, there was $6.2 million of indebtedness under the senior credit facilities,
outstanding at an approximate average annual interest rate of 6.5%. The weighted average interest
rate on all of the Companys debt was approximately 10.3%, which gives effect to the senior credit
facilities, the line of credit in France and the $3.0 million of Convertible Notes. Total 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 in payment of interest and expensed at the average market price of the stock over the
interest period. 7. New Pronouncement  Inventory Costs In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory
Costs(SFAS 151). The provisions of this statement become effective for the Company in fiscal 2006.
SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the
accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material
(spoilage). Existing rules indicate that under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. SFAS 151 requires that those items be recognized as current
period charges regardless of whether they meet the criterion of so abnormal. In addition, SFAS
151 requires that allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The adoption of this Statement is not expected to
have a material impact on the valuation of inventory or operating results. 
 Item 2.Managements Discussion and Analysis of Results of Operations and Financial Condition The following discussion of our results of operations and financial condition should be read
together with the other financial information and Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of a variety of factors, including
those discussed in Factors Affecting Results of Operations and elsewhere in this report. Overview The Companys business is the design, manufacture, sale and servicing of advanced digital print
production equipment based on our patented electron beam imaging (EBI) technology. A majority of
our revenue is from the sale of maintenance, spare parts and supplies that are used with this
equipment. The equipment includes both roll-fed or web presses (the CR Seriesand RS Series)
where the paper input is on rolls, and cut-sheet or sheet-fed printers and presses (the Imaggia
and the legacy Chectronicsystem) that use pre-cut sheets of paper or base stock. For the second quarter and first half of fiscal 2005 (the three- and six-month periods ended March
31, 2005), our revenues were lower than for those periods last year. The market for digital
printing equipment remains soft and
improvements in our revenues from maintenance, spares and supplies depend on expanding our
installed base of equipment. 9




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We have been able to significantly reduce our operating expenses in fiscal 2005, particularly
selling, general and administrative expenses. As a result, net income was $262,000, or $0.04 per
share, for the second quarter of fiscal 2005, and net loss for the first half of the year was
$257,000, or $0.04 per share, compared with net income in the second quarter and first six months
of fiscal 2004 of $380,000, or $0.06 per share, and $740,000, or $0.12 per share, respectively. Critical Accounting Policies We have prepared Managements Discussion and Analysis of Results of Operations and Financial
Condition, which discusses the Condensed Consolidated Financial Statements of the Company, in
accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires that we 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, we evaluate our estimates and assumptions, including those
related to revenue recognition, product warranties, inventory, allowance for doubtful accounts and
income taxes. We base our estimates and judgments on historical experience and on various other
factors that we believe 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. We believe the following critical accounting policies, among others, affect the more significant
judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements. Revenue Recognition Revenue on printing equipment sales is recognized upon customer acceptance and transfer of risk of
loss. Revenue for equipment sales is not recognized when the contract includes a right of return
until after the expiration of the right. Discounts, credits and other sales incentive arrangements
offered to our customers are accounted for as reductions to revenue at the point the revenue is
recognized. Revenue for post-shipment obligations, such as training and installation, considered
perfunctory as defined under Staff Accounting Bulletin No. 104, Revenue Recognition, are deferred
and recognized as the services are performed. For spare parts and supplies stored at customer
sites, we recognize revenue 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. In accordance with Emerging Issues Task Force Issue 99-19, Reporting
Revenue Gross as a Principle verses Net as an Agent, as primary obligor to the manufacturer, we
record revenue for pre-press or finishing equipment manufactured by others on a gross basis.
Freight revenue is recorded on a gross basis and recognized upon shipment. The related freight
costs are recorded as costs of sales. Product Warranties We provide a limited warranty on our digital presses, certain licensed software and on proprietary
spares and supplies. Our standard equipment warranty commences with installation and extends for a
period of 90 days thereafter. Similarly, on proprietary spares and supplies, our warranty is for
90 days from product shipment date. For certain licensed software, we warrant substantial
conformance to documented specifications. Warranty reserves are reviewed quarterly and adjustments
are made from time to time based on actual claims experience in order to properly estimate the
amounts necessary to settle future and existing claims on products sold as of the balance sheet
date. While we believe that the warranty reserve is adequate and that the judgment applied is
appropriate, such amounts estimated to be due and payable could differ materially from what will
actually transpire in the future. 10




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Inventory We reduce the stated value of our 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 we project, additional reductions in stated value may be
required. Allowance for Doubtful Accounts We record an allowance for doubtful accounts based on identification of specific accounts
receivable, supplemented by a general allowance of approximately 20% of accounts aged greater than
90 days not otherwise specifically considered. Specific identification of doubtful accounts and
determination of the amount of the required allowance involves a degree of judgment based on
discussion with our customer support and sales organization, examination of the financial stability
of our customers and review of their payment history. There can be no assurance that our estimates
will match actual amounts ultimately written off. During periods of downturn in the market for
printed materials or economic recession, a greater degree of risk exists concerning the ultimate
collectibility of accounts receivable due to the impact that these conditions might have on our
customer base. We evaluate the adequacy of the allowance for doubtful accounts quarterly. Income Taxes In determining the carrying value of the Companys net deferred tax assets, we 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. We have fully reserved our net deferred tax
assets, totaling $2.2 million and $3.0 million as of March 31, 2005 and September 30, 2004,
respectively, recognizing that the Company has incurred losses in four of the last five fiscal
years and there is no assurance that this or future years will be profitable. If these estimates
and assumptions change in the future, we may record a reduction in the valuation allowance,
resulting in an income tax benefit in the Companys Consolidated Statements of Operations. We
evaluate the realizability of the deferred tax assets and assess the valuation allowance quarterly. 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. Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)Sales:Maintenance, spares and supplies
    
    
    87.6
    %
    
    
    83.8
    %
    
    
    88.5
    %
    
    
    84.5
    %Printing equipment
    
    
    12.4
    
    
    
    16.2
    
    
    
    11.5
    
    
    
    15.5NET SALES
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    44.1
    
    
    
    41.7
    
    
    
    46.3
    
    
    
    44.4GROSS PROFIT
    
    
    55.9
    
    
    
    58.3
    
    
    
    53.7
    
    
    
    55.6Operating Expenses:Selling, general and administrative
    
    
    44.4
    
    
    
    45.7
    
    
    
    44.3
    
    
    
    42.4Research and development
    
    
    7.9
    
    
    
    8.2
    
    
    
    8.1
    
    
    
    8.552.3
    
    
    
    53.9
    
    
    
    52.4
    
    
    
    50.9INCOME FROM OPERATIONS
    
    
    3.6
    
    
    
    4.4
    
    
    
    1.3
    
    
    
    4.7Net interest expense
    
    
    2.1
    
    
    
    1.3
    
    
    
    2.0
    
    
    
    1.3Net realized exchange (gain) loss
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    0.5
    
    
    
    0.0Net unrealized exchange (gain) loss
    
    
    (0.2
    )
    
    
    0.3
    
    
    
    (0.3
    )
    
    
    0.3INCOME (LOSS) BEFORE INCOME TAXES
    
    
    2.1
    
    
    
    3.1
    
    
    
    (0.9
    )
    
    
    3.1Income tax expense
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.5NET INCOME (LOSS)
    
    
    2.0
    %
    
    
    2.6
    %
    
    
    (1.0
    )%
    
    
    2.6
    %
 Net Sales. The Companys revenues consist of sales of (i) maintenance, spare parts and supplies,
and (ii) printing systems and related equipment. For the second quarter of fiscal 2005, net sales
were $12.8 million, down 12% from $14.7 million for the second quarter of fiscal 2004. For the
first six months of fiscal 2005, net sales were $25.8 million, down 11% from $28.9 million for the
same period in fiscal 2004. For the second quarter of fiscal 2005, revenues from maintenance, spare parts and supplies of $11.3
million were down 8% from $12.3 million for the second quarter of fiscal 2004. Similarly, revenues
from maintenance, spare parts and supplies for the first half of fiscal 2005 were $22.8 million,
compared with $24.4 million for the same period in fiscal 2004, lower by 6%. We attribute the
decrease in revenues in both of the fiscal 2005 periods
primarily to a decline in usage of the Companys installed base of legacy equipment, offset by increases in CR Seriesusage. We expect revenues from maintenance,
spare parts and supplies to continue to experience varying degrees of downward pressure from
attrition of older equipment in the field, until such time as installations of our newer CR Series
printing systems are sufficient to reverse this trend. Net sales of printing equipment were $1.6 million for the second quarter of fiscal 2005, down 33%
from $2.4 million for the same period in fiscal 2004. For the six months ended March 31, 2005,
revenues from the sale of printing equipment were $3.0 million,
34% lower than printing equipment
sales for the same period in fiscal 2004 of $4.5 million. Our printing systems primarily consist
of the CR Seriesand the Imaggia. The Checktronicand Foliotronicare among 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. The decline in revenues from printing equipment for the second quarter of
fiscal 2005, 12




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compared with the second quarter of fiscal 2004, was due to fewer CR Seriessystem
sales. For the first half of fiscal 2005 compared with the first half of fiscal 2004, the decline
in revenues from printing equipment was due to lower sale in all product lines except Imaggia. Gross Margin.The Companys gross margin percentage for the second quarter of fiscal 2005 was 56%,
compared with 58% for the second quarter of fiscal 2004, and 54% for the first half of fiscal 2005,
compared with 56% for the same period in fiscal 2004. The decrease in the gross margin percentage
was primarily due to unabsorbed labor and overhead costs incurred in fiscal 2005 as a result of
reduced equipment production levels. This unfavorable variance was partially offset by the greater
proportion of fiscal 2005 net sales derived from maintenance, spare parts and supplies, at margins
greater than the margin on equipment sales. In general, we anticipate that the gross margin
percentage in fiscal 2005 as a whole will be lower than in fiscal 2004, as we expect revenues for
the last half of fiscal 2005 to be derived from a higher proportion of printing equipment revenues
at lower margins and for unabsorbed labor costs, at some level, to adversely impact gross margin
until production levels are increased. Selling, General and Administrative Expenses.Selling, general and administrative expenses of $5.7
million for the second quarter of fiscal 2005, compared with $6.7 million for the same quarter of
fiscal 2004. As a percentage of net sales, selling, general and administrative expenses were 44%
for the second quarter of fiscal 2005, compared with 46% for the year-ago quarter. Reduced legal,
professional and bank refinancing costs accounted for approximately one-third and one-half of the
quarterly and six-month reductions, respectively. Reduced customer support costs and, to a lesser
extent, reduced compensation costs mostly from a workforce reduction program comprised the majority
of the remainder of the decrease in these expenses between periods. Research and Development Expenses. Research and development expenses were $1.0 million for the
second quarter of fiscal 2005, compared with $1.2 million for the second quarter of fiscal 2004, or
8% of net sales in each period. For the six months ended March 31, 2005, research and development
expenses were $2.1 million, compared with $2.5 million for the same period in fiscal 2004, or 8%
and 9% of net sales, respectively. The higher expenses in fiscal 2004 were due to purchased
materials and compensation costs for the development of the CR2000digital press and print quality
enhancements for the CR Seriesprinting systems, introduced to the marketplace in fiscal 2004. Net Interest Expense. Net interest expense for the second quarter of fiscal 2005 was $269,000,
compared with $192,000 for the second quarter of fiscal 2004. The increase was primarily due to
non-cash interest expense on the Convertible Notes of $141,000 in the current fiscal year quarter,
compared with non-cash interest of $97,000 in the year-ago quarter. The Convertible Notes were
issued in February 2004, and thus were outstanding for only a part of the year-ago period. Net
interest expense for the first half of fiscal 2005 was $528,000, with a non-cash component of
$287,000, compared with net interest expense for the first half of fiscal 2004 of $387,000, with a
non-cash component of $97,000. The bank debt levels, to which the cash interest expense applies,
have tended to be lower and the interest rates higher in fiscal 2005, compared with fiscal 2004. Foreign Exchange Gains and Losses. Delphax incurs realized and unrealized transactional foreign
exchange gains and losses on currency conversion transactions that are reflected in our
Consolidated Statements of Operations. Realized and unrealized transactional exchange gains and
losses reflect actual and anticipated gains or losses recognized as the result of transactions
between entities with different functional currencies. The net transactional exchange gains for
the three months ended March 31, 2005 and 2004 were $75,000 and $3,000, respectively. For the
six-month periods ended March 31, 2005 and 2004, we recognized transactional exchange losses of
$41,000 and $75,000, respectively. The Company experiences translational foreign currency exchange
gains and losses, which are reflected in equity, with gains due to the weakening, and losses due to
the strengthening, of the U.S. dollar against the currencies of our 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
Canadian subsidiary is the U.S. dollar. We anticipate continuing to have transactional and
translational foreign currency gains and losses from foreign operations in the future, although
strategies to reduce the size of the gains and losses will be reviewed and implemented whenever
economical and practical. Income Taxes. For fiscal 2005, we project that our income tax expense will be comprised of
applicable minimum taxes, as we anticipate utilizing loss carry-forwards from previous years.
Interim income tax expense for the second 13




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quarter and the first six months of fiscal 2005 was recognized on that basis, at $12,000 and $24,000, respectively.
For the second quarter and the
first six months of fiscal 2004, interim period income tax expense of $76,000 and $151,000,
respectively, was recognized based on projected profitable European operations for the fiscal year.
As of March 31, 2005 and 2004, we have fully reserved deferred tax assets of $2.2 million and
$2.7 million, respectively, recognizing that Delphax has incurred losses in four of the last five
fiscal years and there is no assurance that this or future years will be profitable. Earnings or Loss per Share.For the second quarter of fiscal 2005, basic and diluted earnings per
share were $0.04, compared with basic and diluted earnings per share of $0.06 for the second
quarter of fiscal 2004. For the first six months of fiscal 2005, basic and diluted loss per share
was $0.04, compared with basic and diluted earnings per share of $0.12 for the first six months of
fiscal 2004. The second quarter of fiscal 2005 was profitable as a result of bringing current
expense levels in line with current net sales levels. Market Risk Delphax has foreign subsidiaries located in Canada, the United Kingdom and France, does business in
more than 60 countries and generates approximately 25% to 30% of its revenues from outside North
America. Our ability to sell our products in foreign markets may be affected by changes in
economic, political or market conditions in the foreign markets in which we do business. The parent companys net investment in its foreign subsidiaries was $4.9 million at March 31, 2005,
compared with $7.3 million at September 30, 2004, translated into U.S. dollars at the closing
exchange rates. The decrease between periods was primarily due to losses in the Canadian
subsidiary resulting from low sales levels to the parent company and idle plant capacity. 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 and six months ended March 31, 2005. The functional currency of the Canadian
subsidiary is the U.S. dollar. In the past, but not in recent years, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In the first six months of fiscal 2005 and
2004, the Company did not enter into any foreign exchange contracts and does not anticipate
entering into any such contracts in the near future. Interest Rate Risk Substantially all of our senior 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, 2005 and 2004 of approximately $17,000 and $24,000,
respectively, and in the six-month periods then ended of approximately $34,000 and $56,000,
respectively. Factors Affecting Results of Operations The Companys revenues are subject to fluctuations, which may be material. Our net sales and
operating results may fluctuate from quarter to quarter because (i) our 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 our operating expenses are based on anticipated revenue levels
and a high percentage of our operating costs are relatively fixed, variations in the timing of
revenue recognition will result in significant fluctuations in operating results from period to
period. We have two significant customers that accounted for 30% and 17% of net sales in the second quarter
of fiscal 2005 and 19% and 20% of net sales in the second quarter of fiscal 2004. For the first
six months of fiscal 2005, these customers accounted for 28% and 18% of net sales, compared with
18% and 19% of net sales for the same period in fiscal 2004. We anticipate, but cannot assure,
that these customers will continue to be significant throughout fiscal 2005. However, the loss of,
or significant decrease in sales to, either of these customers could have a material adverse effect
on the Company. 14




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##### Table of Contents



We are dependent on our bank credit facilities to fund operations. Our ability to maintain working
capital depends on compliance with the credit agreements. The senior credit agreements were
amended in February 2005, revising the debt service coverage ratio and interest coverage ratio
requirements as of December 31, 2004, through March 31, 2005 and providing for interest rates
ranging from prime plus 0.25% to prime plus 1% depending on the calculated debt service coverage
ratio. As of March 31, 2005, the interest rates applicable to our revolving and term loans were
6.5% and 6.75%, respectively. The Companys credit facilities are discussed below under the
heading Liquidity and Capital Resources. Liquidity and Capital Resources Working capital was $22.8 million at March 31, 2005, compared with $22.1 million at September 30,
2004. Accounts receivable increased from $7.9 million at September 30, 2004, to $8.9 million at
March 31, 2005 due to timing of collections. Inventory decreased from $21.7 million at September
30, 2004, to $19.8 million at March 31, 2005 primarily due to sale of finished goods, but with
lesser reductions in both raw materials and component parts, and work-in-progress. Accounts
payable decreased approximately $2.9 million, from $5.6 million at September 30, 2004, to $2.7
million at March 31, 2005, primarily due to reductions in inventory purchases and expenses and
payment of vendor payables during the period. Debt, excluding capital leases, totaled
approximately $9.0 million at March 31, 2005 and September 30, 2004, as detailed below. March 31, 2005
    
    
    September 30, 2004Balance
    
    
    Available
    
    
    Balance
    
    
    AvailableOutstanding
    
    
    Credit
    
    
    Outstanding
    
    
    Credit(In thousands)Senior credit facilities:Term loans
    
    $
    931
    
    
    $
    
    
    
    $
    1,028
    
    
    $
    Revolving loans,
$12.5 million limit
    
    
    5,316
    
    
    
    2,110
    
    
    
    5,631
    
    
    
    1,917Line of credit, France
    
    
    746
    
    
    
    
    
    
    
    541
    
    
    
    Total bank
credit facilities
    
    
    6,993
    
    
    
    2,110
    
    
    
    7,200
    
    
    
    1,9177% Convertible Notes, $3.0 million
issued at a discount of $1.4 million
amortized over the 4-year
term of the loan
    
    
    1,971
    
    
    
    
    
    
    
    1,804
    
    
    
    Total debt, excluding
capital leases
    
    $
    8,964
    
    
    $
    2,110
    
    
    $
    9,004
    
    
    $
    1,917
 We expect availability under the credit facilities to be adequate to fund operations in fiscal
2005. We have undertaken no significant investing activities. No significant capital investment has been
undertaken, and at March 31, 2005, Delphax had no material commitments for capital expenditures.
Short-term investments are purchased as cash is available and sold as they mature. 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 our 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 15




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risks and uncertainties that could cause 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 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 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 within 90 days prior to the filing of this report. Based upon this review, these
officers believe that our disclosure controls and procedures are effective in ensuring that
material information related to Delphax is made known to them by others within the organization. (b) Changes in Internal Controls. There were no significant changes in the Companys internal controls or in other factors that
could significantly affect these controls during the quarter covered by this report or from the end
of the reporting period to the date of this Form 10-Q. 16




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 2.Recent Sales of Unregistered Securities On January 3, 2005, we
issued 16,406 shares of Delphax Common Stock in payment of $65,000
of accrued interest on the Companys Convertible Notes. As of March 31, 2005, interest of $57,000
on the Convertible Notes was accrued related to 16,406 shares issued on April 1, 2005. The
Convertible Notes provide for 7% interest in the form 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 shares issued in payment of accrued interest on the Convertible Notes 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 On February 11, 2005, Delphax and its Canadian subsidiary entered into amendments to their credit
agreements with their senior lenders. The amendments reduced the debt service coverage ratio and
interest coverage ratio requirements as of December 31, 2004, through March 31, 2005. During that
period, the interest rates applicable to the loan are temporarily increased by 0.25% to 0.5% when
the ratios fall outside of certain parameters. The related increase in interest expense during
this period was not material. 
 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 March 31, 2005: February 10, 2005  Form 8-K: Item 12. Disclosure of Results of Operations and Financial
Condition  Earnings release issued February 10, 2005, for the first fiscal quarter
ended December 31, 2004. 17




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##### Table of Contents



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 2, 2005
    
    
    
    /s/ Jay A. HermanJay A. HermanChairman and Chief Executive OfficerDate
    
    May 2, 2005
    
    
    
    /s/ Jeffrey S. MathiesenJeffrey S. MathiesenVice President, Chief Financial Officer
 18