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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 December 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 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 oIndicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes
o No þIndicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practical date.As of February 11, 2005, there were 6,306,000 shares outstanding of Common Stock.




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DELPHAX TECHNOLOGIES INC. INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed consolidated balance sheets  December 31, 2004 and September 30, 2004Condensed consolidated statements of operations  Three months ended December 31, 2004 and 2003Condensed consolidated statements of cash flows  Three months ended December 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 5.
Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESCERTIFICATIONSAmendment No. 4 to Loan and Security AgreementAmending Agreement No. 2 to Loan and Security AgreementCertification 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 December 31,
    
    
    September 30,2004
    
    
    2004(In thousands)(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    724
    
    
    $
    1,314Accounts receivable, less allowance for doubtful accounts of $242 and
$247 as of December 31, 2004 and September 30, 2004 respectively
    
    
    8,403
    
    
    
    7,897Inventory
    
    
    20,785
    
    
    
    21,710Other current assets
    
    
    2,117
    
    
    
    2,389TOTAL CURRENT ASSETS
    
    
    32,029
    
    
    
    33,310Equipment and fixtures, net
    
    
    2,140
    
    
    
    2,368TOTAL ASSETS
    
    $
    34,169
    
    
    $
    35,678LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    3,664
    
    
    $
    5,609Accrued expenses
    
    
    4,605
    
    
    
    3,534Income taxes payable
    
    
    27
    
    
    
    264Current portion of bank credit facilities
    
    
    815
    
    
    
    1,266Current portion of capital leases
    
    
    102
    
    
    
    99Deferred revenue
    
    
    591
    
    
    
    468TOTAL CURRENT LIABILITIES
    
    
    9,804
    
    
    
    11,240Long-term portion of bank credit facilities and 7% convertible
subordinated notes
    
    
    7,774
    
    
    
    7,738Long-term portion of capital leases
    
    
    153
    
    
    
    179TOTAL LIABILITIES
    
    
    17,731
    
    
    
    19,157SHAREHOLDERS EQUITYCommon stock  par value $0.10 per share  authorized 50,000 shares;
issued and outstanding: 6,287 and 6,271 as of December 31, 2004
and September 30, 2004, respectively
    
    
    629
    
    
    
    627Additional paid-in capital
    
    
    18,839
    
    
    
    18,774Accumulated other comprehensive loss
    
    
    (342
    )
    
    
    (711
    )Accumulated deficit
    
    
    (2,688
    )
    
    
    (2,169
    )TOTAL SHAREHOLDERS EQUITY
    
    
    16,438
    
    
    
    16,521TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    34,169
    
    
    $
    35,678
 See notes to unaudited condensed consolidated financial statements. 3




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DELPHAX TECHNOLOGIES INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months EndedDecember 31,2004
    
    
    2003(In thousands, except share data)(Unaudited)Sales:Maintenance, spares and supplies
    
    $
    11,588
    
    
    $
    12,124Printing equipment
    
    
    1,382
    
    
    
    2,119NET SALES
    
    
    12,970
    
    
    
    14,243Cost of sales
    
    
    6,287
    
    
    
    6,711GROSS PROFIT
    
    
    6,683
    
    
    
    7,532Operating Expenses:Selling, general and administrative
    
    
    5,746
    
    
    
    5,570Research and development
    
    
    1,069
    
    
    
    1,2546,815
    
    
    
    6,824(LOSS) INCOME FROM OPERATIONS
    
    
    (132
    )
    
    
    708Net interest expense
    
    
    259
    
    
    
    195Net realized exchange loss
    
    
    171
    
    
    
    56Net unrealized exchange (gain) loss
    
    
    (55
    )
    
    
    22(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (507
    )
    
    
    435Income tax expense
    
    
    12
    
    
    
    75NET (LOSS) INCOME
    
    $
    (519
    )
    
    $
    360Basic and diluted (loss) earnings per common share
    
    $
    (0.08
    )
    
    $
    0.06Weighted average number of shares outstanding during the period:Basic
    
    
    6,287
    
    
    
    6,215Diluted
    
    
    6,287
    
    
    
    6,264
 See notes to unaudited condensed consolidated financial statements. 4




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DELPHAX TECHNOLOGIES INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months EndedDecember 31,2004
    
    
    2003(In thousands)(Unaudited)OPERATING ACTIVITIESNet (loss) income
    
    $
    (519
    )
    
    $
    360Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    287
    
    
    
    361Non-cash interst on 7% convertible subordinated notes
    
    
    148
    
    
    
    Loss on disposal of equipment and fixtures
    
    
    
    
    
    
    137Other
    
    
    19
    
    
    
    (211
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (261
    )
    
    
    462Inventory
    
    
    1,081
    
    
    
    (72
    )Other current assets
    
    
    334
    
    
    
    (261
    )Notes receivable from customers
    
    
    
    
    
    
    (114
    )Accounts payable and accrued expenses
    
    
    (1,194
    )
    
    
    746Deferred revenue
    
    
    111
    
    
    
    105NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    6
    
    
    
    1,513INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (56
    )
    
    
    (172
    )Proceeds from sale of short-term investments
    
    
    
    
    
    
    43NET CASH USED IN INVESTING ACTIVITIES
    
    
    (56
    )
    
    
    (129
    )FINANCING ACTIVITIESIssuance of common stock for interest on 7% convertible
subordinated notes
    
    
    67
    
    
    
    Repayment on bank credit facilities, net
    
    
    (625
    )
    
    
    (2,000
    )Principal payments on capital lease obligations
    
    
    (23
    )
    
    
    (10
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (581
    )
    
    
    (2,010
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    41
    
    
    
    52DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (590
    )
    
    
    (574
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,314
    
    
    
    2,670CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    724
    
    
    $
    2,096
 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 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 months ended December 31, 2004 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 December 31, 2004 and 2003, inventory was comprised as follows: December 31,
    
    
    September 30,2004
    
    
    2004(In thousands)Raw materials and component parts
    
    $
    10,904
    
    
    $
    11,093Work-in-progress
    
    
    1,184
    
    
    
    1,156Finished goods
    
    
    8,697
    
    
    
    9,461$
    20,785
    
    
    $
    21,710
 6




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3. Earnings per Share The following table sets forth the computation of basic and diluted loss and earnings per share: Three Months EndedDecember 31,2004
    
    
    2003(In thousands, except share data)Numerator:Numerator for basic (loss) earnings per share
    
    $
    (519
    )
    
    $
    360Dilutive potential loss, Convertible Notes
    
    
    
    
    
    
    Numerator for diluted (loss) earnings per share
    
    $
    (519
    )
    
    $
    360Denominator:Denominator for basic earnings and loss per share,
weighted average shares
    
    
    6,287
    
    
    
    6,215Dilutive potential common shares:Employee stock options
    
    
    
    
    
    
    49Warrants
    
    
    
    
    
    
    Convertible Notes
    
    
    
    
    
    
    Dilutive potential common share:
    
    
    
    
    
    
    49Denominator for diluted earnings and loss per share,
adjusted weighted average shares
    
    
    6,287
    
    
    
    6,264(Loss) earnings per common share
    
    $
    (0.08
    )
    
    $
    0.06(Loss) earnings per common share,
assuming dilution
    
    $
    (0.08
    )
    
    $
    0.06
 For the first quarter of fiscal 2005, a dilutive potential loss of $65,000 related to Convertible
Notes, and dilutive potential common shares related to employee stock options of 64,000, warrants
of 16,000 and Convertible Notes of 938,000 were excluded because their effect would be antidilutive. 4. Comprehensive Income The components of comprehensive loss and income, net of related tax, for the three months ended
December 31, 2004 and 2003 were as follows: Three Months EndedDecember 31,2004
    
    
    2003(In thousands)Net (loss) income
    
    $
    (519
    )
    
    $
    360Foreign currency translation adjustment
    
    
    369
    
    
    
    418Comprehensive (loss) income
    
    $
    (150
    )
    
    $
    778
 7




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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 months
ended December 31, 2004 and 2003 were as follows: Three Months EndedDecember 31,2004
    
    
    2003(In thousands, except per share data)Net (loss) income, as reported
    
    $
    (519
    )
    
    $
    360Stock-based compensation determined under fair
value based method for all awards
    
    
    (44
    )
    
    
    (52
    )Pro forma net (loss) income, assuming fair value
method for all stock-based awards
    
    $
    (563
    )
    
    $
    308Basic (loss) earnings per share, as reported
    
    $
    (0.08
    )
    
    $
    0.06Diluted (loss) earnings per share, as reported
    
    
    (0.08
    )
    
    
    0.06Basic (loss) earnings per share, pro forma
    
    
    (0.09
    )
    
    
    0.05Diluted (loss) earnings per share, pro forma
    
    
    (0.09
    )
    
    
    0.05
 New Pronouncement The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment(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 first fiscal period beginning after June 15, 2005,
our fourth quarter of fiscal 2005. 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 and Convertible Subordinated Debt Our debt 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. 8




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The senior credit agreement was amended in February 2005, revising certain ratios and providing for
a temporary increase in the interest rates applicable to the loan, ranging from 0.25% to 0.5%, when
ratios fall outside certain parameters. 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 determined 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 December 31, 2004, there was $6.7 million of indebtedness under the senior credit facilities,
outstanding at an approximate average annual interest rate of 5.5%. The weighted average interest
rate on all of the Companys debt was approximately 10.0%, which gives effect to the senior credit
facilities 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. 9




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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 its patented electron beam imaging (EBI) technology. A majority of
our revenue is from the sale of maintenance contracts, 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
Imaggiaand the legacy Chectronicsystem) that use pre-cut sheets or paper or base stock. For the first quarter of fiscal 2005 (the three months ended December 31, 2004), our revenues were
improved over the immediately preceding quarter, but were lower than for the same quarter a year
ago. The gross margin decreased slightly for the first quarter of fiscal 2005, compared with the
same quarter last year, primarily due to unabsorbed overhead from lower equipment production levels
in the current year period. Operating expenses were flat year to year. The $132,000 loss from operations and increased
interest expense and foreign currency exchange losses in the current year combined to result in a
loss of $519,000 or $0.08 per share for the first quarter of fiscal 2005, compared with earnings of
$360,000 or $0.06 per share for the corresponding quarter a year ago. 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, 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 Our printing equipment systems are tested at our facility prior to shipment, and we recognize
revenue related to orders shipped under standard performance conditions when systems are shipped.
Systems shipped subject to non-standard contractual performance conditions, such as financing
approval or special print applications, are recognized as revenue upon completion or attainment of
the specified condition. We recognize service revenue as services are rendered. 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. 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. 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
collectability 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 $3.2 million and $3.0 million as of December 31, 2004 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 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 EndedDecember 31,2004
    
    
    2003(Unaudited)Sales:Maintenance, spares and supplies
    
    
    89.3
    %
    
    
    85.1
    %Printing equipment
    
    
    10.7
    
    
    
    14.9NET SALES
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    48.5
    
    
    
    47.1GROSS PROFIT
    
    
    51.5
    
    
    
    52.9Operating Expenses:Selling, general and administrative
    
    
    44.3
    
    
    
    39.1Research and development
    
    
    8.2
    
    
    
    8.852.5
    
    
    
    47.9(LOSS) INCOME FROM OPERATIONS
    
    
    (1.0
    )
    
    
    5.0Net interest expense
    
    
    2.0
    
    
    
    1.4Net realized exchange loss
    
    
    1.3
    
    
    
    0.4Net unrealized exchange (gain) loss
    
    
    (0.4
    )
    
    
    0.2(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (3.9
    )
    
    
    3.0Income tax expense
    
    
    0.1
    
    
    
    0.5NET (LOSS) INCOME
    
    
    (4.0
    )%
    
    
    2.5
    %
 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 first quarter of fiscal 2005, net
revenues were $13.0 million, down 9% from $14.2 million for the first quarter of fiscal 2004. For the first quarter of fiscal 2005, revenues from maintenance, spare parts and supplies of $11.6
million were down 4% from $12.1 million for the first quarter of fiscal 2004. We attribute the
decrease in revenues to a decline in usage of the Companys installed base of legacy equipment,
offset by increases in OEM business and in CR Seriesusage. We expect revenues from
maintenance, spare parts and supplies to continue to experience downward pressures from attrition
of older equipment in the field, until such time as installations of our newer CR Seriesprinting
systems are sufficient to reverse this trend. Revenues from the sale of printing equipment were $1.4 million for the first quarter of fiscal
2005, down 35% from $2.1 million for the same period in fiscal
2004. Our printing
systems primarily consist of the CR Series and 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 first quarter of fiscal 2005, compared with the first quarter of fiscal 2004, was
due to lower sales in all product lines except Imaggia. 12




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Gross Margin.The Companys gross margin percentage for the first quarter of fiscal 2005 was 52%,
compared with 53% for the first quarter of fiscal 2004. The decrease in the gross margin
percentage was primarily due to unabsorbed labor and overhead costs incurred in the first quarter
of 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 full-year fiscal 2005 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 of $5.7
million for the first quarter of fiscal 2005 were relatively flat compared with $5.6 million for
the first quarter of fiscal 2004. As a percentage of net sales, selling, general and
administrative expenses were 44% for the first quarter of fiscal 2005, compared with 39% for the
year-ago quarter, primarily due to lower fiscal 2005 net sales levels. Research and Development Expenses. Research and development expenses were $1.1 million for the
first quarter of fiscal 2005, compared with $1.3 million for the first quarter of fiscal 2004, or
8% and 9% of net sales, respectively. The higher expense in fiscal 2004 was due to 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 first quarter of fiscal 2005 was $259,000,
compared with $195,000 in fiscal 2004. The increase was primarily due to non-cash interest expense
of $148,000 related to the Convertible Notes issued in
February 2004, partially offset by the lower
interest expense on senior debt. The average senior debt outstanding was lower, but the applicable
interest rates higher, for the first quarter of fiscal 2005, compared with the first quarter of
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, respectively, gains or losses recognized as the result of
transactions between entities with different functional currencies. The net transactional exchange
losses for the three months ended December 31, 2004 and 2003
were $116,000 and $78,000,
respectively. The Company experiences translational foreign currency 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 first quarter of fiscal 2005 has been recognized on that basis.
For the first quarter of fiscal 2004, an interim period income tax expense of $75,000 was
recognized based on projected profitable European operations for the fiscal year. As of December
31, 2004 and 2003, we have fully reserved deferred tax assets of $3.2 million and $2.6 million,
respectively, recognizing that Delphax 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 first quarter of fiscal 2005, basic and diluted loss per share
was $0.08, compared with basic and diluted earnings per share of $0.06 for the first quarter of
fiscal 2004. The decrease in earnings between periods was primarily attributable to slightly lower
margins on lower net sales, coupled with flat operating expenses. 13




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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 $7.3 million at December 31,
2004 and September 30, 2004, 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 December 31, 2004. 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 three months of fiscal 2004 and
2005, 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 December 31, 2004 and 2003 of
approximately $17,000 and $32,000, 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 25% and 19% of net sales in the first quarter
of fiscal 2005 and 17% and 18% of net sales in the first quarter of 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. 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 agreement was amended
in February 2005, revising certain ratios and providing for a temporary increase in the interest
rates applicable to the loan, ranging from 0.25% to 0.5%, when ratios fall outside certain
parameters. The Companys credit facilities are discussed below under the heading Liquidity and
Capital Resources. Liquidity and Capital Resources Working capital was $22.2 million at December 31, 2004, compared with $22.1 million at September
30, 2004. Accounts receivable increased from $7.9 million at September 30, 2004, to $8.4 million
at December 31, 2004 due to timing of collections. Inventory decreased from $21.7 million at
September 30, 2004, to $20.8 million at December 31, 2004 primarily due to sale of finished goods.
Accounts payable and accrued expenses decreased approximately $874,000, from $9.1 million at
September 30, 2004, to $8.3 million at December 31, 2004, primarily due to control over inventory
purchases and expenses, partially offset by a customer deposit on a CR
Seriessystem placed at a customer site on a trial basis during
the current-year quarter. In the
first quarter of fiscal 2005, our debt decreased by approximately
$415,000, primarily due to the
reduction of the French credit facility. 14




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We have undertaken no significant investing activities. No significant capital investment has been
undertaken, and at December 31, 2004, Delphax 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, we refinanced our bank debt 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 Delphax and a new senior lender. See Note 6 to
Condensed Consolidated Financial Statements for details. We expect availability under the credit
facilities to be adequate to fund operations in fiscal 2005. 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 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. 15




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PART II. OTHER INFORMATION 
 Item 2.Recent Sales of Unregistered Securities On October 1, 2004, the
Company issued 16,406 shares of Company Common Stock in payment of $67,000
of accrued interest on the Companys Convertible Notes. As of December 31, 2004, interest of
$65,000 on the Convertible Notes was accrued related to the 16,406 shares issued on January 3,
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 on October 1, 2004 and January 3, 2005 where 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 are attached as Exhibits 10.1 and 10.2 to this Quarterly Report. The amendments reduce 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 potential increase in interest expense during this period is not expected
to be material. 
 Item 6.Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: 10.1
Amendment No. 4 to Loan and Security Agreement Dated February 4,
2004 between Delphax Technologies Inc. and LaSalle Business Credit,
LLC 10.2
Amending Agreement No. 2 to Loan and Security Agreement Dated
February 4, 2004 between Delphax Technologies Canada Limited and
ABN AMRO Bank N.V., Canada Branch 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 December 31, 2004: December 16, 2004 - Form 8-K: Item 12. Disclosure of Results of Operations and Financial
Condition - Earnings release issued December 16, 2004, for the fiscal year ended
September 30, 2004.
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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 February 11, 2005
    
    /s/ Jay A. HermanJay A. HermanChairman and Chief Executive OfficerDate February 11, 2005
    
    /s/ Jeffrey S. MathiesenJeffrey S. MathiesenVice President, Chief Financial Officer
 17