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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, 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
  þ o
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DELPHAX TECHNOLOGIES INC.
 INDEX
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed consolidated balance sheets  December 31, 2005 and September 30, 2005Condensed consolidated statements of operations  Three months ended December 31, 2005 and 2004Condensed consolidated statements of cash flows  Three months ended December 31, 2005 and 2004Notes to condensed consolidated financial statementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 6.
    
    ExhibitsSIGNATURESCERTIFICATIONSRenewal Agreement to Lease AgreementCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 DELPHAX TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,2005
    
    
    2005(In thousands)(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    955
    
    
    $
    736Accounts receivable, less allowance for doubtful accounts of
$170 and $174 as of December 31, 2005 and September 30, 2005, respectively
    
    
    7,862
    
    
    
    6,615Inventory
    
    
    19,211
    
    
    
    19,470Other current assets
    
    
    2,169
    
    
    
    2,000TOTAL CURRENT ASSETS
    
    
    30,197
    
    
    
    28,821Equipment and fixtures, net
    
    
    1,315
    
    
    
    1,454Other non-current assets
    
    
    126
    
    
    
    125TOTAL ASSETS
    
    $
    31,638
    
    
    $
    30,400LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    2,676
    
    
    $
    3,233Accrued compensation
    
    
    1,842
    
    
    
    1,512Other accrued expenses
    
    
    865
    
    
    
    910Income taxes payable
    
    
    293
    
    
    
    Current portion of bank credit facilities
    
    
    193
    
    
    
    193Current portion of capital leases
    
    
    103
    
    
    
    106Customer deposits
    
    
    274
    
    
    
    1,006Deferred revenue
    
    
    273
    
    
    
    305TOTAL CURRENT LIABILITIES
    
    
    6,519
    
    
    
    7,265Long-term portion of bank credit facilities and 7% convertible
subordinated notes
    
    
    8,092
    
    
    
    5,989Long-term portion of capital leases
    
    
    51
    
    
    
    74TOTAL LIABILITIES
    
    
    14,662
    
    
    
    13,328SHAREHOLDERS EQUITYCommon stock  par value $0.10 per share  authorized 50,000 shares; issued and outstanding: 6,356 and 6,339 as of December 31, 2005
and September 30, 2005, respectively
    
    
    636
    
    
    
    634Additional paid-in capital
    
    
    19,110
    
    
    
    19,011Accumulated other comprehensive loss
    
    
    (751
    )
    
    
    (710
    )Accumulated deficit
    
    
    (2,019
    )
    
    
    (1,863
    )TOTAL SHAREHOLDERS EQUITY
    
    
    16,976
    
    
    
    17,072TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    31,638
    
    
    $
    30,400
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DELPHAX TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedDecember 31,2005
    
    
    2004(In thousands except pershare data)(Unaudited)Sales:Maintenance, spares and supplies
    
    $
    10,095
    
    
    $
    11,588Printing equipment
    
    
    2,642
    
    
    
    1,382NET SALES
    
    
    12,737
    
    
    
    12,970Cost of sales
    
    
    6,023
    
    
    
    6,287GROSS PROFIT
    
    
    6,714
    
    
    
    6,683Operating Expenses:Selling, general and administrative
    
    
    5,319
    
    
    
    5,746Research and development
    
    
    1,138
    
    
    
    1,0696,457
    
    
    
    6,815INCOME (LOSS) FROM OPERATIONS
    
    
    257
    
    
    
    (132
    )Net interest expense
    
    
    235
    
    
    
    259Net realized exchange loss
    
    
    152
    
    
    
    171Net unrealized exchange gain
    
    
    (57
    )
    
    
    (55
    )LOSS BEFORE INCOME TAXES
    
    
    (73
    )
    
    
    (507
    )Income tax expense
    
    
    83
    
    
    
    12NET LOSS
    
    $
    (156
    )
    
    $
    (519
    )Basic and diluted loss per common share
    
    $
    (0.02
    )
    
    $
    (0.08
    )Weighted average number of shares outstanding during the period:Basic
    
    
    6,356
    
    
    
    6,287Diluted
    
    
    6,356
    
    
    
    6,287
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DELPHAX TECHNOLOGIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedDecember 31,2005
    
    
    2004(In thousands)(Unaudited)OPERATING ACTIVITIESNet loss
    
    $
    (156
    )
    
    $
    (519
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    240
    
    
    
    287Non-cash interest on 7% convertible subordinated notes:Amortization of original issue discount
    
    
    87
    
    
    
    83Issuance of common stock
    
    
    39
    
    
    
    65Stock-based compensation
    
    
    51
    
    
    
    Other
    
    
    
    
    
    
    19Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (1,247
    )
    
    
    (261
    )Inventory
    
    
    259
    
    
    
    1,081Other current assets
    
    
    (169
    )
    
    
    334Accounts payable, accrued expenses, deposits and other
    
    
    (699
    )
    
    
    (1,194
    )Deferred revenue
    
    
    (33
    )
    
    
    111NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (1,628
    )
    
    
    6INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (101
    )
    
    
    (56
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (101
    )
    
    
    (56
    )FINANCING ACTIVITIESAdditional borrowing (repayment) on bank credit facilities, net
    
    
    2,016
    
    
    
    (558
    )Principal payments on capital lease obligations
    
    
    (27
    )
    
    
    (23
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    1,989
    
    
    
    (581
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (41
    )
    
    
    41INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    219
    
    
    
    (590
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    736
    
    
    
    1,314CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    955
    
    
    $
    724
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DELPHAX TECHNOLOGIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Interim Financial Statements
     2. Inventory
  December 31,
    
    
    September 30,2005
    
    
    2005(In thousands)Raw materials and component parts
    
    $
    12,346
    
    
    $
    12,662Work-in-progress
    
    
    1,569
    
    
    
    1,237Finished goods
    
    
    5,296
    
    
    
    5,571$
    19,211
    
    
    $
    19,470
 New Pronouncement  Inventory Costs
 Inventory Costs
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3. Earnings per Share
  Three Months EndedDecember 31,2005
    
    
    2004(In thousands, except pershare amounts)Numerator:Numerator for basic loss per share
    
    $
    (156
    )
    
    $
    (519
    )Dilutive potential loss, Convertible
Notes
    
    
    
    
    
    
    Numerator for diluted loss per share
    
    $
    (156
    )
    
    $
    (519
    )Denominator:Denominator for basic loss per share,
weighted average shares
    
    
    6,356
    
    
    
    6,287Dilutive potential shares:Employee stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Convertible Notes
    
    
    
    
    
    
    Dilutive potential shares
    
    
    
    
    
    
    Denominator for diluted loss per
share, weighted average shares
    
    
    6,356
    
    
    
    6,287Loss per share  basic
    
    $
    (0.02
    )
    
    $
    (0.08
    )Loss per share  diluted
    
    $
    (0.02
    )
    
    $
    (0.08
    )
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4. Comprehensive Loss
  Three Months EndedDecember 31,2005
    
    
    2004(In thousands)Net loss
    
    $
    (156
    )
    
    $
    (519
    )Foreign currency translation adjustment
    
    
    (41
    )
    
    
    369Comprehensive loss
    
    $
    (197
    )
    
    $
    (150
    )
 5. Senior Credit Facilities and Convertible Subordinated Debt
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6. Stock-based Compensation
 Share
Based Payment
 9




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Accounting for Stock Issued to Employees
 Three Months EndedDecember 31, 2004(In thousands, except per sharedata)Net loss, as reported
    
    $
    (519
    )Stock-based compensation determined under
fair value based method for all awards
    
    
    44Pro forma net loss, assuming fair
value method for all stock-based awards
    
    $
    (563
    )Basic loss per share, as reported
    
    $
    (0.08
    )Diluted loss per share, as reported
    
    
    (0.08
    )Basic loss per share, pro forma
    
    
    (0.09
    )Diluted loss per share, pro forma
    
    
    (0.09
    )
  Three Months EndedDecember 31, 2005Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    58
    %Risk-free interest rate
    
    
    4.3
    %Expected life of options
    
    4.75
    years
  WeightedAverageExerciseNumber
    
    
    Price perof Options
    
    
    Share(In thousands)Options outstanding, September 30, 2005
    
    
    872
    
    
    $
    3.44Granted
    
    
    115
    
    
    
    2.59Canceled
    
    
    (55
    )
    
    
    3.61Options outstanding, December 31, 2005
    
    
    932
    
    
    $
    3.32
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Options OutstandingWeighted
    
    
    WeightedAverage
    
    
    AverageNumber
    
    
    Remaining
    
    
    ExerciseRange of
    
    of Options
    
    
    Contractual
    
    
    Price perExercise Prices
    
    Outstanding
    
    
    Life

    
    Share(In thousands)$1.750 - 4.800
    
    
    893
    
    
    3.46 years
    
    $
    3.145.063 - 7.750
    
    
    21
    
    
    3.58 years
    
    
    5.998.125 - 9.625
    
    
    18
    
    
    0.32 years
    
    
    9.63$1.750 - 9.625
    
    
    932
    
    
    3.40 years
    
    $
    3.32
 Options ExercisableWeightedAverageNumber
    
    
    ExerciseRange of
    
    of Options
    
    
    Price perExercise Prices
    
    Exercisable
    
    
    Share(In thousands)$1.750 - 4.800
    
    
    520
    
    
    $
    3.225.063 - 7.750
    
    
    17
    
    
    
    5.928.125 - 9.625
    
    
    18
    
    
    
    9.63$1.750 - 9.625
    
    
    555
    
    
    $
    3.50
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 CR Series RS
Series Imaggia Checktronic CR Series Imaggia Checktronic Foliotronic Checktronic Foliotronic CR Series Foliotronic Checktronic
  11




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Critical Accounting Policies
   Revenue Recognition
 Revenue Recognition Reporting Revenue Gross as a Principal verses Net as an Agent
 Product Warranties
  12




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Inventory
  Stock-based Compensation Expense
    Three Months EndedDecember 31, 2005Expected dividend yield
    
    
    0
    %Expected stock price volatility
    
    
    58
    %Risk-free interest rate
    
    
    4.3
    %Expected life of options
    
    4.75
    years
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Allowance for Doubtful Accounts
  Income Taxes
  14




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Results of Operations
  Three Months EndedDecember 31,2005
    
    
    2004(Unaudited)Sales:Maintenance, spares and supplies
    
    
    79.3
    %
    
    
    89.3
    %Printing equipment
    
    
    20.7
    
    
    
    10.7NET SALES
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    47.3
    
    
    
    48.5GROSS PROFIT
    
    
    52.7
    
    
    
    51.5Operating Expenses:Selling, general and administrative
    
    
    41.8
    
    
    
    44.3Research and development
    
    
    8.9
    
    
    
    8.250.7
    
    
    
    52.5INCOME (LOSS) FROM
OPERATIONS
    
    
    2.0
    
    
    
    (1.0
    )Net interest expense
    
    
    1.7
    
    
    
    2.0Net realized exchange loss
    
    
    1.2
    
    
    
    1.3Net unrealized exchange gain
    
    
    (0.4
    )
    
    
    (0.4
    )LOSS BEFORE INCOME TAXES
    
    
    (0.5
    )
    
    
    (3.9
    )Income tax expense
    
    
    0.7
    
    
    
    0.1NET LOSS
    
    
    (1.2
    )%
    
    
    (4.0
    )%
 Net Sales
 CR Series
 CR Series CR Series
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Gross Margin.
 Selling, General and Administrative Expenses.
 Research and Development Expenses
 Income (Loss) from Operations.
 Net Interest Expense
 Foreign Exchange Gains and Losses
 Income Taxes
 Loss per Share.
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Market Risk
    Interest Rate Risk
   Risk Related to Operations
  Limited sales of our new product lines. CR Series RS Series CR Series RS Series
 Reliance on significant customers.
 Requirements for availability of working capital.
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Substantial operations in foreign markets.
 Net sales are subject to fluctuations, which may be material.
 Liquidity and Capital Resources
   December 31, 2005
    
    
    September 30, 2005Balance
    
    
    Available
    
    
    Balance
    
    
    AvailableOutstanding
    
    
    Credit
    
    
    Outstanding
    
    
    Credit(In thousands)Senior credit facilities:Term loans
    
    $
    787
    
    
    $
    
    
    
    $
    836
    
    
    $
    Revolving loans,
$12.5 million limit
    
    
    5,268
    
    
    
    4,843
    
    
    
    3,203
    
    
    
    5,592Line of credit, United Kingdom
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    176Total bank credit facilities
    
    
    6,055
    
    
    
    5,019
    
    
    
    4,039
    
    
    
    5,7687% Convertible Notes, $3.0 million
issued at a discount of $1.4 million
amortized over the the 4-year
term of the loan
    
    
    2,230
    
    
    
    
    
    
    
    2,143
    
    
    
    Total debt, excluding capital leases
    
    $
    8,285
    
    
    $
    5,019
    
    
    $
    6,182
    
    
    $
    5,768
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th
 Cautionary Statement
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
     
 PART II. OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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Item 6. Exhibits.
       20




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SIGNATURES
  DELPHAX TECHNOLOGIES INC.
RegistrantDate February 10, 2006
    /s/ Jay A. HermanJay A. HermanChairman and Chief Executive Officer Date February 10, 2006
    /s/ Jay A. HermanJay A. HermanActing Chief Financial Officer 21