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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

DELPHAX TECHNOLOGIES INC.

(952) 939-9000

Not Applicable

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    X                     No

	Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

	As of August 5, 2002, there were 6,175,898 shares outstanding of Common Stock.

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INDEX

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 30, 2002

NOTE A – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2001.

Reclassifications have been made in the prior year to conform to classifications in the current year.

NOTE B – Earnings per Share

The following table sets forth the computation of basic and diluted loss and earnings per share:

a — No incremental shares related to options are included because the impact would be antidilutive.

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NOTE C – Comprehensive Income

The components of comprehensive loss and income, net of related tax, for the three- and nine-month periods ended June 30, 2002 and 2001 are as follows:

NOTE D – Acquisition of Delphax Systems, Corporate Name Change and Workforce Reduction

On December 20, 2001, the Company and its newly organized Canadian subsidiary acquired substantially all of the North American business assets of Delphax Systems, a Massachusetts general partnership, and Delphax Systems, Inc., a Delaware corporation (collectively, the “Acquired Company”). The Acquired Company is located in suburban Toronto, Ontario and is engaged in the development, manufacture and distribution of print engines, print management software and a range of digital printing systems incorporating the Acquired Company’s proprietary electron-beam imaging technology. The Acquired Company is the supplier of the print engines used in a number of the Company’s products.

The purchase price consisted of approximately $15.8 million in cash plus the assumption of approximately $3.4 million of liabilities. The property acquired included fixed assets, inventory, accounts receivable, contract rights, various intellectual property and intangibles, including rights to the name “Delphax.” Effective April 1, 2002, following an affirmative shareholder vote at the March 21, 2002 annual meeting of shareholders, the Company changed its name from Check Technology Corporation to Delphax Technologies Inc. The wholly-owned subsidiaries of the Company have also been renamed. New and former names are as follows:

The Company intends to continue to use the purchased assets in substantially the same manner as used by the Acquired Company. As part of the acquisition, the Company anticipated that efficiencies could be achieved in integrating the two companies, and, as a result, included in accrued expenses in the Consolidated Balance Sheets and in the cost of the acquisition $875,000 for restructuring in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). On April 23, 2002, the Company effected a workforce reduction, eliminating approximately 40 positions in the Canadian subsidiary. Benefits are paid on either a lump-sum basis or over time. As of June 30, 2002, the accrued liability for benefits payable in the future was $523,000. It is estimated that this balance will be sufficient to cover the remaining obligation under the workforce reduction plan.

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NOTE D – Acquisition of Delphax Systems, Corporate Name Change and Workforce Reduction (Continued)

The following unaudited pro forma combined summary statements of operations for the three- and nine-month periods ended June 30, 2002 and 2001 were prepared in accordance with SFAS 141 and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and assumes the acquisition had occurred at the beginning of the nine-month periods presented. The following pro forma data reflects adjustments for interest expense in both periods, and the nine months ended June 30, 2001 includes an expense of approximately $13.1 million for inventory reserves and an expense of approximately $2.0 million for write-down of equipment and fixtures in the first quarter of the period. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of future results of the Company.

Unaudited Pro Forma
Combined Summary Statements of Operations

NOTE E – Credit Agreement

Effective December 20, 2001, the Company entered into a bank credit agreement, secured by substantially all the assets of the Company, expiring December 19, 2004. The credit agreement provides two types of loans, term and revolving, including letters of credit. The term loan portion of the credit facility was advanced as a single borrowing on December 20, 2001, in the amount of $4.0 million, also outstanding as of June 30, 2002. No amount repaid or prepaid on any term loan may be borrowed again. The Company may borrow on a revolving loan basis up to the lesser of: (i) the revolving credit commitment in effect at such time and (ii) the borrowing base as then determined and computed. The revolving credit commitment was $15.0 million as of June 30, 2002, and is subject to a commitment fee of 0.5% per annum on the unused portion of the commitment. As of June 30, 2002, revolving loans outstanding were $12.3 million. Term loans and revolving loans, at the Company’s election, may be outstanding as base rate loans or Eurodollar loans, provided that $3.0 million of the principal amount of the revolving loans bear interest at the fixed rate of 7.35% per annum.

Principal payments on the term loan are due in installments of $250,000 on the last day of each March, June, September and December in each year commencing with June 30, 2002, with any remaining principal and interest due on December 19, 2004. Similarly, the revolving credit commitment will be permanently reduced by $250,000 on the last day of each March, June, September and December in each year commencing June 30, 2002.

Because June 30, 2002, was a Sunday, the scheduled reductions in both the term loan and the revolving credit commitment were effected on July 1, 2002. As of that date, outstanding term loans were paid down to $3.75 million and the revolving credit commitment was reduced to $14.75 million.

Outstanding base rate loans accrue interest at the bank’s prime rate plus 0.5%. Outstanding Eurodollar loans accrue interest at adjusted LIBOR plus 3%. As of June 30, 2002, $2.8 million was outstanding as base rate loans and $13.5 million was outstanding as Eurodollar loans, at a weighted average interest rate of approximately 5.9%.

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NOTE E – Credit Agreement (Continued)

As of June 30, 2002, the Company was not in compliance with one of the financial covenants of the credit agreement. The lender has advised the Company that it is reserving all rights and remedies under the credit agreement and will consider further requests for loans on a case-by-case basis. Since the loan is in default, the lender could, but has not, declared the loans due and payable. Thus, the Company has classified the entire outstanding loan balance as a current liability.

NOTE F – Executive Loan

During fiscal 1995, the President and Chief Executive Officer exercised 40,000 options to purchase common stock at $2.00 per share, by executing a $148,996, five-year, full recourse note, bearing interest at a floating rate, under the Executive Loan Program. The purpose of the loan was to provide cash for the exercise of the options and to pay the related income taxes. When exercised, the Company’s stock had a market value of $6.375 per share. In 1998, the loan terms were amended to change the loan from full recourse to non-recourse, and the floating rate was fixed at 5.25%. In May of fiscal 2000, the Company extended the term of the loan to May 2001 and granted forgiveness of the loan ratably over the extension period. These modifications resulted in the options being treated as a fixed stock award. The Company recognized the fair market value of the stock award of $225,000 over the extension period, which concluded in the third quarter of fiscal 2001. As a result, no expense was incurred in fiscal 2002; $135,186 was recognized as compensation expense related to the stock award in fiscal 2001. Over the life of the loan, total principal payments were $54,671.

NOTE G – Closure of the Company’s Australian Subsidiary

In February 2001, the Company committed to a plan to close its subsidiary in Australia, developed a formal exit plan to cease operations effective September 30, 2001, and communicated the plan to all 14 full- and part-time employees of the subsidiary. The Company determined that operations in the market served by the Australian subsidiary could be more profitably served by alternative means, including independent distributors and sales agents. At the commitment date, exit costs were estimated at $115,000, comprised solely of termination benefits, which were included with selling, general and administrative expenses in the Consolidated Statements of Operation and with accrued expenses in the Consolidated Balance Sheets. Customer service and transition issues delayed the office closing until the first quarter of fiscal 2002. As a result of this delay and refinement of closing cost estimates, an additional charge of $100,000 was recorded in the fourth quarter of fiscal 2001, bringing the total one-time charge to $215,000. As of December 31, 2001, operations of the subsidiary had ceased and all employees were terminated.

NOTE H – Accounting for Derivative Instruments and Hedging Activities

As of October 1, 2000, the Company adopted Statement of Financial Accounting Standards Number 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires companies to account for derivatives and hedging activities, including the following two elements: (i) all derivatives are measured at fair value and recognized in the balance sheets as assets or liabilities, and (ii) derivatives meeting certain criteria could be specifically designated as a hedge. The adoption of this Statement had no impact on the Company’s operating results or financial position.

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NOTE I – Revenue Recognition in Financial Statements

On December 3, 1999, the Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 was effective for the Company in the fourth quarter of fiscal 2001 and had no material impact on the Company’s operations or financial position.

NOTE J – Business Combinations and Goodwill and Other Intangible Assets

On June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations, clarifies the criteria for recognizing intangible assets separately from goodwill and is effective for business combinations completed subsequent to June 30, 2001. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separable intangible assets not deemed to have an indefinite life will continue to be amortized over their useful lives, but with no maximum life. The amortization provisions of SFAS 142 apply immediately to goodwill and intangible assets acquired after June 30, 2001 and is required to be adopted for all prior acquisitions in years beginning after October 1, 2002, our fiscal 2003. SFAS 141 has been applied in accounting for the acquisition of the Canadian subsidiary described above in NOTE D. The Company believes SFAS 142 will have no material effect on the Company’s results of operations or financial position.

NOTE K – Impairment or Disposal of Long-Lived Assets

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS 144 as of October 1, 2002 and does not expect that adoption of the Statement will have a significant impact on the Company’s financial position and results of operations.

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Results of Operations

The Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2002 include the post-acquisition results of the business acquired by the Company on December 20, 2001. See Note D to the financial statements.

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.

The Company’s revenues consists of (i) sales of printing systems and related equipment, and (ii) maintenance contracts, spare parts, supplies and consumable items. For the three-month period ended June 30, 2002 (third quarter of fiscal 2002), net revenues were $13.5 million, up 23% from $11.0 million for the three-month period ended June 30, 2001 (third quarter of fiscal 2001). Revenues from the sale of printing equipment were $2.3 million for the third quarter of fiscal 2002, down 67% from $7.1 million for the same period in fiscal 2001. For the nine months ended June 30, 2002, net revenues were $38.4 million, up 17% from $32.8 million for the same period a year ago. Revenues from the sale of printing equipment for the first nine months of fiscal 2002 were $12.0 million, down 44% from $21.6 million for the first nine months of fiscal 2001.

The Company’s printing systems primarily consist of the Imaggia product line, the Checktronic and Foliotronic product lines (our legacy products) and the PS MICR systems product line (manufactured by Océ Printing Systems GmbH and sold on a private label basis as the PS75 MICR and PS155 MICR). In addition, with the acquisition of the Canadian subsidiary in December 2001, the Company expanded its product lines to include the CR Series and RS

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Series of continuous-feed print systems. In June 2002, the Company reached an agreement with LexisNexis Matthew Bender for the establishment of the first major reference site for the Delphax high-speed CR Series publishing system. This installation, which currently includes two CR900P continuous-feed digital publishing systems capable of producing 900 pages per minute, is significant in that it represents the Company’s initial step into the publishing market.

The decline in revenues from printing equipment for the first nine months of fiscal 2002 compared with the same period a year ago was primarily due to significantly lower sales of the Imaggia product line, only slightly offset by stronger sales of the Foliotronic and other legacy products in the second quarter of fiscal 2002. Printing equipment revenues for the three and nine months ended June 30, 2002 included (i) $665,000 and $7.7 million, respectively, from the sale of the Company’s Imaggia product line, a decrease of 88% and 56% from the $5.6 million and $17.5 million for the comparable year-ago periods and (ii) $1.7 million and $4.3 million, respectively, for all other products combined, up 14% and 7%, respectively, from year-ago sales of $1.5 million and $4.1 million. The Company attributes lower printing equipment sales to customer postponement of equipment purchases in a period of economic uncertainty for high-end capital equipment.

For the third quarter of fiscal 2002, revenues from maintenance contracts, spare parts, supplies and consumable items increased 187%, from $3.9 million for the third quarter of fiscal 2001 to $11.2 million for the most recent fiscal quarter. Revenues from maintenance contracts, spares parts, supplies and consumable items for the nine-month periods increased 135%, from $11.2 million for the first nine months of fiscal 2001 to $26.3 million for the first nine months of fiscal 2002. The increases between the quarter and year-to-date periods were due primarily to incremental revenues from the fiscal 2002 acquisition of the Canadian subsidiary, which contributed $12.0 million to fiscal-year-to-date revenues and $5.9 million in the third quarter. In addition, revenues from maintenance contracts, spare parts, supplies and consumable items were also higher due to the larger installed base of Imaggia. For both these reasons, the Company expects domestic revenues from maintenance contracts, spare parts, supplies and consumable items to continue throughout fiscal 2002 at levels higher than in fiscal 2001.

The Company’s gross margin percentages for the third quarter and first nine months of fiscal 2002 were 51% and 50%, respectively, compared with 48% for both the quarter and fiscal-year-to-date periods in fiscal 2001. The improved margins are primarily due to the increase in consumables and supplies revenues generated by the Canadian acquisition. However, in general for fiscal 2002, the Company anticipates that its gross margin percentage will be about the same as for fiscal 2001.

Selling, general and administrative expenses for the third quarter increased 48%, from $3.9 million in fiscal 2001 to $5.8 million in fiscal 2002, and increased as a percentage of net sales from 36% to 43%. Similarly, for the nine-month periods ended June 30, 2002 and 2001, selling, general and administrative expense increased 30%, from $11.8 million in fiscal 2001 to $15.4 million in fiscal 2002. Research and development expenses for the three-month periods ended June 30, 2002 and 2001 were $1.7 million and $680,000, respectively, higher by 151% year to year, and increased as a percentage of net sales from 6% to 13% for the most recent fiscal quarter. Similarly, for the nine-month periods ended June 30, 2002 and 2001, research and development expense increased 106%, from $2.0 million for the first nine months of fiscal 2001, to $4.2 million for the first nine months of fiscal 2002. These significant increases in both selling, general and administrative expenses and research and development expenses were primarily due to the acquisition of the Canadian subsidiary, the impact of which is reflected in full for the second and third quarters of fiscal 2002. In particular, selling, general and administrative expenses were higher primarily due to the increase in customer service staff and associated expenses required to support the increase in revenues from maintenance contracts, spare parts, supplies and consumable items. The Company anticipates that its expense levels through the remainder of fiscal 2002 will be higher than in fiscal 2001 due to the acquisition.

Interest expense for the three and nine months ended June 30, 2002, was $251,000 and $556,000, respectively, compared with $25,000 and $41,000 for the same periods in fiscal 2001. Interest income for the three and nine months ended June 30, 2002, was $10,000 and $23,000, respectively, compared with $10,000 and $38,000 for the same periods in fiscal 2001. Due to the Company borrowing to finance the acquisition of the Canadian subsidiary, and, to a lesser extent, to fund increases in inventory in the fiscal 2002 periods, the Company incurred higher interest expense and had less funds available for short-term investments in the current versus prior fiscal year periods.

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For the three and nine months ended June 30, 2002, the Company realized net exchange gains of $23,000 and $13,000, respectively, compared with net realized exchange losses of $34,000 and $144,000, respectively, for the same periods in the previous fiscal year. In the first quarter of fiscal 2002, a realized exchange loss of $152,000 was incurred due to recognition of accumulated unrealized exchange losses of the Australian subsidiary upon closure of the subsidiary during the quarter. The Company incurs realized foreign exchange gains and losses on currency conversion transactions. The Company experiences unrealized foreign currency gains and losses, which are reflected on the Company’s statements of operations, with unrealized gains due to the weakening, and unrealized losses due to the strengthening, of the U.S. dollar against the currencies of the Company’s foreign subsidiaries and the resulting effect of currency translation on the valuation of the intercompany accounts and certain assets of the subsidiaries, which are denominated in U.S. dollars. Net unrealized exchange gains for the three and nine months ended June 30, 2002 were $47,000 and $77,000, respectively, compared with net unrealized exchange gains of $153,000 and $90,000, respectively, for the same periods in fiscal 2001. The Company anticipates that it will continue to have transactional and translational foreign exchange gains or losses in the future, although strategies to reduce the size of the gains or losses will be reviewed and implemented whenever economical and practical.

Income tax benefit for the three months ended June 30, 2002 was $358,000, compared with income tax expense of $288,000 for the third quarter of fiscal 2001. For the nine months ended June 30, 2002, income tax benefit was $326,000, compared with income tax expense of $710,000 for the same period in fiscal 2001, reflecting estimated annual effective tax rates of 45% and 38%, respectively. Interim effective tax rates vary based on sources of income or loss and estimates of the annual effective tax rate for the fiscal year.

For the third quarter of fiscal 2002, the Company’s basic and diluted loss per share was $0.07, compared with basic and diluted earnings per share of $0.07 for the comparable prior year period. For the nine months ended June 30, 2002, basic and diluted loss per share was $0.06, compared with basic and diluted earnings per share for the first nine months of fiscal 2001 of $0.18. The decline in earnings in both the three- and nine-months periods was primarily attributable to the significant decrease in equipment revenues as customers postponed equipment purchases in a period of continued economic uncertainty, significantly higher operating expense levels due to the acquisition of the Canadian subsidiary and interest on debt financing for the acquisition, only partially offset by the significantly higher maintenance spares and supplies revenues generated by the Canadian acquisition and the tax benefit for the fiscal 2002 periods.

In February 2001, the Company committed to close its subsidiary in Australia, developed a formal exit plan to cease operations effective September 30, 2001, and communicated the plan to all 14 full- and part-time employees of the subsidiary. The Company determined that operations in the market served by the Australian subsidiary could be more profitably served by alternative means, including independent distributors and sales agents. At the commitment date, exit costs were estimated at $115,000. Customer service and transition issues delayed the office closing until the first quarter of fiscal 2002. As a result of this delay and refinement of closing cost estimates, an additional charge of $100,000 was recorded in the fourth quarter of fiscal 2001, bringing the total one-time charge to $215,000. As of December 31, 2001, operations of the subsidiary had ceased and all employees were terminated. By taking this action, the Company anticipated eliminating annual operating expenses of approximately $500,000, beginning in fiscal 2002, with no further loss of revenues from Pacific Rim customers as a result of this change.

On April 23, 2002, the Company effected a workforce reduction, eliminating approximately 40 positions in the Canadian subsidiary. The cost of terminating the employees in these positions, estimated at approximately $875,000, was included in the cost of the acquisition in accordance with SFAS 141 and included in accrued expenses in the Consolidated Balance Sheets. Benefits are paid on either a lump-sum basis or over time. As of June 30, 2002, the accrued liability for benefits payable in the future was $523,000. It is estimated that this balance will be sufficient to cover the remaining obligation under the workforce reduction plan. By taking this action, the Company anticipates eliminating annual operating expenses of approximately $1.3 million without affecting its ability to fulfill current or future orders.

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Market Risk

The Company has foreign subsidiaries located in Canada, England and France, does business in 60 countries and generates approximately 24% of its revenues from outside North America. This percentage is significantly lower in fiscal 2002 than in fiscal 2001 due to the maintenance, spares and supplies revenues derived from the acquisition of the Canadian subsidiary as, predominantly, this business is with U.S. customers. The Company’s ability to sell its products in foreign markets may be affected by changes in economic, political or market conditions in these foreign markets.

The Company’s net investment in its foreign subsidiaries was $7.1 million and $5.7 million at June 30, 2002 and September 30, 2001, respectively, translated into U.S. dollars at the closing exchange rates. The potential loss based on end-of-period balances and prevailing exchange rates resulting from a hypothetical 10% strengthening of the dollar against foreign currencies was not material in the quarter ended June 30, 2002.

From time to time, the Company has entered into foreign exchange contracts as a hedge against specific foreign currency receivables. In the first nine months of fiscal 2002, the Company did not enter into any foreign exchange contracts and does not anticipate entering into any such contracts through the remainder of the fiscal year.

Factors Affecting Results of Operations

The Company’s revenues are subject to fluctuations which may be material.

In January 2000, the Company entered into a three-year equipment and service contract with a significant customer for Imaggia systems and related supplies and consumables that was valued at approximately $40.0 million. Equipment deliveries under the contract began in the second quarter of fiscal 2000 and concluded in the third quarter of fiscal 2001. In the fourth quarter of fiscal 2001, the Company executed a new contract with this customer, valued at approximately $19.5 million, of which approximately $11.5 million was for Imaggia systems and an estimated $8.0 million over three years is for supplies and consumable items. Equipment deliveries under the most recent contract concluded in the second quarter of fiscal 2002. Under both contracts, the Company recorded printing systems and related equipment revenues with the delivery of each component piece of equipment. The Company records revenues for maintenance, spares and supplies based on the monthly usage of these components. Revenues from this customer have been significant, representing 57% and 32% of total revenues for fiscal 2001 and 2000, respectively. The Company anticipates that revenues from this customer will also be significant in fiscal 2002, but to a lesser extent than in fiscal 2001.

On December 20, 2001, the Company and its newly organized Canadian subsidiary acquired substantially all of the North American business assets of Delphax Systems, a Massachusetts general partnership, and Delphax Systems, Inc., a Delaware corporation (collectively, the “Acquired Company”). The Acquired Company is located in suburban Toronto, Ontario and is engaged in the development, manufacture and distribution of print engines, print management software and a range of digital printing systems incorporating the Acquired Company’s proprietary electron-beam imaging technology. The Acquired Company is the supplier of the print engines used in a number of the Company’s products. Through June 30, 2002, the acquisition has contributed approximately $12.0 million in incremental revenues. The Company anticipates that the acquisition will contribute incremental maintenance, spares and supplies revenues in the fourth quarter in excess of $5.0 million and have a positive earnings impact. While the Company expects the acquisition to provide increased revenues and incremental operating income in the future, there can be no assurance that actual results will be as anticipated. In addition, the acquisition expanded the Company’s product lines to include the CR Series and RS Series of continuous-feed print systems. In June of 2002, the Company reached an agreement with LexisNexis Matthew Bender for the establishment of the first major reference site for the Delphax high-speed CR Series publishing system. To date no other CR Series systems and only one RS Series system have been sold and there can be no assurance that such systems will be sold in the future.

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The Company’s PS MICR systems product line is marketed under an agreement with Océ Printing Systems GmbH for the right to private label, sell and service the PS75 MICR product and other high-performance sheet-fed MICR and non-MICR printing systems manufactured by Océ. The Company agreed to purchase a minimum number of PS75 MICR units from Océ to maintain the exclusive right to sell the PS75 MICR product. The Company purchased less than the minimum, and as a result, the Company incurred a penalty and forfeited certain rights of exclusivity. The Company plans to continue offering the PS MICR systems for sale, but there is no assurance that significant sales will be made.

The Company’s net sales and operating results may also fluctuate from quarter to quarter because (i) the Company’s sales cycle is relatively long, (ii) the size of orders may vary significantly, (iii) the availability of financing for customers in some countries is variable, (iv) customers may postpone or cancel orders, and (v) economic, political and market conditions in some markets change with minimal notice and effect the timing and size of orders. Because the Company’s operating expenses are based on anticipated revenue levels and a high percentage of the Company’s operating costs are relatively fixed, variations in the timing of revenue recognition will result in significant fluctuations in operating results from period to period.

Euro Conversion

On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union’s common currency (Euro). The transition period for the introduction of the Euro was from January 1, 1999 to January 1, 2002. The Company prepared for the introduction of the Euro and evaluated methods to address the many issues involved with the introduction of the Euro, including the conversion of information technology systems, recalculating currency risk, strategies concerning continuity of contracts, and ramifications on the processes for preparing taxation and accounting records. The conversion on January 1, 2002 had no material impact on the Company’s financial statements.

Revenue Recognition

On December 3, 1999, the Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number 101 Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the SEC staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 was effective for the Company in the fourth quarter of fiscal 2001 and had no material impact on the Company’s operations or financial position.

Liquidity and Capital Resources

Working capital was $13.1 million at June 30, 2002, compared with $16.9 million at September 30, 2001. Of the $3.8 million decrease, approximately $15.1 million was a result of borrowing on the credit facility to purchase the Canadian subsidiary, partially offset by the current assets and current liabilities of the acquired entity. The Company’s inventory levels increased to $23.2 million at June 30, 2002, from $11.8 million at September 30, 2001. Inventory acquired from acquisition of the Canadian subsidiary comprised approximately $8.7 million of the increase. Accounts receivable increased to $11.3 million at June 30, 2002, from $10.1 million at September 30, 2001, with approximately $4.1 million of the increase due to the Canadian acquisition, offset by collection of receivables and lower second and third quarter equipment sales. Cash and short-term investments amounted to $978,000 at June 30, 2002, compared with $592,000 at September 30, 2001. The increase in cash and short-term investments was primarily due to the timing of borrowing and repaying amounts under the Company’s credit facility. Deferred revenue was $338,000 at June 30, 2002, compared with $1.1 million at September 30, 2001. This decrease was principally due to completion of deliveries under the equipment portion of the equipment contract with the significant customer that is described above and the earning of the related deferred revenue. As of June 30, 2002, deferred revenue was comprised primarily of unearned maintenance contract revenues.

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The Company has undertaken no significant investing activities. No significant capital investment has been undertaken or is planned, and at June 30, 2002, the Company had no material commitments for capital expenditures. Short-term investments are purchased as cash is available and sold as they mature.

To finance the acquisition of the Canadian subsidiary on December 20, 2001, the Company entered into a bank credit agreement, secured by substantially all the assets of the Company, expiring December 19, 2004. The credit agreement provides two types of loans, term and revolving, including letters of credit. The term loan portion of the credit facility was advanced as a single borrowing on December 20, 2001, in the amount of $4.0 million, also outstanding as of June 30, 2002. No amount repaid or prepaid on any term loan may be borrowed again. The Company may borrow on a revolving loan basis up to the lesser of: (i) the revolving credit commitment in effect at such time and (ii) the borrowing base as then determined and computed. The revolving credit commitment was $15.0 million as of June 30, 2002, and is subject to a commitment fee of 0.5% per annum on the unused portion of the commitment. As of June 30, 2002, revolving loans outstanding were $12.3 million. Term loans and revolving loans, at the Company’s election, may be outstanding as base rate loans or Eurodollar loans, provided that $3.0 million of the principal amount of the revolving loans bear interest at the fixed rate of 7.35% per annum.

Principal payments on the term loan are due in installments of $250,000 on the last day of each March, June, September and December in each year commencing with June 30, 2002, with any remaining principal and interest due on December 19, 2004. Similarly, the revolving credit commitment will be permanently reduced by $250,000 on the last day of each March, June, September and December in each year commencing June 30, 2002.

Because June 30, 2002, was a Sunday, the scheduled reductions in both the term loan and the revolving credit commitment were effected on July 1, 2002. As of that date, outstanding term loans were paid down to $3.75 million and the revolving credit commitment was reduced to $14.75 million.

Outstanding base rate loans accrue interest at the bank’s prime rate plus 0.5%. Outstanding Eurodollar loans accrue interest at adjusted LIBOR plus 3%. As of June 30, 2002, $2.8 million was outstanding as base rate loans and $13.5 million was outstanding as Eurodollar loans, at a weighted average interest rate of approximately 5.9%.

As of June 30, 2002, the Company was not in compliance with one of the financial covenants of the credit agreement. The lender has advised the Company that it is reserving all rights and remedies under the credit agreement and will consider further requests for loans on a case-by-case basis. Since the loan is in default, the lender could, but has not, declared the loans due and payable. Thus, the Company has classified the entire outstanding loan balance as a current liability.

The Company is engaged in discussions with the lender to determine remedies and renegotiate the terms of the credit agreement. While the Company believes it will be successful in renegotiating the terms of the credit agreement, there is no assurance that it will be. The Company’s ability to fund its future working capital requirements is dependent on successful completion of these negotiations.

Cautionary Statement

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company’s Annual Report, the Company’s Form 10-K, in other filings with the Securities and Exchange Commission, in the Company’s press releases and in oral statements made to securities market analysts and shareholders, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause the Company’s actual results to differ materially from historical earnings and those presently anticipated or projected.

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The factors mentioned under the subheading “Factors Affecting Results of Operations” are among those that in some cases have affected, and in the future could affect, the Company’s actual results, and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided under the caption “Market Risk” under Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three months ended June 30, 2002.

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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.

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