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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For the fiscal year ended September 30, 2002

Commission File Number: 0-10691

DELPHAX TECHNOLOGIES INC.

Registrant’s telephone number, including area code: (952) 939-9000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($.10 par value)
Preferred Stock Purchase Rights
(Title of Class)

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 last 60 days.
YES  X     NO     

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X 

The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $18,218,899 at December 16, 2002 when the closing price of such stock, as reported by NASDAQ, was $2.95.

There were 6,175,898 shares outstanding of Registrant’s $.10 par value Common Stock as of December 16, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Commission in January 2003 for the Company’s Annual Meeting of Shareholders scheduled for March 20, 2003 are incorporated by reference into Part III.

This Form 10-K consists of 166 pages (including exhibits). The index is set forth on page 2.

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INDEX

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PART I

Item 1. Business

Company Background

Delphax Technologies Inc., formerly Check Technology Corporation, (the Company) designs, manufactures, sells and services advanced print-production systems based on its exclusive electron beam imaging (EBI) technology. The Company also derives a substantial portion of its revenues from the sale of maintenance contracts, spare parts, supplies and consumable items. The Company’s printing systems personalize, encode, print and collate documents for publishing, direct mail, legal, financial, security, forms and other commercial printing applications. The Company was formed in 1981 and began to ship its first system, the Model 2000 Checktronic®, in 1983. The original product concept for the Company was a computerized financial document production system, which integrated (i) automatic collation of checkbook components, (ii) high quality alphanumeric and graphics printing for customer personalization and bank address and (iii) consistent Magnetic Ink Character Recognition (MICR) printing for the electronic processing of checks.

Within a short time after the introduction of the Checktronic system, the Company recognized the product’s applicability in such areas as insurance claim production and centralized funds disbursements. The latter includes payroll and accounts payable checks. The Company calls these “Checkwriting” applications. Checkwriting typically requires a high level of security (e.g., secure operator access and the ability to produce an audit trail after a batch of checks is produced). The Company developed sophisticated control software/hardware, which met these stringent operating requirements. This security capability is offered as an option on many of the Company’s systems and differentiates the Company’s products from many competitors’ products.

The Company has had a significant presence in the international check production marketplace since 1983. The integration of the check production functions described above allowed lower cost production of small check orders (25 to 100 checks) that are typical in most markets outside the United States. This and an improvement in printing quality created a demand for the Company’s systems in many international markets. The Company opened its first subsidiary in England in 1983 and a subsidiary in France in 1987.

During 1998, the Company launched the Imaggia® MG20 system in response to the changing demands of security printers and on-demand printing applications worldwide. The Imaggia MG20 system utilizes state-of-the-art digital, non-impact technology, offering print quality that is visually indistinguishable from offset print. The Company markets the Imaggia system to customers with high volume folio production and print-on-demand (POD) applications.

In April 1999, the Company completed an agreement with Océ Printing Systems GmbH for worldwide exclusive rights to sell (on a private label basis) and service the PS75 MICR product manufactured by Océ. In addition, the Company obtained certain non-exclusive rights to sell and service other high-performance sheet-fed MICR printing systems (PS MICR systems) and non-MICR printing systems manufactured by Océ.

In July 2001, the Company announced introduction of the Imaggia II system. Faster, easier to use and supporting a larger media size than the Imaggia MG20 system, the Imaggia II system features a new flat-screen operator interface with the front-end data processing capacity to support production of truly variable data from sheet to sheet. The Company began shipping the Imaggia II system in the second quarter of fiscal 2002.

In December 2001, the Company, through a 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 was 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 EBI technology. The Acquired Company was the supplier of the print engines used in a number of the Company’s products and was additionally the supplier of print engines for a number of non-competing original equipment manufacturers (OEM).

In April 2002, the Company announced the introduction of the CR Series of high-volume, roll-fed print production systems. The CR900 and CR1300 systems deliver 200 feet per minute throughput, and 300 feet per minute throughput, respectively, and feature high quality image and wide-format, duplex production at full 600 DPI print quality for publishers, direct mailers, bill and statement printers, in-house data and document centers and service bureaus. The Company completed its first sale of the CR Series in June 2002.

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In April 2002, the Company also introduced the RS Series of roll-fed, sheet-output print production systems. The RS Series systems feature fast throughput, duplex production with a variety of built in finishing options for data and document centers, education, public utilities and the financial industry. The Company completed its first sale of the RS Series in June 2002.

As of September 30, 2002, the Company had an installed base of approximately 4,000 EBI systems located in more than 60 countries.

Products

Digital printing systems are classified as either “cut-sheet” or “continuous-feed” printers, depending on their paper-handling capabilities. Cut-sheet printers require the input of individual pre-cut sheets of paper, or base stock. Continuous-feed printers use rolls of paper or fan-folded stacks of paper, and are also known as “roll-fed” printers. Since the unbroken path of paper running through a roll-fed printer is known as a “web,” they are also frequently called “continuous-web printers” or simply “web printers.”

Roll-fed printers are ideal for high volume printing applications. It is not uncommon for a single roll of base stock to exceed 40,000 feet. Roll-fed print systems are limited to a single base stock per print job and often require more extensive post-print finishing processes.

Cut-sheet printers are generally not as fast as roll-fed printers as they are limited by the process of moving individual sheets of paper through the print engine at high speeds. Cut-sheet printers are designed for applications that require multiple base stock sources or variable overprint on pre-printed stocks, or where volume per print job is comparatively small.

The Company sells both cut-sheet and roll-fed printing systems that are currently used in a number of commercial printing applications: folio production, insurance claims, fulfillments, disbursements, publishing, direct mail and transactional processing. Folio production applications include the printing of checkbooks and financial payment coupon books. Insurance claims applications consist of explanation of benefit forms and insurance claim checks. Fulfillment applications include coupons and rebate checks. Disbursement applications include accounts payable checks and payroll checks. Publishing applications include the printing of books and manuals. Direct mail applications include the printing of personalized and mass-market mailings. Transactional processing applications include the printing of invoices and statements. These advanced print-production systems enable customers to utilize the speed, flexibility and efficiency advantages of EBI technology to easily and quickly transform various paper stocks into fully collated books, letters, checks and forms.

The Company’s digital print systems are based upon its exclusive EBI technology. Its flagship products, the CR Series and the Imaggia system, deliver industry-leading throughput for both roll-fed and cut-sheet printing environments. The systems are extremely versatile, providing unparalleled ability to handle a wide range of substrates, from ultra lightweight paper to heavy stock.

Cut-Sheet Print Production Systems. Currently, the Company’s premier cut-sheet printing system is the Imaggia, which offers best-in-class speed of 150 feet per minute at 600 DPI print quality. The Imaggia system utilizes state-of-the-art digital, non-impact technology, offering print quality that is visually indistinguishable from offset print. The Imaggia print quality also meets the highest worldwide standards for MICR encoding on secure documents. The Company markets two models of the Imaggia system to customers for the high volume production of checks, financial documents, business forms and customized direct mail applications. The Imaggia system accommodates a wide range of substrates, from ultra lightweight paper to heavy stock and varying paper sizes up to 18.75 inches in width and 26 inches in length. The Imaggia system can be purchased with various input and output paper handling options and provides a high level of flexibility, reliability and the consistency required to produce high quality documents while reducing production costs.

The Company’s other manufactured cut-sheet system is the Checktronic system. The Checktronic system uses a combination of EBI and impact technology. The Company markets four models of the Checktronic system to customers with medium to high volume folio production, insurance claim, fulfillment and disbursement applications. The Checktronic system operates at rated speeds of up to 120 pages per minute and can be purchased with advanced security/audit capability. It is now sold principally as a system upgrade or refurbished product in Latin America, Asia and Africa.

The Company has an agreement with Océ Printing Systems GmbH for certain non-exclusive rights to sell (on a private label basis) and service two high-performance sheet-fed MICR and non-MICR printing systems manufactured by Océ. The

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Company’s PS MICR systems line of products utilize electrophotography imaging technology, suitable for customers with medium to high volume folio production, insurance claim, fulfillment, disbursement and print-on-demand applications. The Model PS75 MICR operates at a rated speed of 75 pages per minute, while the Model PS155 operates at 155 pages per minute and has highlight color capabilities. The two PS MICR systems have both simplex and duplex operating modes.

Roll-Fed Print Production Systems. The Company’s premier roll-fed printing system is the CR Series high-volume, roll-fed production system which delivers an industry leading 300 feet per minute throughput and features high quality image and wide-format, duplex production at full 600 DPI print quality. The Company markets two models of the CR Series system to publishers, direct mailers, bill and statement printers, in-house data and document centers and service bureaus. The CR Series accommodates a wide range of substrates, from ultra lightweight paper to heavy stock and can be purchased with various output paper handling options. The CR Series of printers provides a high degree of flexibility, reliability and the consistency required to produce high quality printed output while reducing production costs.

The Company’s other manufactured roll-fed print system is the RS Series. The RS Series utilizes the Company’s EBI print technology to provide roll-fed duplex production at rated speeds of up to 330 pages per minute. The Company markets three models of the RS Series to customers that require quality, short-run, quick-turnaround printing. The system is well suited for the production of statements and transaction documents, coupons and tags, student information, explanation of benefits pamphlets and letter checks.

Finishing Units. In addition to document production systems, the Company manufactures a finishing system to complement its cut-sheet product line. The Foliotronic® system consists of a guillotine and stitcher/binder module. Its rated throughput is up to 2,000 books per hour. When used with the Company’s print production systems, the Foliotronic system enables customers with folio production applications to transform blank paper stock into finished books.

Additional finishing systems are offered in conjunction with the Company’s cut-sheet and roll-fed products through various external supplier partnerships established by the Company in order to provide a complete printing solution to its customers when necessary. These additional finishing systems may provide such post-printing activities as batching, stacking, slitting, cutting, folding and binding depending upon the type of equipment and the application. Suppliers of finishing systems are required to meet stringent standards for quality, reliability and interoperability with the Company’s print production systems.

Service and Maintenance. Service and maintenance revenues result from the sale of maintenance contracts, proprietary consumable and supply items and spare parts to customers who have purchased the Company’s print engines and print-production equipment. Supplies are operating materials that are consumed during normal operation of the Company’s systems. Examples of these supplies are EBI print heads, which are consumed in creating the electronic image, erase rods, which are consumed in removing the electronic image, and toner, which is consumed in the printing of each document.

The Company employs customer engineers at each of its major service locations. For customers who purchase maintenance contracts after the warranty period, which is typically 90 days from customer acceptance of a system, the Company provides ongoing customer support through its service network, for which it charges for time and materials on an annual service contract basis. Some customers elect to provide their own maintenance and service on the systems they have purchased. Historically, warranty service expense has not been significant to the Company after the initial units of a new product have been placed with customers.

Sales and Marketing

Organization. The Company’s system sales are made predominantly through direct sales personnel based in the United States and Europe. Marketing activities for the Company and its subsidiaries are centralized at the Company’s headquarters in Minnetonka, Minnesota, USA. These activities include the development and implementation of product pricing, advertising and public relations strategies. In addition, the Company utilizes market research and market development resources to anticipate changes in the Company’s competitive environment.

United States Market. The Company’s traditional market for its products has been primarily the production of checks and other financial documents. With the expansion of its product offering as a result of the Canadian acquisition, the markets for the Company’s products has increased to include additional segments of the publishing, direct mail, and transactional processing markets.

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The publishing market in the United States is comprised of two major segments; (i) long-run printing applications, and (ii) short-run printing applications referred to as POD applications. Long-run printing applications include newspapers, magazines, first edition book printing, consumer catalogs and greeting cards. POD applications include the production of checks and other financial documents, coursework textbooks, forms, newsletters, second edition paperback books, personalized catalogs, policy manuals, product catalogs and product manuals. The direct mail market is comprised of variable data printing applications including post cards, self-mailers, letters, flyers and personalized newsletters. The transactional processing market is comprised of variable data printing applications including bill and statement production, check writing, policy printing and security documents. The Company maintains an installed base of both cut-sheet and roll-fed print equipment in these markets.

The market in the United States for checks and other financial documents is the largest in the world, notwithstanding the fact that the annual consumption of checks has shown a slowing growth rate over the last several years. The Company believes alternatives to the check document, such as debit and credit cards, will eventually reduce the number of checks used, although the size and rate of reduction are difficult to predict. Company studies have shown that other documents produced by the Company’s systems have exhibited higher growth rates over the same period. These documents include payment coupons, tax payment and other installment payment products.

Checkwriting activities have been affected by alternative payment technologies. These substitutes include Electronic Funds Transfer (EFT) and Electronic Data Interchange (EDI). Although these alternatives comprise only a small percentage of total payment transactions in the United States, they are expected to have an increasingly significant impact on United States disbursement activities over the next several years.

Historically, the Company’s cut-sheet systems have been sold in the United States primarily to check printers, payment coupon producers, service bureaus and large corporations. These organizations all have requirements for the production of personalized encoded document packages such as small personal check orders, installment payment books, payroll, accounts payable and insurance claims checks. The Company’s roll-fed systems have been sold to publishers, direct mail printers, governments, service bureaus and commercial printers with POD and transactional processing applications. The Company expects to continue to increase its installed system base in the United States.

International Market. The market for the Company’s products outside the United States has been primarily in personalized check production. The average personalized check order size in most international markets is between 25 and 100 checks. These small order sizes are produced cost effectively on the Company’s products because of their automatic collation capabilities. Stringent MICR quality standards, enforced by the major clearing banks in most international markets, are also met by the Company’s high quality MICR printing capabilities. As a result of these market factors, the Company has had success in penetrating the largest personal check production markets outside of the United States. These include Brazil, France, Mexico, Philippines, Spain and the United Kingdom. The Company believes additional opportunities exist for its products outside of the United States in the publishing, direct mail and transactional processing markets.

Competition

The Company’s products are sold into a number of different market segments. Competition will differ depending on the segment and application in which the Company competes. Many of the Company’s competitors are well established and have significantly greater access to financial, technical and personnel resources. The Company believes sales of the CR Series and Imaggia systems are critical to its ability to remain competitive in the markets it serves, and is continuing to invest in the future success of these products with improved speed and print quality enhancements. See “Research and Development.”

Folio production involves the manufacture of checkbooks and payment coupon books. In the United States, check production is dominated by a small number of companies such as Deluxe Corporation (St. Paul, Minnesota), John H. Harland Company (Decatur, Georgia), Liberty Enterprises (St. Paul, Minnesota) and Clarke American (San Antonio, Texas), all of which are customers of the Company. These major customers establish competitive standards for alphanumeric print quality, MICR print quality and delivery time that must be met or surpassed in order to compete effectively in the United States personal check market. With the Checktronic system product line, the Company was able to establish itself only in the production of new account kits, money market checkbooks and other applications that do not require offset or letterpress quality. The Imaggia system was designed to provide entry into the United States check production market. The Company’s major competitors in the manufacture of checkbooks in the United States are Xerox (United States) and Océ (Germany).

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The Company has had success in the segment of the United States folio production segment that involves the production of personalized payment books such as installment loan and tax payment books. This market is dominated by a small number of companies such as NCP (Birmingham, Alabama), Cummins Allison (Indianapolis, Indiana) and Venture Encoding (Dallas, Texas). The predominant personal checkbook manufacturers discussed above also produce payment books. The Company’s products have found market acceptance in this segment because they provide the efficiency, reliability and production flexibility sought by this segment. Xerox and Océ are presently the Company’s major competition for the production of payment books.

International folio production markets, like the United States payment book production market, are also driven more by cost and production efficiency factors than by alphanumeric print quality standards. In addition, enforcement of high MICR standards by the clearing banks in most international markets makes MICR printing quality an extremely important competitive factor. The Company’s Checktronic system product line has found a high degree of acceptance in the international market segments because these systems provide the efficiency, production flexibility and MICR quality sought by the major check producers. The Company competes in the international marketplace with Troy (United States), Xerox, Océ and Nipson (France).

The centralized high volume production of insurance claims and check disbursements does not require extensive collation. For this reason, the Company finds many competitors in this market segment. Specific competitors include Xerox, Océ, Troy and IBM (United States). The Company’s products offer security and audit control, which for companies that generate many checks is a significant advantage as it restricts unauthorized access to data printed on the Company’s systems. The Company’s security/audit capability also physically tracks the total number of documents printed and maintains a running total of the dollar amounts printed in each run.

The publishing market, with its varied applications and specialized requirements, is highly competitive. Heidelberg (Germany), Nipson, Océ, IBM, Hitachi (Japan) and Xerox are currently the Company’s major competitors in the publishing market. The direct mail market is focused on high volume, low cost production. The Company’s major competitors in this market are IBM, Océ, Xerox and Scitex (United States). The transactional processing market demands high volume, low cost production and the capability to process variable data. IBM, Océ and Xerox are the Company’s major competitors in the transactional processing market.

Backlog

At December 9, 2002, the Company had a backlog of approximately $8.7 million, compared with a backlog of $9.9 million at December 3, 2001. The Company defines its backlog as purchase orders which are unfilled. Because of customer changes in delivery schedules and potential cancellation of orders, the Company’s backlog as of any particular date may not be representative of the Company’s actual sales for any succeeding fiscal period. During most of fiscal 2001, the Company had a significant backlog due to the January 2000 acceptance of a three-year Imaggia system and service contract, valued at approximately $40.0 million. Backlog declined throughout the year as scheduled deliveries were met and rebounded modestly with a follow-on contract with the customer in September 2001.

The Company’s equipment is manufactured to orders received, and to date, the Company has never been unable to meet a scheduled shipment date because of excessive order backlog. The Company expects that, from time to time, it will continue to have periods during which there may be little or no backlog.

Manufacturing and Sources of Supply

The Company has adopted a manufacturing process to enable it to produce a platform version of its major products that can be quickly configured to a customer’s specific order without rework. This process has enabled the Company to begin manufacturing without firm final orders. As a result, the Company has been able to reduce manufacturing parts and material inventories, and respond quickly to new orders.

The Company has begun consolidating all of its manufacturing and engineering operations at its facility in Mississauga, Ontario, and expects to complete the process in calendar 2003. Some of the components of the Company’s print production systems are manufactured by outside vendors, tested and then incorporated into the systems by Company employees. Most of the components are available from multiple sources, however, many of the critical components of the Company’s print systems would require redesign if new suppliers were used.

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Research and Development

Since its formation, the Company’s research and development activities have been focused on the development of digital printing systems capable of producing, on a precision basis, financial documents at required speeds and volumes. The Company is continuing to develop the CR Series of roll-fed systems, which is targeted at customers with high volume publishing POD and direct mail applications. Development activities for the CR Series are focused on increasing throughput speed and enhancing print quality. The Company also continues to develop features for the Imaggia system, which is targeted at customers with high volume folio production and POD applications and has achieved its greatest success to date in the high volume United States check printing market. Software enhancements to improve the front-end data processing and serviceability of both the CR Series and Imaggia systems in the field are also important. In keeping with the Company’s philosophy of providing continuous improvement to the units operating in the field, most of the new capabilities of both the CR Series and the Imaggia can also be offered to existing customers in the field as upgrades. The Company expects that product-engineering efforts seeking further improvements and enhancements will be ongoing. The Company has also continued product engineering on its legacy product lines. The Company’s research and development expenditures were $5.7 million in fiscal 2002, $2.6 million in fiscal 2001 and $2.7 million in fiscal 2000.

Patents

In July 1997, the Company received a patent covering certain aspects of its Imaggia system. In prior years, the Company has received patents covering the Model 2000 Checktronic system, its fusing process and the autotaper for the Foliotronic system. With its Canadian acquisition in December 2001, the Company acquired a number of patents relating to EBI print technology, its print systems and components of such systems. In addition, the Company received certain rights to patents held by others for EBI print technology, its print systems and components of such systems. There is no assurance that such patents and rights to patents will afford the Company any competitive advantage. The Company believes that its future success will depend primarily upon the technical competence and creative skills of its employees rather than on patents. Patents held by others may cover the Company’s printing systems, or components of such systems, in whole or part. Although the Company is not presently aware of any such patents, it could be required to obtain patent licenses in order to conduct its business.

Employees

As of December 16, 2002, the Company had 417 full-time and 8 part-time employees. Many of the Company’s employees are highly skilled, and the Company’s future success will depend, in part, upon its ability to attract and retain such employees. The Company is not subject to any collective bargaining agreement and considers its employee relations to be good.

Item 2. Properties

The Company’s corporate offices are located in Minnetonka, a suburb of Minneapolis, Minnesota. The Company leases a 75,000 square foot building under a lease that expires on September 15, 2010. The annual rent is $420,000, increasing to $481,000 on September 15, 2005 and thereafter, plus operating expenses and real estate taxes incurred by the landlord.

The Company’s Canadian subsidiary leases two facilities totaling 202,916 square feet of office and manufacturing space in Mississauga, a suburb of Toronto, Canada, a portion of which is subleased to another tenant. The combined gross annual rent is $667,465, increasing to $712,549 in September 2003. The related lease agreements expire in 2005 and 2006, with various renewal options.

In addition, the Company leases office space for its European sales and service center in Crawley, England, under a lease which expires in 2013 and provides for annual lease payments of $180,000, subject to adjustment every five years, plus a pro rata portion of the operating expenses incurred by the landlord. The Company leases smaller office premises for its operations in France.

The Company believes that its current arrangements for facilities are more than adequate to meet its present needs and those for the foreseeable future. With the planned consolidation of the North American manufacturing and engineering operations at its Canadian subsidiary, the Company expects to have excess space available at its Minnetonka location and will be reviewing it options for bringing its facilities in line with current and projected needs.

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Item 3. Legal Proceedings

The Company is involved in legal proceedings, which are routine litigation incident to its business. While it is impossible to estimate with certainty the ultimate legal and financial result of such litigation, management is of the opinion that while such litigation may have an impact on results of a particular reporting period, the ultimate disposition of such litigation will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2002.

The names and ages of all of the Company’s executive officers and the positions held as of the date of this report are:

Executive Officers of the Company

Officers of the Company are elected annually by the Board of Directors and serve until their successors are duly elected and qualified. There are no family relationships among the Company’s officers and directors.

Set forth below is a summary of the business experience of each of the executive officers of the Company:

Jay A. Herman joined the Company as Executive Vice President and Chief Financial Officer in May 1988, was promoted to President in June 1989 and elected Chairman of the Board in October 2001. Prior to joining the Company, Mr. Herman was Vice President and Chief Financial Officer of Gelco Corporation’s International Division. He held that post from 1986 to 1988. Between 1979 and 1986, Mr. Herman held positions of Vice President of Administrative Services for Gelco Corporation and Director of Planning and Budgets for Gelco’s Fleet Leasing Division. Before joining Gelco, Mr. Herman held several positions with General Mills.

Robert M. Barniskis joined the Company as Vice President, Chief Financial Officer in November 1999. Prior to joining the Company, Mr. Barniskis spent 14 years in various financial roles within Rosemount Inc., a wholly owned subsidiary of Emerson Electric Company. He was Finance Director, Americas, of Rosemount’s Measurement Division from 1998 to 1999. Between 1996 and 1998, Mr. Barniskis was Finance Director, Asia Pacific, for Fisher-Rosemount Systems, Inc., based in Singapore. Previous to this, Mr. Barniskis was Director of Finance and MIS for Kay-Ray/Sensall, Inc., a wholly owned subsidiary of Rosemount Inc., from 1993 to 1995.

M. H. (Bill) Kuhn joined the Company as Vice President, Customer Service in November 2000. Mr. Kuhn’s previous experience in management and customer service, largely focused on the capital goods market, spans over 30 years, most recently, from 1997 to 2000 as Vice President, Global Customer Support for Grove Worldwide. Earlier in his career, Mr. Kuhn held increasingly more responsible roles with Hogue Equipment from 1986 to 1996, A. K. Equipment from 1980 to 1986 and Caterpillar from 1969 to 1980.

Bruce H. Malmgren was named Vice President, Sales in January 2002 after having held the position of Vice President, Sales and Marketing since November 2000. Since 1966, Mr. Malmgren served in successively more responsible sales and marketing positions, and sales and marketing management roles at various companies, most notably, Xerox Corporation from 1968 to 1990. Just prior to joining the Company, from 1995 to 2000, Mr. Malmgren was President of National Independent Billing, Inc. and Senior Vice President and National Sales Manager for Dataserv, Inc. from 1992 to 1994. Mr. Malmgren has announced his intention to leave the Company in February 2003.

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Kevin R. Mitchell joined the Company in January 2002 as Vice President, Marketing. In December 2002, in addition to his marketing responsibilities, Mr. Mitchell assumed responsibility for worldwide sales and was named Vice President Sales and Marketing. Mr. Mitchell has over 30 years experience in developing and managing high-growth businesses with special expertise in creating effective marketing and branding strategies for growing companies with strong technology components. Prior to joining the Company, Mr. Mitchell was president and chief executive officer of HealthTechnics, Inc., an innovative provider of information and decision support solutions for the healthcare industry, and over his career has held various executive positions in sales and marketing.

Dieter P. Schilling was named Vice President, Operations in November 2000 after having held the position of Vice President of Operations and Customer Service since October 1989. From October 1986 until October 1989, he held the position of Vice President of Customer Service. Mr. Schilling joined the Company as Director of Field Services in 1985 and was promoted to Director of Customer Service in April of 1986. Previous to this, Mr. Schilling was a co-founder and President of Southern California Telephone, a telecommunications interconnect company, which was sold to American Telecommunications, Inc. in 1985.

Peter J. Wood joined the Company as Vice President, Engineering in July 1997. Mr. Wood has over 30 years experience in the development and user application of electronic digital product technology. Prior to joining the Company, Mr. Wood served as Principal Consultant to Vivo Software, Inc. from 1996 to 1997, as Vice President, Engineering and Technology, for Iris Graphics Inc. from 1995 to 1996 and as President of Vital Imaging Systems, Inc. from 1993 to 1995.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s Common Stock trades on the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) under the symbol “DLPX.” The following table sets forth for the periods indicated, the range of high and low closing prices per share as reported by NASDAQ. The NASDAQ bid quotations represent inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions.

Stock Repurchase Program

In September 1998, the Company announced a stock repurchase program of up to 500,000 shares of Common Stock. In the fiscal year ended September 30, 2001, the Company purchased 27,250 shares at a cost of $83,000, bringing the total purchased under the program to 197,750 shares at a cost of approximately $518,000. No shares were repurchased in fiscal 2002.

Holders

As of December 16, 2002, the Company had 285 holders of Common Stock of record.

Dividends

The holders of Common Stock are entitled to receive dividends when and as declared by the Company’s Board of Directors. Since its inception, the Company has not paid any dividends and does not anticipate paying any dividends in the foreseeable future. The Company intends to retain any earnings it may generate to provide for the operation and projected expansion of its business.

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Equity Compensation Plan Information

The following table sets forth certain information as regarding outstanding options to purchase Common Stock as of September 30, 2002:

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Item 6. Selected Financial Data

(1)		Basic loss or earnings per share of Common Stock is computed by dividing the net loss or income for the period by the weighted average number of shares of Common Stock outstanding during the period.
(2)		Diluted loss or earnings per share of Common Stock is computed by dividing the net loss or income for the period by the weighted average number of shares of Common Stock and equivalents outstanding during the period.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Consolidated Financial Statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and adjustments, including those related to inventory, income taxes, revenue recognition and restructuring initiatives. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Inventory

The Company reduces the stated value of its inventory for obsolescence or impairment in an amount equal to the difference between the cost of the inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional reductions in stated value may be required. Conversely, if actual future demand or market conditions are more favorable than those projected by management, reserves in excess of those estimated to be required in the future may be released.

Income Taxes

In determining the carrying value of the Company’s net deferred tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. During the fiscal year ended September 30, 2002, the Company fully reserved its net deferred tax assets totaling $2,060,000, recognizing that the Company has incurred losses in three of the last four fiscal years and there is no assurance that future years will be profitable. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s Consolidated Statements of Operations. Management evaluates the realizability of the deferred tax assets and assesses the valuation allowance quarterly.

Revenue Recognition

The Company recognizes revenue when systems are shipped or services are rendered. For spare parts, supplies and consumable items stored at customer sites, revenue is recognized when the inventory is used by the customer. Amounts billed to customers under maintenance contracts are recorded as deferred revenue and recognized in income over the term of the maintenance agreement. Customer billings in advance of system shipment are recorded as deferred revenue and recognized upon shipment of the system. Revenue on the Company’s PS MICR systems product line, manufactured by Océ and private-labeled by the Company, is recorded on a gross basis. Freight revenue is recorded on a gross basis and recognized upon shipment. The related freight costs are recorded as a cost of sales.

Restructuring Initiatives

In April 2002, the Company effected a workforce reduction, eliminating approximately 40 positions in the Canadian subsidiary. See Note E of the Consolidated Financial Statements. As of September 30, 2002, the accrued liability for benefits payable in the future was $232,000. It is estimated that this balance will be sufficient to cover the remaining obligation under the workforce reduction plan. In addition, subsequent to fiscal yearend, the Company announced plans to consolidate its North American manufacturing and engineering operations at its Canadian subsidiary. See Note K of the Consolidated Financial Statements. Currently, these operations are divided between the facilities in the United States and Canada. The Company’s worldwide headquarters and marketing function will continue to be based in the United States. The selling and customer service functions will remain unchanged in the United States, as well as in the subsidiaries in the United Kingdom and France. The Company expects to incur approximately $1.1 million in restructuring expenses over the course of the consolidation, which is scheduled to be completed by the end of calendar 2003. These restructuring expenses are wholly comprised of employee severance costs unrelated to the acquisition of the Canadian subsidiary and, therefore, will be properly charged to operating expense in fiscal 2003. At the end of each quarter, management evaluates its estimates of costs to complete the restructuring initiatives. Differences, if any, between previous and revised cost estimates many result in a charge or credit to the Company’s results of operations.

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Results of Operations

The Consolidated Statements of Operations for fiscal 2002 include the post-acquisition results of the business acquired by the Company on December 20, 2001. See Note E to the Consolidated 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 Consolidated Financial Statements and notes thereto presented elsewhere in this report.