<PAGE>
As filed with the Securities and Exchange Commission on May 14, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
CREO PRODUCTS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Canada 3555 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3700 Gilmore Way
Burnaby, British Columbia, Canada
V5G 4M1
(604) 451-2700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
CT Corporation System
1633 Broadway
New York, New York 10019
(212) 664-1666
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Douglas H. Collom, Esq. Robert B. Knauss, Esq.
Christopher J. Ozburn, Esq. Lisa M. Wiens-Sinko, Esq.
Jon P. Layman, Esq. Munger, Tolles & Olson LLP
Priya Cherian Huskins, Esq. 355 South Grand Avenue
Wilson Sonsini Goodrich & Rosati 35th Floor
Professional Corporation Los Angeles, California 90071
650 Page Mill Road (213) 683-9100
Palo Alto, California 94304
(650) 493-9300
</TABLE>
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Proposed Maximum Aggregate
Title of Each Class of Securities to Amount to be Offering Price Offering Amount of
be Registered Registered(1) Per Share(2) Price(1)(2) Registration Fee
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, without par value... 5,750,000 shares $15.00 86,250,000 $23,978
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes (i) Common Shares that are to be offered and sold in the
United States, (ii) Common Shares that are to be offered and sold
outside the United States in transactions that are not subject to
registration under the Securities Act of 1933, as amended, but that may
be resold from time to time in the United States during the
distribution, and (iii) an aggregate of 750,000 Common Shares that the
underwriters have the option to purchase from the selling shareholders
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities
Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PART I
EXPLANATORY NOTE
The prospectus relating to Common Shares registered hereby to be offered in
the United States (U.S. Prospectus) is set forth following this page. The
prospectus relating to Common Shares registered hereby to be offered in Canada
(Canadian Prospectus) will consist of certain alternate pages to pages in the
U.S. Prospectus and the balance of the pages included in the U.S. Prospectus
for which no alternate page is provided. The U.S. Prospectus and the Canadian
Prospectus are substantially identical except that they contain different front
and back cover pages and the Canadian Prospectus contains additional sections
under the captions "Summary--Risk Factors," "Eligibility for Investment,"
"Material Contracts," "Prior Sales of Common Shares," "Purchasers' Statutory
Rights," "Certificate of Creo Products Inc." and "Certificate of the
Underwriters" and does not contain the sections included in the U.S. prospectus
under the captions "Taxation," "Exchange Controls," "Where You Can Find More
Information" and "Risk Factors - It may be difficult to enforce U.S. laws and
judgments against a Canadian company, its assets and key personnel." In
addition, there are variations in sequence of particular sections. The form of
U.S. Prospectus is included herein.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 14, 1999
PROSPECTUS
5,000,000 Shares
[LOGO OF CREO PRODUCTS INC.]
Creo Products Inc.
Common Shares
$ per share
--------
Creo Products Inc. is selling 4,000,000 Common Shares and the selling
shareholders named in this prospectus are selling 1,000,000 Common Shares. Creo
will not receive any proceeds from the sale of the shares by the selling
shareholders. The underwriters named in this prospectus may purchase up to
750,000 additional Common Shares from the selling shareholders under certain
circumstances.
This is an initial public offering of Common Shares. Creo currently expects
the initial public offering price to be between $13.00 and $15.00 per share,
and has applied to have the Common Shares included for quotation on the Nasdaq
National Market under the symbol "CREO" and listed on the Toronto Stock
Exchange under the symbol " ".
--------
Investing in the Common Shares involves certain risks. See "Risk Factors"
beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price.............................................. $ $
Underwriting Discount.............................................. $ $
Proceeds to Creo (before expenses)................................. $ $
Proceeds to the Selling Shareholders (before expenses)............. $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about , 1999.
--------
Salomon Smith Barney
Merrill Lynch & Co.
RBC Dominion Securities
Corporation
, 1999
<PAGE>
You should rely only on the information contained in this prospectus. Creo
has not authorized anyone to provide you with different information. Creo is
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as at any date other than the date of this prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 9
Use of Proceeds............................................................ 17
Dividend Policy............................................................ 17
Capitalization............................................................. 18
Dilution................................................................... 19
Selected Consolidated Financial Data....................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 22
Business................................................................... 33
Management................................................................. 44
Interests of Management and Others in Certain
Material Transactions..................................................... 52
Principal and Selling Shareholders......................................... 53
Description of Share Capital............................................... 56
Taxation................................................................... 57
Exchange Controls.......................................................... 61
Underwriting............................................................... 62
Shares Eligible for Future Sale............................................ 65
Legal Matters.............................................................. 67
Experts.................................................................... 67
Where You Can Find More Information........................................ 68
Index to Financial Statements.............................................. F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade the Common Shares,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
All dollar amounts in this prospectus are expressed in United States dollars,
except where we indicate otherwise. Unless we indicate otherwise, all
references to "U.S.$" or "$" are to U.S. dollars and all references to "C$" are
to Canadian dollars. As at , the noon buying rate in New York City
for cable transfers in Canadian dollars was U.S.$1.00 = C$ .
This prospectus contains trademarks and registered trademarks of Creo and
other companies.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully and
consider the information under "Risk Factors" and in our financial statements
and the notes relating to these financial statements, together with the
information included elsewhere in this prospectus, before deciding to invest in
our Common Shares. Except where otherwise noted, the information in this
prospectus takes into account a 2-for-1 stock split effected in May 1999 and is
based upon information as at March 31, 1999. Except where otherwise indicated,
all dollar amounts in this prospectus are expressed in United States dollars.
Except where otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option. In this prospectus, except
where otherwise indicated, "Creo," "we," "us" and "our" refer to Creo Products
Inc. and its subsidiaries.
Our Company
Creo is a leading developer, manufacturer and distributor of comprehensive
"computer-to-plate" (CTP) digital solutions that automate the prepress phase of
commercial printing. "Prepress" refers to the process by which master printing
plates are created prior to actual printing. Our CTP technology transfers
digitized text, graphic images and line artwork directly from desktop
publishing computer systems onto printing plates, eliminating several labor-
intensive, complex and costly steps in the conventional prepress process. We
offer a comprehensive line of precision imaging equipment, including scanners,
proofing devices and plate imagers, as well as workflow management software. A
key component of our CTP solutions is our patented thermal imaging head, which
splits the output of a single high-power laser into 240 separate beams to
create precise images on heat-sensitive printing plates. Our CTP technology
enables printers to use printing presses more profitably, while improving their
ability to meet customer demands for tighter deadlines, better and more
consistent color quality, shorter print runs, and greater customization of
print jobs.
We were the first to develop and commercialize a fully integrated high-speed
CTP solution, and our innovations have established thermal imaging as the
industry standard for CTP. Since 1994, more than 900 of our CTP imaging systems
have been installed in 29 countries, which is more than twice the number of
installations of any of our competitors. Eight of the ten largest commercial
printers in North America are adopting Creo systems as their CTP solutions.
Creo systems are currently used to print high-circulation glossy magazines,
including Glamour, Newsweek, Scientific American, Sports Illustrated and Time,
as well as other documents such as color brochures and catalogs.
We are a leader in developing innovative prepress technology. We are at the
forefront of research and development of next-generation digital prepress
technology, including digital offset press (DOP) products which transfer
digital data directly onto a printing press. We currently hold 30 U.S. and
foreign patents, and have 39 U.S. and foreign patent applications pending.
Our Market Opportunity
Our CTP solutions address the prepress needs of commercial printers.
Commercial printing is the largest segment of the printing industry and
commercial printers are the largest purchasers of prepress capital equipment.
Commercial printers use high-speed lithographic offset printing presses, which
require a set of master printing plates, to produce multiple copies of high-
quality color materials.
The worldwide market for prepress imaging equipment has been estimated by
industry sources to exceed $3 billion annually. Although many of the largest
commercial printers have begun to adopt CTP solutions, we believe the market is
still developing. We believe that less than 20% of commercial printers in the
world currently use CTP solutions. According to industry estimates, CTP unit
shipments worldwide are expected to grow at a compound annual growth rate of
approximately 20% from 1999 through 2003.
4
<PAGE>
Conventional prepress requires highly skilled workers to perform a series of
complex, time-consuming and labor-intensive manual tasks to create each
printing plate. The complexity of conventional prepress limits the ability of
commercial printers to respond to the changing demands of their customers.
Conventional prepress suffers from many shortcomings that limit printers'
ability to make last-minute changes and to tailor output to specific customer
requirements on a cost-effective basis. These shortcomings include process
variability, the use of costly films, paper and hazardous chemicals and idle
time for expensive commercial presses. Growing demand for tighter deadlines,
better and more consistent color quality, shorter print runs, and greater
customization of print jobs has meant that printers using conventional prepress
incur costs that they cannot readily pass on to their customers.
The Creo Solution
Our CTP solutions consist of a comprehensive range of products that allow
printers to eliminate numerous steps from the conventional prepress process by
directly transferring computer-generated data onto plates, eliminating the need
to create and process film. We believe that our solutions save time, eliminate
waste, improve accuracy and color consistency, reduce costs and increase press
utilization, thereby improving operating margins for our customers. The
principal features of our solution are:
. End-to-End Prepress Solution. The Creo solution integrates a complete
range of Creo products that address the entire prepress process.
. Open Architecture and Connectivity. The Creo solution supports industry-
standard file formats, readily interfaces with a broad range of
proprietary data formats, accommodates a wide variety of input media and
is adaptable to emerging file formats and standards such as Adobe
Portable Document Format.
. Modularity, Scalability and Versatility. The Creo solution is modular
and scalable, with components that can be assembled in a variety of
configurations to meet the needs of customers with varying print volume
and press size.
. Knowledgeable and Comprehensive Customer Support. We offer comprehensive
pre-sale evaluation, installation, system integration, training and
post-sale support through what we believe is the most knowledgeable and
experienced field service organization in our industry.
Our Relationship with Heidelberg
An important part of our growth strategy has been establishing strategic
alliances with major industry participants. In October 1997, we formed a joint
venture with Heidelberger Druckmaschinen AG (Heidelberg), to develop,
manufacture, market and distribute our CTP solutions worldwide. Heidelberg is
the world's largest press manufacturer, with offices in more than 160
countries. Heidelberg has substantial international marketing and distribution
channels for commercial printing presses and prepress equipment, and an
extensive customer support and service organization. In the six months ended
March 31, 1999, our product revenue from the joint venture was $27.1 million,
which represented 34.8% of our total revenue. We have also entered into a
separate agreement with Heidelberg to collaborate on the development of DOP
technology.
Our Strategy
Our objective is to maintain our position as a leading developer and supplier
of innovative digital prepress products and technologies. We plan to:
. Expand Our Technology Leadership. We intend to continue to make
significant investments in the research and development of innovative,
next-generation, market-leading technologies such as DOP, as well as to
apply our existing technologies to new markets such as packaging
printing.
5
<PAGE>
. Focus on Customer Success. We will continue to offer world-class service
and support while working closely with our customers to ensure that our
systems generate clear economic benefits.
. Expand and Leverage Strategic Business Alliances. We will continue our
strategy of establishing collaborative relationships with leading
commercial printers, manufacturers of printing presses, plates and
consumables, and others in the commercial printing industry in order to
broaden our distribution, product development and manufacturing
capabilities.
. Expand Our Global Market Presence. We intend to expand our market
penetration geographically, with a focus on small to mid-size commercial
printers.
Our Background
Creo was incorporated under the Canada Business Corporations Act on May 30,
1985. We have two operating subsidiaries: Creo Inc., incorporated under the
laws of the State of Washington, through which we conduct sales, marketing and
service functions in the United States; and Creo Products N.V., incorporated
under the laws of Belgium, which performs similar functions for us in Europe.
We also have two non-operating subsidiaries: Creo Products ULC, an unlimited
liability company incorporated under the laws of Nova Scotia, Canada; and Creo
SRL, a Society with Restricted Liability organized under the laws of Barbados.
Our principal office is located at 3700 Gilmore Way, Burnaby, British
Columbia, Canada, V5G 4M1, and our telephone number is (604) 451-2700.
6
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Shares offered by Creo................... 4,000,000 shares
Common Shares offered by the selling
shareholders................................... 1,000,000 shares
Total........................................ 5,000,000 shares
Common Shares to be outstanding after the
offering....................................... 32,027,854 shares (1)
Use of proceeds................................. We intend to use the proceeds
of this offering for working
capital and other general
corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.......... CREO
Proposed Toronto Stock Exchange symbol..........
</TABLE>
- --------
(1) Excludes 4,595,232 Common Shares issuable upon the exercise of options
outstanding as at March 31, 1999, at a weighted average exercise price of
C$11.75 per share, and 24,598 Common Shares issuable upon exercise of
warrants outstanding as at March 31, 1999, at an exercise price of $9.38
per share.
7
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth our summary financial data. You should read
this information together with our consolidated financial statements, the notes
to those statements beginning on page F-1 of this prospectus, and the
information under "Selected Financial Data," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Our
consolidated financial statements were prepared in accordance with Canadian
generally accepted accounting principles, which differ in certain respects from
United States generally accepted accounting principles. All dollar amounts set
forth below are stated in U.S. dollars.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts under Canadian
GAAP
Statement of Operations
Data:
Total revenue........... $ 6,089 $19,835 $47,938 $95,583 $128,848 $ 59,249 $ 78,057
Gross profit............ 1,500 4,968 16,172 41,949 57,631 26,060 37,369
Earnings (loss) from
operations............. (3,312) (8,074) (7,360) 8,287 19,346 8,847 13,715
Net earnings (loss)..... (2,560) (5,323) (7,243) 5,837 11,090 5,126 7,631
Basic earnings (loss)
per share.............. $ (0.17) $ (0.30) $ (0.34) $ 0.26 $ 0.44 $ 0.21 $ 0.28
======= ======= ======= ======= ======== ======== ========
Fully diluted earnings
(loss) per share....... $ (0.17) $ (0.30) $ (0.34) $ 0.24 $ 0.41 $ 0.19 $ 0.25
======= ======= ======= ======= ======== ======== ========
Shares used in per share
calculation
Basic.................. 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Fully diluted.......... 15,075 17,848 21,209 30,428 30,502 30,499 32,648
<CAPTION>
As at
March 31, 1999
-----------------
As
Actual Adjusted
-------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................................ $ 37,150 $ 88,380
Working capital.................................................. 59,039 110,269
Total assets..................................................... 136,890 188,120
Shareholders' equity............................................. 89,742 140,972
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts under U.S. GAAP
Net earnings (loss)..... $(2,469) $(5,231) $(6,938) $ 6,081 $ 10,358 $ 4,394 $ 7,631
Basic earnings (loss)
per share............. $ (0.16) $ (0.29) $ (0.33) $ 0.27 $ 0.41 $ 0.18 $ 0.28
======= ======= ======= ======= ======== ======== ========
Diluted earnings (loss)
per share............. $ (0.16) $ (0.29) $ (0.33) $ 0.25 $ 0.38 $ 0.16 $ 0.27
======= ======= ======= ======= ======== ======== ========
Shares used in per share
calculation
Basic.................. 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Diluted................ 15,075 17,848 21,209 24,191 27,036 27,433 28,067
</TABLE>
8
<PAGE>
RISK FACTORS
Investing in our Common Shares involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
prospectus before deciding to invest in our Common Shares. The risks described
below are not the only ones we face. Additional risks that generally apply to
publicly traded companies, that are not yet identified or that we currently
think are immaterial, may also impair our business operations. Our business,
operating results and financial condition could be adversely affected by any of
the following risks. The trading price of our Common Shares could decline due
to any of these risks, and you could lose all or part of your investment. You
should refer to the other information set forth in this prospectus, including
our financial statements and the related notes.
This prospectus also contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects," "anticipates," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed below and
elsewhere in this prospectus.
Our CTP solutions may not gain broad market acceptance.
We derive a substantial majority of our revenue from sales to commercial
printers of products based on our technology and our continued success depends
on broad market acceptance of our technology. Adoption of CTP technology
requires commercial printers to make significant and costly changes to their
prepress operations. To date, our CTP solutions have been adopted principally
by large, multi-plant commercial printers. Small and mid-size printers may be
slower to adopt our CTP solutions due to their cost or to such printers'
reluctance to interfere with existing relationships with other suppliers of
prepress equipment. If our products fail to gain broad market acceptance, this
could have a material adverse effect on our business, financial condition or
results of operations.
Our joint venture with Heidelberg may not be successful or may be terminated.
Creo commenced its joint venture with Heidelberg in October 1997, and we
substantially depend on the operating and financial performance of the joint
venture. Joint venture sales of Creo's products accounted for 27.6% of our
total revenue for the year ended September 30, 1998, and 34.8% of our total
revenue for the six months ended March 31, 1999.
We depend on the worldwide marketing and distribution networks of Heidelberg
for the sale of Creo's products under the joint venture, and on Heidelberg's
worldwide service and customer support organization for service support outside
North America. If Heidelberg fails to effectively manage its marketing and
customer service and support operations for the benefit of the joint venture,
market acceptance of Creo's products may be adversely affected.
We depend on product development funding from Heidelberg for products that
are to be commercialized through the joint venture. In connection with such
products, Heidelberg contributed $4.1 million, equal to 21.5% of our total
research and development expenses for the year ended September 30, 1998, and
$3.2 million, equal to 23.8% of our total research and development expenses for
the six months ended March 31, 1999. If the joint venture were terminated, this
funding would cease and, to maintain our product development budgets, we would
be required to replace this funding with our own working capital, which could
adversely affect our operating margins and financial results.
We depend on Heidelberg's manufacturing capabilities for most of our 4-page
and 8-page CTP output devices. Because of the implementation of the joint
venture, we have not expanded our own manufacturing capacity to enable us to
manufacture all joint venture products. If the joint venture were terminated,
we may not be able to increase our manufacturing capacity rapidly enough to
meet future demand for these products.
9
<PAGE>
Our agreement with Heidelberg grants broad termination rights to both
parties. For example, either party may terminate the joint venture if the joint
venture fails to achieve, as of March 31, 1999, or for any rolling 12 month
period after March 31, 1999, the highest revenue levels in both North America
and Europe of any seller of CTP products that are competitive with the CTP
products sold by the joint venture. This level of financial performance was not
achieved for the 12 months ended March 31, 1999, and it is uncertain whether
this requirement will be met for any such 12 month period. Although neither
party has given any notice of an intention to terminate the agreement, if the
agreement were to be terminated, we may not be able to maintain the level of
operations prior to the termination.
If the joint venture should fail to achieve the benefits that we anticipate
or should terminate, this could have a material adverse effect on our business,
financial condition or results of operations.
The market in which we operate is highly competitive.
Direct competition among providers of digital prepress solutions is likely to
increase as the demand for solutions of this type expands. We face intense
direct competition from other manufacturers of CTP products such as Scitex
Corporation Ltd., Agfa-Gevaert N.V., Dainippon Screen Mfg. Co. Ltd., Barco N.V.
and Cymbolic Sciences International, Inc. Some of these companies have longer
operating histories, significantly greater resources and name recognition, a
larger installed base of prepress products and a broader customer base and
product range. The establishment of cooperative relationships among our
competitors, or between them and others such as manufacturers of printing
equipment, prepress automation systems and consumables, may enable them to
offer more competitive prices than ours or otherwise make it difficult for us
to gain access to potential customers. We may not be able to compete
successfully in the future against existing or new competitors, and our failure
to remain competitive could have a material adverse effect on our business,
financial condition or results of operations.
Our operating results may fluctuate.
Our recent revenue growth rates may not be sustainable. You should not use
our past results to predict future performance. Our operating expenses, which
include product development, sales and marketing and general and administration
expenses, are relatively fixed in the short term. If our revenue is lower than
we expect because we sell fewer CTP products, there is a delay in the release
of new products, or for other reasons, we may not be able to quickly reduce our
spending in response. Other factors that may cause our operating results to
fluctuate include:
. fluctuations in the performance of the joint venture could make it
difficult for us to predict and control our expenses associated with its
operations, and could adversely affect our ability to manufacture
sufficient quantities of products to meet customer demand;
. changes in the capital expenditure budgets of our customers, which may
cause seasonal or other fluctuations in the volume and timing of orders
for our products;
. the length of our sales cycle;
. fluctuations in foreign currency exchange rates;
. the level of product and price competition and pricing or marketing
decisions that we may have to make in response to competitive pressures;
. the timing of product upgrades or new product introductions, whether by
us, by competitors or by plate suppliers;
. changes in the mix of products we sell;
. shortages of key components which could make it difficult or impossible
for us to install finished systems on a timely basis; and
. difficulties in hiring, training and retaining qualified personnel.
10
<PAGE>
These and other factors are difficult to forecast and could have a material
adverse effect on our business, financial condition or results of operations.
We depend on third-party suppliers.
We depend on third parties for some of the key components of our products.
There is a limited number of potential suppliers; therefore, it may be
difficult to find qualified suppliers. As lead times for these components can
vary significantly, it may be difficult to replenish our inventory. A failure
to maintain a reliable supply of key components could have a material adverse
effect on our business, financial condition or results of operations.
Our products may contain defects.
Our products and some of the key components supplied to us by third parties
incorporate complex imaging technology, software and hardware. Despite rigorous
testing, undetected errors, defects or bugs may cause failures at any time. We
may not be able to sell our products if they have reliability, quality or
compatibility problems. Moreover, errors, defects or bugs can result in
additional development costs, diversion of technical and other resources from
our other development efforts, claims by our customers or others against us, or
the loss of credibility with our current and prospective customers.
Reliability, quality or compatibility problems with our products could have a
material adverse effect on our business, financial condition or results of
operations.
For example, in mid-1997, a number of the thermal imaging heads installed in
our CTP output devices failed as a result of environmental conditions
prevailing at certain customers' sites. This resulted in a design change to all
of our thermal heads.
Our agreements with our customers typically contain provisions designed to
limit our product liability exposure, but these may not be effective in all
circumstances. We carry product liability insurance which we consider adequate,
but a successful claim against us for an amount exceeding our policy limits
could have a material adverse effect on our business, financial condition or
results of operations.
We may not be able to establish or maintain necessary relationships with third
parties.
Plate suppliers and press manufacturers assist us in developing our
technology, facilitating broad market acceptance of our products, and enhancing
our sales, marketing and distribution capabilities. Our business strategy
depends in part on our ability to maintain and enhance these relationships and
to develop others. Failure to do so could have a material adverse effect on our
business, financial condition or results of operations.
We may not be able to adapt to rapid technological change.
The market for our products is characterized by rapid technological change,
evolving industry standards, frequent new product introductions and
enhancements, and changing customer demands. Accordingly, our future success
will depend on our ability to invest significantly in research and development,
to develop, introduce and support new products and enhancements on a timely
basis and to gain market acceptance of our products. New products can require
significant time and investment to achieve profitability. Our efforts to
introduce new products or services may not be successful or profitable. In
addition, a number of companies, including us, are currently working with press
manufacturers to develop products that use next generation DOP technology as a
digital prepress solution. Although the number of DOP products currently
available is limited, it is likely that new DOP products will be introduced.
Although we expect that various digital prepress technologies, including CTP,
will co-exist for the foreseeable future, DOP products could in time replace or
provide lower-cost alternatives to our existing CTP solutions, causing them to
become obsolete. In addition, recent innovations in xerography could make it a
more economic alternative to offset printing for short print runs.
11
<PAGE>
While our products are designed to be compatible with most major media
sources, file formats, computing platforms, operating systems and databases,
future enhancements or upgrades of such formats or systems could result in
incompatibility with our products. If this were to happen, we would have to
redesign and reconfigure our products to ensure continuing compatibility.
Failure to respond effectively to rapid technological change could have a
material adverse effect on our business, financial condition or results of
operations.
Third-party funding of our research and product development activities may
decline.
Our investment in research and development has been subsidized in part by
funding received from media vendors, press manufacturers and our customers in
connection with specific product development initiatives undertaken by us at
their request. During fiscal 1998, Heidelberg, other press and media suppliers
and Canadian Government investment tax credits provided research and
development funding equal to 21.5%, 22.8% and 19.5% of our gross research and
development expenditure for the period. A decline or halt in third-party
funding of our research and product development activities could have a
material adverse effect on our business, financial condition or results of
operations.
We depend on key personnel.
Our ability to maintain our competitive position depends to a significant
extent on the efforts and abilities of our senior management, particularly Amos
Michelson, Chief Executive Officer, and Dan Gelbart, our President and chief
technologist. We do not have employment agreements with any of these
individuals or any other key executives. The loss of their services could have
a material adverse effect on our business, financial condition or results of
operations. In addition, we do not have "key person" life insurance policies
covering any of our employees.
Our success is also dependent on our ability to attract, retain and motivate
highly skilled technical and other personnel. While we have so far been
successful in doing this, there is a limited number of people with the
necessary technical skills and understanding, and competition for their
services is intense. A failure to recruit or retain personnel could have a
material adverse effect on our business, financial condition or results of
operations.
We have limited protection of our intellectual property and proprietary
technology.
Our success and ability to compete depends to a significant extent on our
proprietary technology. We currently rely on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures, contractual
provisions and patents to protect our proprietary technology. Our intellectual
property rights, particularly our existing or future patents, may be
invalidated, circumvented, challenged, infringed or required to be licensed to
others. The rights granted under our patents may not provide competitive
advantages to us. In addition, our future patent applications may not be issued
with the scope of the claims sought by us, if at all. Furthermore, others may
develop technologies that are similar or superior to our technology, duplicate
or reverse engineer our technology or design around the patents owned or
licensed by us. In addition, effective patent, trademark, copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
We cannot be sure that steps taken by us to protect our technology will prevent
misappropriation or infringement.
We may from time to time receive notifications of claims that we may be
infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, we may seek licenses under such
patents or intellectual property rights. However, we cannot be sure that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us.
If we fail to obtain a license from a third-party for technology used by us
we could incur substantial liabilities and be forced to suspend the manufacture
or shipment of products or our use of processes requiring the technology.
Litigation could result in significant expenses to us, adversely affect sales
of the challenged product or technology and divert the efforts of our technical
and management personnel, whether or not such
12
<PAGE>
litigation is determined in our favor. In the event of an adverse result in any
such litigation, we could be required to:
. pay substantial damages;
. cease the manufacture, use, sale, purchase or import of infringing
products;
. expend significant resources to develop or acquire non-infringing
technology; and
. discontinue the use of certain processes or obtain licenses to the
infringing technology.
Any of these developments could have a material adverse effect on our
business, financial condition or results of operations.
We may not be able to manage our growth effectively.
We have experienced rapid growth, which places a significant strain on our
personnel and other resources. To manage our expanded operations effectively,
we will need to further improve our operational, financial and management
systems. We will also need to successfully hire, train, motivate and manage our
employees. We may not be able to manage our growth effectively, which could
have a material adverse effect on our business, financial condition or results
of operations.
We are subject to risks associated with our international operations.
The proportion of our revenue derived from operations outside North America
has grown from approximately 28.0% during the year ended September 30, 1996 to
approximately 41.7% during the year ended September 30, 1998. In the six months
ended March 31, 1999, foreign operations accounted for approximately 32.9% of
our revenue. We are attempting to increase our presence in markets outside
North America. This requires considerable management time and attention, and a
commitment of financial resources. Our efforts may not be successful to the
degree that we expect. Additionally, international operations are subject to
numerous inherent potential risks, including:
. unexpected changes in regulatory requirements;
. export restrictions, tariffs and other trade barriers;
. changes in local tax rates or rulings by local tax authorities;
. challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign
countries;
. less favorable intellectual property laws;
. longer accounts receivable payment cycles and difficulties in collecting
payments;
. political and economic instability; and
. fluctuations in currency exchange rates and the imposition of currency
exchange controls.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations.
Currency fluctuations will cause translation gains and losses.
Substantially all of our revenue is received in U.S. dollars. A significant
portion of our expenses are incurred in Canadian dollars and Belgian francs. As
a result, appreciation in the value of these currencies relative to the U.S.
dollar could adversely affect our operating results. Foreign currency
translation gains and losses arising from normal business operations are
credited to or charged against other income for the period incurred. To date,
we have not established any currency hedging to minimize the effect of these
gains or losses. As a result, fluctuations in the value of Canadian dollars and
Belgian francs relative to U.S. dollars have caused and will continue to cause
currency translation gains and losses.
13
<PAGE>
We face Year 2000 risks.
We are highly dependent on our computer software programs and operating
systems in operating our business. We also depend on proper functioning of
computer systems of third parties such as suppliers and customers. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. There can be no assurance that all
systems will function adequately. If they do not, the result could be a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Proper functioning of our products depends on their ability to correctly
interpret dates following December 31, 1999. Should our products experience
problems in doing so, we may be subject to warranty claims. Moreover, we may be
subject to claims for service interruptions and other damages related to the
malfunctioning of our systems. Our product liability insurance may not be
adequate to cover this possibility.
We are controlled by our principal shareholders.
We expect that following the completion of this offering our directors,
officers and their respective affiliates and other principal shareholders will
beneficially own approximately 60.1% of our outstanding Common Shares. If these
shareholders were to act together, they may be able to control all matters
requiring approval by our shareholders, including the election of directors and
the approval of mergers or other business combinations.
We will have discretion as to the use of the net proceeds from this offering.
A substantial portion of the net proceeds of this offering has been allocated
to general corporate purposes, including working capital, and specific uses for
these funds have not yet been identified. Accordingly, our management will have
broad discretion as to how to use these funds, and may spend them in ways with
which the shareholders do not agree. See "Use of Proceeds."
There has been no prior public market for our Common Shares.
There has been no public trading market for our Common Shares prior to this
offering, and we cannot be certain that an active trading market will develop
upon completion of the offering or, if one does develop, that it will be
sustained. In addition, there is a risk that the market price will decline
below the initial public offering price, which was established by negotiation
with the representatives of the underwriters. See "Underwriting" for a
discussion of the factors considered in establishing the initial public
offering price of the Common Shares.
The market price of our Common Shares could be volatile.
Many factors could affect the market price of our Common Shares and as a
result you may not be able to resell your Common Shares at or above the initial
public offering price. These factors include:
. variations in our operating results and those of other providers of
prepress solutions;
. variations in industry growth rates;
. actual or anticipated announcements of technical innovations or new
products or product enhancements by us or our competitors;
. general economic conditions in the printing and prepress equipment
industry;
. divergence of our operating results from research analysts' expectations;
and
. changes in earnings estimates by research analysts.
In particular, the market prices of the shares of many companies in the
technology and emerging growth sectors have experienced wide fluctuations that
have often been unrelated to the operating performance of such companies.
14
<PAGE>
You will incur immediate and substantial dilution.
If you invest in our Common Shares, your interest will be diluted by an
amount equal to the difference between the initial public offering price per
share of our Common Shares and the net tangible book value per share of our
Common Shares after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding Common Shares. Based
on an assumed initial public offering price per Common Share of $14.00, we have
calculated this dilution as $9.60 per share. You may incur additional dilution
upon the exercise of outstanding stock options or warrants.
The substantial number of shares that will be eligible for sale in the near
future may adversely affect the market price of our Common Shares.
We cannot provide any assurance that a significant public market for our
Common Shares will develop or be sustained after this offering has been
completed. The sale of substantial numbers of Common Shares in the public
market, or the possibility of such a sale, could adversely affect prevailing
market prices for our Common Shares.
Upon completion of the offering, a total of 32,027,854 of our Common Shares
will be outstanding, based on the Common Shares outstanding as of March 31,
1999, and assuming no exercise of the underwriters' over-allotment option or of
any options or warrants.
All of the Common Shares sold in the offering in the United States and Canada
will be freely tradable without restriction under either the Securities Act of
1933, as amended (Securities Act) (except by "affiliates" as defined in Rule
144 under the Securities Act) or applicable Canadian securities laws (except by
"control persons" as defined under such laws).
For the reasons set forth under "Shares Eligible for Future Sale," we believe
that the following restricted Common Shares and Common Shares issuable upon
exercise of options or warrants will be freely tradable and eligible for resale
at the following times and by the following persons:
<TABLE>
<CAPTION>
Canadian Residents U.S. Residents Other
------------------ -------------- ---------
<S> <C> <C> <C>
On the date of this prospectus.... 0 1,066 1,924
90 days after the date of this
prospectus....................... 0 246 0
180 days after the date of this
prospectus....................... 15,790,925 11,182,419 4,530,836
After 180 days after the date of
this prospectus.................. 60,370 76,952 2,946
</TABLE>
For a further description of the eligibility of Common Shares for sale into
the public market following the offering, see "Management--Shares Eligible for
Future Sale."
It may be difficult to enforce U.S. laws and judgments against a Canadian
company, its assets and key personnel.
We are organized under the federal laws of Canada, our headquarters are in
Canada, most of our directors and officers and certain of the experts named in
this prospectus are residents of Canada, and a substantial portion of our
assets and assets of those persons are located outside the United States. As a
result, it may be difficult for you to initiate a lawsuit within the United
States against these non-U.S. residents or us, or to enforce any judgment
obtained in the United States against us or any of those persons. In addition,
there may be doubt as to the enforceability of:
. liabilities predicated on U.S. federal securities laws determined in
original actions in the Province of British Columbia; and
. judgments of U.S. courts obtained in actions based upon the civil
liability provisions of U.S. federal securities laws in the courts of
the Province of British Columbia.
Moreover, no treaty exists between the United States and Canada for the
reciprocal enforcement of foreign court judgments. Consequently, you may be
prevented from pursuing remedies under U.S. federal securities laws against us
or them.
15
<PAGE>
We are subject to risks associated with potential acquisitions.
As part of our business strategy, we expect to review acquisition prospects
that would complement our existing product offerings, improve market coverage
or enhance our technological capabilities. We have no current agreements or
negotiations underway with respect to any acquisitions, and we may not be able
to identify suitable acquisition opportunities. Future acquisitions could
result in the following:
. potentially dilutive issuances of equity securities;
. large one-time write-offs;
. the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
. difficulties in the assimilation of operations, personnel technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns; and
. risks of entering geographic and business markets in which we have no or
limited prior experience and potential loss of key employees of acquired
organizations.
Since we have not made any acquisitions in the past, we are not certain that
we will be able to successfully integrate any businesses, products,
technologies or personnel that we may acquire in the future. Our failure to do
so could have a material adverse effect on our business.
There are provisions in our Articles of Incorporation and by-laws and Canadian
law which could materially and adversely affect our shareholders.
Under our Articles of Incorporation, our board of directors has the authority
to issue an unlimited number of Common Shares and an unlimited number of
Preferred Shares. It also has the authority, without further vote or action by
the shareholders, to determine the price, rights, preferences, privileges and
restrictions, including voting and conversion rights, of the Preferred Shares,
and to determine to whom they shall be issued. The rights of holders of Common
Shares will be subject to, and may be adversely affected by the rights of the
holders of any Preferred Shares that may be issued in the future. The issuance
of Preferred Shares could make it more difficult for a third party to acquire a
majority of our outstanding voting shares.
Under our by-laws, a quorum for a meeting of shareholders is at least two
shareholders physically present or represented by proxy who between them hold
not less than 20% of the outstanding Common Shares. In addition, under the
Canada Business Corporations Act (CBCA), which governs us, and our by-laws, the
majority required for approval of any action by our shareholders is expressed
as a percentage of those who actually vote at a meeting. It is therefore
possible for the rights of holders of our Common Shares to be modified by the
affirmative vote of the holders of less than a majority of outstanding Common
Shares. See "Description of Share Capital."
We do not plan to pay cash dividends.
We have not paid and do not plan to pay any cash dividends on our capital
stock. We currently intend to retain any future earnings to fund growth, and
therefore do not expect to pay any cash dividends in the foreseeable future.
16
<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $14.00 per share, the
net proceeds to Creo from the sale of the 4,000,000 Common Shares that we are
offering will be approximately $51,230,000, after deducting underwriting
commissions and discounts and Creo's estimated expenses in connection with this
offering. We will not receive any proceeds from the sale of Common Shares by
the selling shareholders.
The principal purposes of this offering are to increase our working capital,
to create a public market for our Common Shares, to facilitate future access by
Creo to public equity markets, and to provide us with increased visibility and
credibility. We intend to use the net proceeds primarily for general corporate
purposes, including working capital. If the opportunity arises, we may use a
portion of the net proceeds to acquire or invest in related businesses,
products and technologies. We have no commitments or agreements with respect to
any material acquisition of, or investment in, any third party. Creo has the
right to purchase a substantial majority of the capital stock of Creo Ltd., a
former subsidiary for approximately $18.0 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Pending any use of the net proceeds for the above purposes,
we intend to invest the funds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain any future earnings for developing and expanding our
business, and therefore we do not currently expect to pay cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth (1) the actual capitalization of Creo as at
March 31, 1999 and (2) such capitalization on an as adjusted basis to give
effect to the sale of 4,000,000 Common Shares offered by Creo at an assumed
initial public offering price of $14.00 per share, and the receipt of net
proceeds therefrom.
<TABLE>
<CAPTION>
As at March 31,
1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, less current portion (1)................... $ 6,512 $ 6,512
------- --------
Shareholders' equity:
Common Shares: unlimited voting Common Shares, without
par value, 28,027,854 shares issued and outstanding,
actual; 32,027,854 shares issued and outstanding, as
adjusted (2)............................................ 78,917 130,147
Preferred Shares: unlimited preferred shares, no shares
issued and outstanding, actual and as adjusted.......... -- --
Retained earnings.......................................... 10,825 10,825
------- --------
Total shareholders' equity............................... 89,742 140,972
------- --------
Total capitalization..................................... $96,254 $147,484
======= ========
</TABLE>
- --------
(1) The long-term debt, which bears interest at 8.05% per annum and matures
February 4, 2002, is secured by a first mortgage on certain properties
located in Delta and Burnaby, British Columbia.
(2) Excludes 4,595,232 Common Shares issuable upon the exercise of options
outstanding as at March 31, 1999, at a weighted average exercise of C$11.75
per share, and 24,598 Common Shares issuable upon exercise of warrants
outstanding as at March 31, 1999, at an exercise price of $9.38 per share.
18
<PAGE>
DILUTION
If you invest in our Common Shares, your interest will be diluted by an
amount equal to the difference between the public offering price per Common
Share and the net tangible book value per Common Share after this offering. We
calculate net tangible book value per Common Share by dividing the net tangible
book value (total assets less intangible assets and total liabilities) by the
number of outstanding Common Shares.
The net tangible book value of Creo as at March 31, 1999 was $89.7 million or
approximately $3.20 per Common Share. After giving effect to the sale of the
4,000,000 Common Shares offered by Creo under this prospectus, at an assumed
initial public offering price per Common Share of $14.00, and after deducting
underwriting commissions and discounts and Creo's estimated expenses in
connection with this offering, the net tangible book value of Creo as at March
31, 1999 would have been $141.0 million or approximately $4.40 per Common
Share. This represents an immediate increase in net tangible book value of
$1.20 per Common Share to existing shareholders and an immediate dilution of
$9.60 per Common Share to new investors. The following table illustrates this
dilution on a per Common Share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Common Share........... $14.00
Net tangible book value per Common Share at March 31, 1999..... $3.20
Increase in net tangible book value per Common Share
attributable to new investors................................. 1.20
Net tangible book value per Common Share after the offering...... 4.40
------
Dilution in net tangible book value per Common Share to new
investors....................................................... $ 9.60
======
Dilution as a percentage of offering price....................... 68.6%
======
</TABLE>
The following table summarizes on a pro forma basis as at March 31, 1999 the
differences between the number of Common Shares purchased from Creo, the total
consideration paid and the average price per share paid by existing
shareholders and by the new investors in the offering, before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by Creo, at an assumed initial public offering price of $14.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 28,027,854 88% $ 78,917,000 58% $ 2.82
New investors................. 4,000,000 12% 56,000,000 42% $14.00
---------- --- ------------ --- ------
Total....................... 32,027,854 100% $134,917,000 100% $ 4.21
========== === ============ === ======
</TABLE>
Sales of Common Shares in the offering by the selling shareholders will
reduce the number of shares held by existing shareholders as at March 31, 1999,
to 27,027,854 shares or 84.4% of the total number of Common Shares outstanding
after the offering (26,277,854 shares or 82.0% if the underwriters' over-
allotment option is exercised in full) and will increase the number of shares
held by new investors to 5,000,000 shares or 15.6% of the total number of
Common Shares outstanding after the offering (5,750,000 shares or 18.0% if the
underwriters' over-allotment option is exercised in full). See "Principal and
Selling Shareholders."
The foregoing discussion and tables assume no exercise of any options or
warrants after March 31, 1999. As at March 31, 1999, an aggregate of 4,595,232
Common Shares were issuable upon the exercise of outstanding options at a
weighted average exercise price of C$11.75 per share and an aggregate of 24,598
Common Shares were issuable upon exercise of outstanding warrants at a weighted
average exercise price of $9.38. If all options and warrants outstanding as at
March 31, 1999 were exercised, the pro forma net tangible book value per share
immediately after completion of the offering would be $4.83. This represents an
immediate dilution in net tangible book value of $9.17 per share to purchasers
of Common Shares in the offering.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements, including the related
notes, included elsewhere in this prospectus. The statement of operations data
for the years ended September 30, 1996, 1997 and 1998 and the balance sheet
data as at September 30, 1997 and 1998 are derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
statement of operations data for the years ended September 30, 1994 and 1995
and the balance sheet data as at September 30, 1994, 1995 and 1996 are derived
from audited financial statements not included in this prospectus. The
consolidated financial data as at and for the six months ended March 31, 1998
and 1999 is unaudited.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP. These principles conform in all material respects with U.S.
GAAP, except as described in note 14 to the consolidated financial statements.
All dollar amounts are expressed in United States dollars.
<TABLE>
<CAPTION>
Six Months
Year Ended September 30, Ended March 31,
------------------------------------------- ----------------
Statement of Operations 1994 1995 1996 1997 1998 1998 1999
Data: ------- ------- ------- ------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts under Canadian
GAAP
Revenue:
Product revenue........ $ 6,089 $19,821 $46,210 $91,669 $114,652 $53,220 $64,894
Service revenue........ -- 14 1,728 3,914 14,196 6,029 13,163
------- ------- ------- ------- -------- ------- -------
Total revenue.......... 6,089 19,835 47,938 95,583 128,848 59,249 78,057
Cost of sales........... 4,589 14,867 31,766 53,634 71,217 33,189 40,688
------- ------- ------- ------- -------- ------- -------
Gross profit............ 1,500 4,968 16,172 41,949 57,631 26,060 37,369
Research and
development, net....... 2,187 5,920 10,683 12,772 6,931 3,233 5,275
Sales and marketing..... 1,387 4,620 8,757 14,619 22,417 10,101 14,396
General and
administration......... 1,238 2,502 4,092 6,271 8,937 3,879 3,983
------- ------- ------- ------- -------- ------- -------
Earnings (loss) from
operations............. (3,312) (8,074) (7,360) 8,287 19,346 8,847 13,715
Other income (expense)
(1).................... 249 424 5 48 (1,580) (799) (593)
------- ------- ------- ------- -------- ------- -------
Earnings (loss) before
income taxes........... (3,063) (7,650) (7,355) 8,335 17,766 8,048 13,122
Income tax expense
(recovery)............. (566) (1,090) (112) 2,498 6,676 2,922 5,491
Earnings (loss) from
discontinued
operations (2)......... (63) 1,237 -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
Net earnings (loss)..... $(2,560) $(5,323) $(7,243) $ 5,837 $ 11,090 $ 5,126 $ 7,631
======= ======= ======= ======= ======== ======= =======
Basic earnings (loss)
per share (3)(4)....... $ (0.17) $ (0.30) $ (0.34) $ 0.26 $ 0.44 $ 0.21 $ 0.28
======= ======= ======= ======= ======== ======= =======
Fully diluted earnings
(loss) per
share (3)(4)........... $ (0.17) $ (0.30) $ (0.34) $ 0.24 $ 0.41 $ 0.19 $ 0.25
======= ======= ======= ======= ======== ======= =======
Shares used in per share
calculation (3):
Basic.................. 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Fully diluted.......... 15,075 17,848 21,209 30,428 30,502 30,499 32,648
Other Financial Data:
Research and
development, gross.... $ 5,584 $ 9,238 $14,698 $14,877 $ 19,123 $ 8,962 $13,256
Research and
development, funding.. 3,397 3,318 4,015 2,105 12,192 5,729 7,981
------- ------- ------- ------- -------- ------- -------
Research and
development, net...... $ 2,187 $ 5,920 $10,683 $12,772 $ 6,931 $ 3,233 $ 5,275
======= ======= ======= ======= ======== ======= =======
Amounts under U.S. GAAP
(5)
Net earnings (loss)..... $(2,469) $(5,231) $(6,938) $ 6,081 $ 10,358 $ 4,394 $ 7,631
======= ======= ======= ======= ======== ======= =======
Basic earnings (loss)
per share (4).......... $ (0.16) $ (0.29) $ (0.33) $ 0.27 $ 0.41 $ 0.18 $ 0.28
======= ======= ======= ======= ======== ======= =======
Diluted earnings (loss)
per share (4).......... $ (0.16) $ (0.29) $ (0.33) $ 0.25 $ 0.38 $ 0.16 $ 0.27
======= ======= ======= ======= ======== ======= =======
Shares used in per share
calculation (6):
Basic.................. 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Diluted................ 15,075 17,848 21,209 24,191 27,036 27,433 28,067
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As at September 30, As at March 31,
---------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
Balance Sheet Data: ------- ------- ------- ------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts under Canadian
GAAP
Cash and cash
equivalents............ $ 3,283 $10,102 $10,937 $30,652 $ 16,224 $22,563 $ 37,150
Working capital......... 4,880 2,249 13,243 40,683 34,562 43,441 59,039
Total assets............ 16,974 39,524 59,592 94,464 102,118 96,298 136,890
Long-term debt (7)...... 2,807 6,405 7,849 6,956 6,600 6,956 6,512
Shareholders' equity
(8).................... 6,009 7,086 20,282 50,475 62,048 55,704 89,742
Amounts under U.S. GAAP
Cash and cash
equivalents............ $ 3,283 $10,102 $10,937 $30,652 $ 16,224 $22,563 $ 37,150
Working capital......... 4,821 2,132 12,931 40,215 34,562 43,441 59,039
Total assets............ 17,124 39,707 60,080 95,196 102,118 96,298 136,890
Long-term debt (7)...... 2,807 6,405 7,849 6,956 6,600 6,956 6,512
Shareholders' equity
(8).................... 6,100 7,269 20,770 51,207 62,048 55,704 89,742
</TABLE>
- --------
(1) Other income (expense) includes foreign exchange gain (loss), interest
income and interest expense.
(2) Creo sold its former data storage business in November 1994.
(3) For an explanation of how earnings per share is calculated, see note 10 to
the consolidated financial statements.
(4) Earnings per share amounts for the year ended September 30, 1995 include
earnings per share from discontinued operations of $0.07.
(5) See note 14 to the consolidated financial statements.
(6) For U.S. GAAP purposes only, per share amounts for the year ended September
30, 1998 and for the six months ended March 31, 1998, include $0.03 and
$0.03, representing the cumulative effect per share of changes in
accounting principles. See note 14 to the consolidated financial
statements.
(7) Excludes current portion.
(8) During the periods presented, we paid no cash dividends.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are a leading developer, manufacturer and distributor of comprehensive
turnkey digital solutions that automate the prepress phase of commercial
printing. Our solutions enable commercial printers to use their installed base
of printing presses more profitably while improving their ability to meet
customer demands for tighter deadlines, better and more consistent color
quality, shorter print runs and greater customization of print jobs.
Revenue. Our revenue is derived from sales of our CTP products to direct
customers and distributors and from fees for service of equipment. Product
revenue is derived from the sale of equipment and software, and includes
revenue earned from installation, training and warranty maintenance services.
Product revenue from sales made directly to end customers is recognized when
title passes to the customer or upon customer acceptance. Customer acceptance
is used as the criterion for revenue recognition when the product sold does not
have an established sales history to allow management to reasonably estimate
returns. Product revenue from sales to distributors is recognized upon shipment
to the distributor. The joint venture with Heidelberg is considered to be a
distributor for purposes of revenue recognition.
Service revenue is derived from customer support agreements entered into in
connection with product sales and renewals. A substantial majority of our
customers contract for service. Service revenue is recorded as deferred revenue
when billed to the customer and is recognized ratably over the term of the
support agreement, which generally is three to twelve months. Creo provides
service support on non-joint venture products on a worldwide basis, and on
joint venture products in NAFTA countries only. Creo does not derive any
service revenue through the joint venture.
Joint Venture. Our joint venture with Heidelberg commenced operations on
October 1, 1997. We each have a 50% economic interest in the joint venture
which was established to develop, manufacture, market and distribute designated
CTP and related workflow products and consumables. The joint venture is co-
managed and does not own any material assets, maintain any employees or operate
any manufacturing or other operating facilities. We share revenue and expenses
equally and generally provide goods and services at cost.
Under Canadian GAAP, operations of the joint venture are accounted for using
proportionate consolidation, which requires that we include in our consolidated
statement of operations one-half of the related revenue and expenses of the
joint venture. This treatment differs from the equity method required by U.S.
GAAP, under which we would be required to record one-half of the net earnings
of the joint venture as a single line item on our consolidated statement of
operations.
Unit sales of CTP products have increased since the commencement of the joint
venture; however, our product revenue growth rate has decreased compared to
prior periods. This decrease is due to the transfer to the joint venture of the
right to sell certain of our products. As a result, using proportionate
consolidation, Creo now records only one-half of the revenues resulting from
the sale of joint venture products. If the joint venture is successful, Creo
expects to realize a number of benefits, including access to Heidelberg's
worldwide customer base and marketing and distribution network, access to its
service and customer support organization outside North America, product
development funding, and improved cost efficiencies for the manufacture of
certain products. Creo believes that the realization of these benefits over
time will result in increased market penetration for its CTP products and
corresponding improvements in Creo's product revenue growth.
Creo's business and results of operation are dependent upon the success of
the joint venture with Heidelberg. Our share of joint venture revenue accounted
for 27.6% of our total revenue for the fiscal year ended September 30, 1998 and
34.8% of our total revenue for the six months ended March 31, 1999. If our
joint venture were to terminate or fail to achieve the benefits that we expect
to occur, our business, results of operations and financial condition would be
materially adversely affected. See "Risk Factors--Our joint venture with
Heidelberg may not be successful or may be terminated."
22
<PAGE>
Research and Development. Since our inception, we have invested heavily in
research and development. This investment has been subsidized in part by
funding received from plate and film suppliers, press manufacturers and our
customers in connection with specific product development initiatives
undertaken by us at their request. We have also received funding from the
Canadian government through investment tax credits. The Canadian government
funds up to 20% of our investment in research and development carried out in
Canada as investment tax credits. These credits are recorded as a reduction in
research and development expense, and are available to reduce income taxes
payable. The research and development funding received from third parties has
resulted in a significant reduction in our total expenditures for research and
development activities. Our joint venture with Heidelberg in particular has
been an important source of such funding. For the 18 months ended March 31,
1999, Heidelberg has provided $7.3 million in research and development funding,
representing 22.4% of our gross research and development expenses for the
period.
Foreign Exchange. Substantially all of our revenue is received in U.S.
dollars. A significant portion of our expenses are incurred in Canadian dollars
and Belgian francs. As a result, appreciation in the value of these currencies
relative to the U.S. dollar could adversely affect our operating results.
Foreign currency translation gains and losses arising from normal business
operations are credited to or charged against other income for the period
incurred. To date, we have not done any currency hedging to minimize the effect
of these gains or losses. As a result, fluctuations in the value of Canadian
dollars and Belgian francs relative to U.S. dollars have caused and will
continue to cause currency translation gains and losses.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP. These principles conform in all material respects with U.S.
GAAP, except as disclosed in note 14 to the consolidated financial statements.
Results of Operations
The following table summarizes historical results of operations as a
percentage of revenue for the periods shown.
<TABLE>
<CAPTION>
Year Ended Six Months
September 30, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
Amounts under Canadian GAAP ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
As a Percentage of Revenue:
Revenue:
Product revenue............... 96.4% 95.9% 89.0% 89.8% 83.1%
Service revenue............... 3.6 4.1 11.0 10.2 16.9
------- ------- ------- ------- -------
Total revenue................. 100.0 100.0 100.0 100.0 100.0
Cost of sales................... 66.3 56.1 55.3 56.0 52.1
------- ------- ------- ------- -------
Gross margin.................... 33.7 43.9 44.7 44.0 47.9
Research and development, net... 22.3 13.4 5.4 5.5 6.8
Sales and marketing............. 18.3 15.3 17.4 17.0 18.4
General and administration...... 8.5 6.5 6.9 6.6 5.1
------- ------- ------- ------- -------
Earnings (loss) from
operations..................... (15.4) 8.7 15.0 14.9 17.6
Other income (expense).......... 0.1 0.0 (1.2) (1.3) (0.8)
------- ------- ------- ------- -------
Earnings (loss) before income
taxes.......................... (15.3) 8.7 13.8 13.6 16.8
Income tax expense (recovery)... (0.2) 2.6 5.2 4.9 7.0
------- ------- ------- ------- -------
Net earnings (loss)............. (15.1)% 6.1% 8.6% 8.7% 9.8%
======= ======= ======= ======= =======
Research and Development Data:
Research and development,
gross.......................... 30.7% 15.6% 14.8% 15.1% 17.0%
Research and development, net... 22.3 13.4 5.4 5.5 6.8
</TABLE>
23
<PAGE>
Six months ended March 31, 1999 compared to six months ended March 31, 1998
Revenue. Total revenue increased 31.7% to $78.1 million for the six months
ended March 31, 1999 from $59.2 million for the six months ended March 31,
1998.
Product revenue increased 21.9% to $64.9 million for the six months ended
March 31, 1999 from $53.2 million for the six months ended March 31, 1998. This
increase in product revenue was due to higher unit sales, at relatively
constant prices, of CTP products both by Creo through direct sales and by the
joint venture. Product revenue from the joint venture increased 66.1% to $27.1
million for the six months ended March 31, 1999 from $16.3 million for the six
months ended March 31, 1998. This increase was primarily due to increased sales
activity on the part of Heidelberg.
Service revenue increased 118.3% to $13.2 million for the six months ended
March 31, 1999 from $6.0 million for the six months ended March 31, 1998. This
increase in service revenue was due to fees generated from additional customer
support agreements entered into in connection with new product sales.
Revenue from our North American customers accounted for $52.4 million, or
67.1% of total revenue for the six months ended March 31, 1999, compared to
$36.5 million, or 61.7% of total revenue, for the six months ended March 31,
1998. Revenue from our European customers accounted for $22.1 million, or 28.4%
of total revenue the six months ended March 31, 1999, compared to $15.5
million, or 26.2% of total revenue, for the six months ended March 31, 1998.
Revenue from our Japanese customers accounted for $1.1 million, or 1.4% of
total revenue, for the six months ended March 31, 1999, compared to $2.8
million, or 4.7% of total revenue, for the six months ended March 31, 1998. The
decrease in Japanese sales is primarily due to depressed economic conditions in
the region.
Cost of Sales. Cost of sales consists of the cost of materials, salaries,
benefits and related overhead costs associated with the generation of revenue,
and includes costs of sales attributable to the joint venture. Cost of sales
increased 22.6% to $40.7 million for the six months ended March 31, 1999 from
$33.2 million for the six months ended March 31, 1998. This increase was
primarily due to higher unit sales of CTP products and higher costs of
servicing products as a result of the increase in our installed base. Cost of
sales decreased as a percentage of total revenue to 52.1% for the six months
ended March 31, 1999 from 56.0% for the six months ended March 31, 1998. This
decrease was primarily due to lower labor, subassembly and component costs,
increased plant capacity utilization and increased efficiencies in our service
department.
Research and Development. Research and development expenses consist of
salaries, benefits and related overhead costs associated with personnel engaged
in research and product development activities, and include research and
development costs attributable to the joint venture. Gross research and
development expenses increased 47.9% to $13.3 million for the six months ended
March 31, 1999 from $9.0 million for the six months ended March 31, 1998. This
increase was primarily due to the hiring of additional research and development
personnel. Gross research and development expenses increased as a percentage of
total revenue to 17.0% for the six months ended March 31, 1999 from 15.1% for
the six months ended March 31, 1998.
Third-party funding of our research and product development activities
increased 39.3% to $8.0 million for the six months ended March 31, 1999 from
$5.7 million for the six months ended March 31, 1998. The $8.0 million in
third-party funding included $3.2 million received from the joint venture, $2.7
million received from media suppliers, press manufacturers and our customers,
and $2.1 million in investment tax credits. The $5.7 million in third-party
funding received for the six months ended March 31, 1998 included $1.3 million
received from the joint venture, $2.7 million received from other third
parties, and $1.7 million in investment tax credits.
As a result of factors affecting gross research and development expenses and
research and development funding, net research and development expenses, which
represent gross research and development expenses less third-party funding,
increased 63.2% to $5.3 million for the six months ended March 31, 1999 from
24
<PAGE>
$3.2 million for the six months ended March 31, 1998. Net research and
development expenses increased as a percentage of total revenue to 6.8% for the
six months ended March 31, 1999 from 5.5% for the six months ended March 31,
1998.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, benefits and related overhead costs associated with sales
personnel, and costs associated with marketing and promotional activities.
Sales and marketing expenses increased 42.5% to $14.4 million, or 18.4% of
total revenue, for the six months ended March 31, 1999 from $10.1 million, or
17.0% of total revenue, for the six months ended March 31, 1998. This increase
was primarily due to expenditures incurred in connection with the expansion of
operations in North America and Europe to support the sale of non-joint venture
products.
General and Administration. General and administration expenses consist of
salaries, benefits and related overhead costs associated with management,
accounting, legal and human resources personnel, as well as professional fees.
General and administration expenses increased 2.7% to $4.0 million, or 5.1% of
total revenue, for the six months ended March 31, 1999 from $3.9 million, or
6.6% of total revenue, for the six months ended March 31, 1998. This increase
was primarily due to the growth of our business.
Income Taxes. Income tax expense increased to $5.5 million for the six months
ended March 31, 1999 from $2.9 million for the six months ended March 31, 1998.
This increase was primarily due to the increase in our profitability. Our
effective tax rate of 41.8% for the six months ended March 31, 1999 was below
the statutory rate of 45.6% due to Canadian manufacturing and processing tax
credits and the fact that a portion of our profits were earned in foreign
jurisdictions with tax rates lower than those in Canada. See note 9 to our
consolidated financial statements.
Year ended September 30, 1998 compared to year ended September 30, 1997
The joint venture with Heidelberg commenced operations on October 1, 1997.
During the joint venture's first full year of operations our revenue growth
decreased compared to prior periods, even though unit sales of our CTP products
increased. This decrease was expected because prior to the start-up of the
joint venture, all of the revenue from sales by us of the CTP products now sold
by the joint venture was recorded in our income statement, whereas now only
one-half of the revenue arising from sales through the joint venture is for our
account. The following comparison of results of operations for the years ended
September 30, 1998 and 1997 should accordingly be read with this development in
mind.
Revenue. Total revenue increased 34.8% to $128.8 million for the year ended
September 30, 1998 from $95.6 million for the year ended September 30, 1997.
Product revenue increased 25.1% to $114.7 million for the year ended
September 30, 1998 from $91.7 million for the year ended September 30, 1997.
This increase was due to higher unit sales of CTP products by us through direct
sales and by the joint venture. Product revenue from the joint venture
represented 31.0% of our total product revenue for the year ended September 30,
1998.
Service revenue increased 262.7% to $14.2 million for the year ended
September 30, 1998 from $3.9 million for the year ended September 30, 1997. As
substantially all of our customers contract for service support, this increase
in service revenue was due to the substantial increase in the installed base of
our equipment.
Revenue from our North American customers accounted for $75.1 million, or
58.3% of total revenue, for the year ended September 30, 1998, compared to
$65.6 million, or 68.6% of total revenue, for the year ended September 30,
1997. Revenue from our European customers accounted for $41.7 million, or 32.3%
of total revenue, for the year ended September 30, 1998, compared to $15.7
million, or 16.4% of total revenue, for the year ended September 30, 1997. The
decrease in North American sales as a percentage of total sales and the
corresponding increase in European sales are primarily due to the commencement
of operations of the joint venture, which recorded 34.6% of its sales during
the period in Europe. Revenue from our Japanese customers
25
<PAGE>
accounted for $5.3 million, or 4.1% of total revenue, for the year ended
September 30, 1998, compared to $9.9 million, or 10.4% of total revenue, for
the year ended September 30, 1997. The decrease in Japanese sales is primarily
due to depressed economic conditions in the region.
Cost of Sales. Cost of sales increased 32.8% to $71.2 million for the year
ended September 30, 1998 from $53.6 million for the year ended September 30,
1997. This increase was primarily due to higher unit sales and higher costs of
servicing products as our installed base increased. Cost of sales decreased
slightly as a percentage of total revenue to 55.3% for the year ended September
30, 1998 from 56.1% for the year ended September 30, 1997. This decrease was
primarily due to lower labor, subassembly and component costs, and increased
plant capacity utilization, offset by increased costs of service related to the
hiring of additional service personnel.
Research and Development. Gross research and development expenses increased
28.5% to $19.1 million for the year ended September 30, 1998 from $14.9 million
for the year ended September 30, 1997. This increase was primarily due to the
hiring of additional research and development personnel. Gross research and
development expenses decreased as a percentage of total revenue to 14.8% for
the year ended September 30, 1998 from 15.6% for the year ended September 30,
1997. This decrease was due to the growth in our revenue base.
Third-party funding of our research and product development activities
increased 479.2% to $12.2 million for the year ended September 30, 1998 from
$2.1 million for the year ended September 30, 1997. The $12.2 million in third-
party funding received during the year ended September 30, 1998 included $4.4
million received from media suppliers and press manufacturers, $4.1 million
received from the joint venture and $3.7 million in investment tax credits. The
$2.1 million in third-party funding received during the year ended September
30, 1997 included $1.4 million received from third parties and $ 0.7 million
received in investment tax credits.
As a result of factors affecting gross research expenses and development and
research and development funding, net research and development expenses
decreased 45.7% to $6.9 million for the year ended September 30, 1998 from
$12.8 million for the year ended September 30, 1997. Net research and
development expenses decreased as a percentage of total revenue to 5.4% for the
year ended September 30, 1998 from 13.4% for the year ended September 30, 1997.
Sales and Marketing. Sales and marketing expenses increased 53.3% to $22.4
million, or 17.4% of total revenue for the year ended September 30, 1998 from
$14.6 million, or 15.3% of total revenue for the year ended September 30, 1997.
This increase was primarily due to expenditures incurred in connection with the
expansion of our operations and the start-up of the joint venture.
General and Administration. General and administration expenses increased
42.5% to $8.9 million, or 6.9% of total revenue for the year ended September
30, 1998 from $6.3 million, or 6.5% of total revenue for the year ended
September 30, 1997. This increase was primarily due to the growth of our
business and the addition of new facilities required for future expansion.
Income Taxes. Income tax expense increased to $6.7 million for the year ended
September 30, 1998 from $2.5 million for the year ended September 30, 1997.
This increase was primarily due to the increase in our profitability. Our
effective tax rate of 37.6% for the year ended September 30, 1998 was below the
statutory rate of 45.6% due to Canadian manufacturing and processing tax
credits and the fact that a portion of our profits were earned in foreign
jurisdictions with tax rates lower than those of Canada. See note 9 to our
consolidated financial statements.
26
<PAGE>
Year ended September 30, 1997 compared to year ended September 30, 1996
Revenue. Total revenue increased 99.4% to $95.6 million for the year ended
September 30, 1997 from $47.9 million for the year ended September 30, 1996.
Product revenue increased 98.3% to $91.7 million for the year ended September
30, 1997 from $46.2 million for the year ended September 30, 1996. This
increase was due to higher unit sales resulting from broader market acceptance
of our CTP products.
Service revenue increased 126.5% to $3.9 million for the year ended September
30, 1997 from $1.7 million for the year ended September 30, 1996. This increase
was due to fees generated from additional customer support agreements entered
into in connection with new product sales.
Revenue from our North American customers accounted for $65.6 million, or
68.6% of total revenue, for the year ended September 30, 1997, compared to
$34.5 million, or 72.0% of total revenue, for the year ended September 30,
1996. Revenue from our European customers accounted for $15.7 million, or 16.4%
of total revenue, for the year ended September 30, 1997, compared to $4.5
million, or 9.3% of total revenue, for the year ended September 30, 1996.
Revenue from our Japanese customers accounted for $9.9 million, or 10.4% of
total revenue, for the year ended September 30, 1997, compared to $7.1 million,
or 14.6% of total revenue, for the year ended September 30, 1996.
Cost of Sales. Cost of sales increased 68.8% to $53.6 million for the year
ended September 30, 1997 from $31.8 million for the year ended September 30,
1996. This increase was primarily due to higher labor, subassembly and
component costs and overhead expenses associated with increased product sales,
and costs related to the hiring of additional service personnel. Cost of sales
decreased as a percentage of total revenue to 56.1% for the year ended
September 30, 1997 from 66.3% for the year ended September 30, 1996. This
decrease was primarily due to product mix, improvements in manufacturing
efficiencies, lower labor, subassembly and component costs, and increased plant
capacity utilization.
Research and Development. Gross research and development expenses increased
1.2% to $14.9 million for the year ended September 30, 1997 from $14.7 million
for the year ended September 30, 1996. This increase was primarily due to an
increase in research and development labor costs, offset by decreased
prototyping material costs as our research and development focus shifted from
new product development to product enhancement. Gross research and development
expenses decreased as a percentage of total revenue to 15.6% for the year ended
September 30, 1997 from 30.7% for the year ended September 30, 1996. This
decrease was primarily due to the growth in our revenue base.
Third-party funding of our research and product development activities
decreased 47.6% to $2.1 million for the year ended September 30, 1997 from $4.0
million for the year ended September 30, 1996. The $2.1 million in third-party
funding received during the year ended September 30, 1997 included $0.7 million
in investment tax credits and $1.4 million received from third parties.
As a result of factors affecting gross research and development expenses and
research and development funding, net research and development expenses
increased 19.6% to $12.8 million for the year ended September 30, 1997 from
$10.7 million for the year ended September 30, 1996. Net research and
development expenses decreased as a percentage of total revenue to 13.4% for
the year ended September 30, 1997 from 22.3% for the year ended September 30,
1996.
Sales and Marketing. Sales and marketing expenses increased 66.9% to $14.6
million for the year ended September 30, 1997 from $8.8 million for the year
ended September 30, 1996. This increase was primarily due to higher sales
commissions and the hiring of additional sales and marketing personnel in North
America and Europe. Sales and marketing expenses decreased as a percentage of
total revenue to 15.3% for the year ended September 30, 1997 from 18.3% for the
year ended September 30, 1996. This decrease was primarily due to increased
productivity among sales personnel.
27
<PAGE>
General and Administration. General and administration expenses increased
53.3% to $6.3 million for the year ended September 30, 1997 from $4.1 million
for the year ended September 30, 1996. This increase was primarily due to the
hiring of additional personnel. General and administration expenses decreased
as a percentage of total revenues to 6.5% for the year ended September 30, 1997
from 8.5% for the year ended September 30, 1996. This decrease was primarily
due to the growth in our revenue base.
Income Taxes. Income tax expense increased to $2.5 million for the year ended
September 30, 1997 from a recovery of $0.1 million for the year ended September
30, 1996. This increase was primarily due to the increase in our profitability.
Our effective tax rate of 30.0% for the year ended September 30, 1997 was below
the statutory rate of 45.6% due to the availability of loss carryforwards,
Canadian manufacturing and processing tax credits and the fact that a portion
of our profits were earned in foreign jurisdictions with tax rates lower than
those of Canada. See note 9 to our consolidated financial statements.
28
<PAGE>
Quarterly Results of Operations
The following tables summarize selected quarterly financial information for
our ten most recent fiscal quarters, as well as the percentage of our revenue
represented by each item. This information is unaudited, but reflects all
adjustments of a normal, recurring nature which are, in the opinion of our
management, necessary to present a fair statement of our financial position and
results of operations for the periods presented. Quarter-to-quarter comparisons
of our financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31,
1996 1997 1997 1997 1997 1998 1998 1998 1998 1999
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts under Canadian GAAP
Revenue:
Product revenue............ $13,557 $19,355 $26,637 $32,120 $22,557 $30,663 $30,835 $30,597 $31,065 $33,829
Service revenue............ 837 897 1,066 1,114 2,354 3,675 3,037 5,130 5,484 7,679
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue.............. 14,394 20,252 27,703 33,234 24,911 34,338 33,872 35,727 36,549 41,508
Cost of sales............... 10,258 11,734 14,073 17,569 14,575 18,614 18,325 19,703 19,471 21,217
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 4,136 8,518 13,630 15,665 10,336 15,724 15,547 16,024 17,078 20,291
Research and development,
net........................ 1,505 3,146 3,575 4,546 2,098 1,135 1,611 2,087 2,033 3,242
Sales and marketing......... 2,026 2,936 4,531 5,126 4,532 5,569 5,723 6,593 6,785 7,611
General and administration.. 1,175 1,248 1,493 2,355 1,680 2,199 2,189 2,869 2,035 1,948
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
operations................. (570) 1,188 4,031 3,638 2,026 6,821 6,024 4,475 6,225 7,490
Other income (expense)...... 365 (438) (158) 279 (504) (295) (278) (503) (332) (261)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes............... (205) 750 3,873 3,917 1,522 6,526 5,746 3,972 5,893 7,229
Income tax expense
(recovery)................. (16) 158 1,243 1,113 552 2,370 2,219 1,535 2,523 2,968
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)......... $ (189) $ 592 $ 2,630 $ 2,804 $ 970 $ 4,156 $ 3,527 $ 2,437 $ 3,370 $ 4,261
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31,
1996 1997 1997 1997 1997 1998 1998 1998 1998 1999
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Revenue:
Revenue:
Product revenue............ 94.2 % 95.6% 96.2% 96.6% 90.6% 89.3% 91.0% 85.6% 85.0% 81.5%
Service revenue............ 5.8 4.4 3.8 3.4 9.4 10.7 9.0 14.4 15.0 18.5
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales............... 71.3 57.9 50.8 52.9 58.5 54.2 54.1 55.1 53.3 51.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin................ 28.7 42.1 49.2 47.1 41.5 45.8 45.9 44.9 46.7 48.9
Research and development,
net........................ 10.4 15.5 12.9 13.7 8.4 3.3 4.7 5.8 5.5 7.8
Sales and marketing......... 14.1 14.5 16.3 15.4 18.2 16.2 16.9 18.5 18.6 18.3
General and administration.. 8.1 6.2 5.4 7.1 6.8 6.4 6.5 8.1 5.6 4.7
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
operations................. (3.9) 5.9 14.6 10.9 8.1 19.9 17.8 12.5 17.0 18.1
Other income (expense)...... 2.5 (2.2) (0.6) 0.8 (2.0) (0.9) (0.8) (1.4) (0.9) (0.6)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes............... (1.4) 3.7 14.0 11.7 6.1 19.0 17.0 11.1 16.1 17.5
Income tax expense
(recovery)................. (0.1) 0.8 4.5 3.3 2.2 6.9 6.6 4.3 6.9 7.2
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)......... (1.3)% 2.9% 9.5% 8.4% 3.9% 12.1% 10.4% 6.8% 9.2% 10.3%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE>
Revenue. Total revenue increased in each quarter during the period October 1,
1996 to September 30, 1997. The increases during this period were primarily due
to higher unit sales of our CTP products. Product revenue for the three months
ended September 30, 1997 included $3.1 million in sales of CTP output devices
to Heidelberg to install in their showrooms in anticipation of the launch of
the joint venture.
The joint venture with Heidelberg commenced operations on October 1, 1997.
The decrease in product revenue from $32.1 million for the three months ended
September 30, 1997 to $22.6 million for the three months ended December 31,
1997 was due to the revenue sharing arrangements implemented in connection with
the joint venture, as well as a delay in the shipment of product due to a
design change required on the thermal head.
Product revenue for the three months ended March 31, 1998 returned to
approximately the level achieved during the three months ended September 30,
1997, excluding the $3.1 million in showroom sales to Heidelberg during the
prior period. Product revenue remained consistent during the quarters ended
June 30, 1998 and September 30, 1998, and increased during the quarters ended
December 31, 1998 and March 31, 1999 to $31.1 million and $33.8 million,
respectively. The increase in product revenue for the six months ended March
31, 1999 reflects the increased market penetration for our CTP products made
possible by Heidelberg's worldwide marketing and distribution network.
Service revenue has generally increased at a steady rate over the ten
quarters ended March 31, 1999, reflecting an increase in fees generated from
customer support agreements. A substantial majority of our customers contract
for service.
Cost of Sales. Cost of sales has generally increased over the ten quarters
ended March 31, 1999, reflecting the growth in our CTP product sales. We expect
that cost of sales will continue to increase as sales of our CTP products grow.
Research and Development. The commencement of operations of the joint venture
on October 1, 1997 resulted in a substantial decrease in net research and
development expense in each of the six quarters ended prior to March 31, 1999
compared to the three months ended September 30, 1997. This decrease reflects
the funding contribution of Heidelberg to research and development initiatives
undertaken by us in connection with CTP products sold by the joint venture. The
increase in net research and development expense in each of the four quarters
ended March 31, 1999 reflects the hiring of additional research and development
personnel. We expect that net research and development expenses will continue
to increase as we introduce new products and enhance existing equipment and
software.
Sales and Marketing. Sales and marketing expenses increased over the ten
quarters, reflecting the growth in our CTP product sales. We expect that our
sales and marketing expenses will continue to increase as sales of our CTP
products grow.
General and Administration. General and administrative expenses increased
during the eight quarters ended September 30, 1998 as we expanded our
infrastructure to accommodate the growth in our CTP product sales. General and
administration expenses decreased during the two quarters ended March 31, 1999,
as the cost of our internal software system had been fully amortized. We expect
that general and administration expenses will continue to increase as sales of
our CTP products grow.
Liquidity and Capital Resources
Since we commercialized our first CTP product in October 1994, we have
financed our operations through a combination of private sales of equity
securities and cash generated by operations. As at March 31, 1999, we had $59.0
million in working capital and $37.2 million in cash and short term deposits.
Our operations used cash of $0.7 million for the year ended September 30, 1997,
and generated cash of $11.6 million for the year ended September 30, 1998 and
$7.3 million for the six months ended March 31, 1999.
30
<PAGE>
As at March 31, 1999, we had deferred revenues and deposits of $20.8 million,
and total borrowings of $6.8 million which are secured by a first mortgage on
our Canadian office and production facilities. We also have $15.0 million
available through a credit facility with a Canadian chartered bank. The credit
facility is repayable on demand and bears interest at LIBOR plus 1%. As at
March 31, 1999, there were no borrowings outstanding under the credit facility.
Our net capital expenditures for the year ended September 30, 1998 were $23.5
million, compared to $4.2 million for the year ended September 30, 1997. Our
net capital expenditures for the six months ended March 31, 1999 were $5.8
million, compared to $5.6 million during the six months ended March 31, 1998.
Our capital expenditures over the past eighteen months have related primarily
to the purchase of land for engineering, production and service support
facilities. Total capital expenditures in 1999 are expected to be less than
$14.0 million.
In 1994, we formed Creo Ltd. (CPI) under the laws of Israel to carry on
certain research and development work relating to our imaging technologies. In
1997, CPI began to focus on developing applications of our technologies to the
printed circuit board industry. In 1998, our Board of Directors decided that we
should focus our energies and resources on our core graphic arts business. As a
result, additional shares of CPI were sold to outside investors, leaving us
with a small minority interest. We also have an option to re-acquire up to an
additional 5,280,000 shares, representing an 88% interest in CPI. This option
is exercisable at any time up to March 12, 2000, at a price of $2.00 per share,
plus a premium ranging from 10% to a maximum of 28% per annum, depending upon
when the option is exercised. We have not currently decided whether to exercise
this option. We are not represented on CPI's board of directors, and have no
role in its management.
We believe that the net proceeds from the sale of the Common Shares in this
offering, together with existing cash balances, cash generated by our
operations and funds available under our credit facility will be sufficient to
meet our anticipated working capital and capital expenditure requirements for
at least the next twelve months.
Year 2000 Readiness Disclosure
State of Readiness. We use a number of computer software programs and
operating systems across our entire organization, including applications used
in financial business systems and various administrative functions. Employing a
team made up of internal personnel, we have completed the process of
identifying and remediating information technology systems which were not Year
2000 compliant. As a result, we believe that none of our information technology
systems currently contain source code that is unable to appropriately interpret
the upcoming Year 2000.
We are dependent on third parties for certain components of our products.
Year 2000 issues may affect these suppliers' ability to deliver product. We are
reviewing our suppliers' plans for Year 2000 compliance to satisfy ourselves
that they have made the necessary modifications to or replacements of any
affected systems. We will rely primarily on the suppliers' commitments to
accomplish this task but have no contractual commitment from the suppliers
regarding Year 2000 issues.
Costs of Addressing Year 2000 Issues. Given the extent of our systems'
compliance, we do not expect Year 2000 compliance costs to have any material
adverse impact on our business. The total costs for the Year 2000 compliance
assessment and remediation undertaken by us have not been significant and are
included in general and administrative expenses.
Risks of Year 2000 Issues. In light of our assessment and remediation efforts
to date, we believe that any residual Year 2000 risk is limited to non-critical
business applications and support hardware. We have no assurance that the
third-party manufacturers who supply certain components to us will be Year 2000
compliant with their internal systems. A reduction in the supply of product
from these suppliers could have a material adverse effect on our business.
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<PAGE>
Contingency Plans. We have developed a contingency plan for all operations to
address the most reasonable likely worst case scenarios regarding Year 2000
compliance.
Impact of Recently Issued Accounting Standards
In addition to the U.S. GAAP differences referred to in note 14 to our
consolidated financial statements, the Financial Accounting Standards (FAS)
Board in the United States has issued FAS 133, "Accounting for Derivative
Instruments and for Hedging Activities." FAS 133 provides comprehensive and
consistent standards for the recognition and measurement of derivatives and
hedging activities. Generally, FAS 133 requires all derivatives to be recorded
on the balance sheet at fair value and establishes new accounting requirements
for different types of hedging activities. FAS 133 is effective for fiscal
years beginning after June 15, 1999.
To date, we have not engaged in any hedging activities. Our management
continues to assess the implications of FAS 133, but does not believe its
adoption will materially affect our historical results of operations or
shareholders' equity when reconciled to U.S. GAAP as set out in our
consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk
We have used an interest rate swap to manage our risk with regards to
interest rate changes. As a result, floating rate debt has been converted to
fixed rate debt. The swap results in our paying an interest rate of 8.05% and
receiving an interest rate of LIBOR + 1.5% for the duration of the long-term
debt. The fair value of the interest rate swap as at September 31, 1998 is
$341,000 in favor of the counterparty.
We have not engaged in any currency hedging to minimize the effect of
exchange gains or losses. We are exposed to foreign currency fluctuations on
our monetary asset and liability balances denominated in Canadian dollars and
Belgian francs.
The table below presents the principal cash flows that exist by maturity date
of our long-term debt and details of our interest rate swap as at September 31,
1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 Total
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Fixed rate U.S.$ debt.................... 647 -- -- -- 647
Average rate........................... 0% -- -- -- 0%
Floating rate U.S.$ debt................. 296 296 296 6,068 6,956
Average rate........................... 7.2% 7.2% 7.2% 7.2% 7.2%
Interest Rate Swaps
U.S.$ pay fixed--U.S.$ receive
variable................................ 296 296 296 6,068 6,956
Average pay rate....................... 6.6% 6.6% 6.6% 6.6% 6.6%
Average receive rate................... 5.7 5.7 5.7 5.7 5.7
</TABLE>
32
<PAGE>
BUSINESS
Overview
Creo is a leading developer, manufacturer and distributor of comprehensive
"computer-to-plate" (CTP) digital solutions that automate the prepress phase of
commercial printing. "Prepress" refers to the process by which master printing
plates are created prior to actual printing. Our CTP technology transfers
digitized text, graphic images and line artwork directly from desktop
publishing computer systems onto printing plates, eliminating several labor-
intensive, complex and costly steps in the conventional prepress process. We
offer a comprehensive line of precision imaging equipment, including scanners,
proofing devices and plate imagers, as well as workflow management software.
Our systems are based on our patented and proprietary thermal imaging and
related technologies. These technologies enable printers to use their printing
presses more profitably, while improving their ability to meet customer demands
for tighter deadlines, better and more consistent color quality, shorter print
runs and greater customization of print jobs.
We were the first to develop and commercialize a fully integrated high-speed
CTP solution and our innovations have established thermal imaging as the
industry standard for CTP. Since 1994, more than 900 of our CTP imaging systems
have been installed in 29 countries, which is more than twice the number of
installations of any of our competitors. Eight of the ten largest commercial
printers in North America are adopting Creo systems as their CTP solutions.
Creo systems are currently used to print high-circulation glossy magazines,
including Glamour, Newsweek, Scientific American, Sports Illustrated and Time,
as well as other documents such as color brochures and catalogs.
We are a leader in developing innovative prepress technology. In 1994, we
delivered the first commercial CTP system for plate production. In 1995, we
commercialized the first thermal CTP system. In 1996, we introduced the first
digital proofing device that allows printers to produce accurate, high-quality
digital proofs with the same imaging equipment used to image plates. We are at
the forefront of research and development of digital prepress technology,
including digital offset press (DOP) products. We believe that DOP technology,
which images digital data directly onto a printing press, will become the next
generation of prepress for short-run offset printing. We currently have 371
people involved in research and development and in the year ended September 30,
1998, our total research and development expenditures were $19.1 million. We
currently hold 30 United States and foreign patents and have 39 United States
and foreign patent applications pending.
An important part of our growth strategy has been establishing strategic
alliances with major industry participants. For example, in October 1997, we
established a joint venture with Heidelberg, the largest press manufacturer in
the world, to develop, manufacture, market and distribute our CTP solutions
worldwide.
Industry Background
Commercial printing is the largest segment of the printing industry and
commercial printers are the largest purchasers of prepress capital equipment.
Commercial printers use high speed lithographic offset printing presses, which
require a set of master printing plates, to produce multiple copies of high-
quality color materials such as magazines, catalogs and corporate annual
reports. Lithographic offset printing produces large volumes of high-quality
copies at high speed and low variable cost. Industry sources estimate that
United States revenues of commercial printers in 1997 exceeded $70 billion. The
revenues of commercial printers outside the United States are generally
estimated to be between 2.5 and 3.5 times larger than in the United States.
The commercial printing industry is mature, fragmented and highly
competitive, and is therefore characterized by narrow profit margins. In
addition, printers face increasing demands from customers for tighter
deadlines, better and more consistent color quality, shorter print runs and
greater customization of print jobs. For example, publishers of magazines and
catalogs increasingly wish to customize their publications to appeal more
effectively to target audiences in different geographic regions or market
segments, and to make last-minute changes in response to late-breaking
developments.
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<PAGE>
Our CTP solutions address the prepress needs of commercial printers. The
worldwide market for prepress imaging equipment has been estimated by industry
sources to exceed $3 billion annually. Although many of the largest commercial
printers have begun to adopt CTP solutions, we believe the market is still
developing. We believe that less than 20% of commercial printers in the world
currently use CTP solutions. The remainder produce plates using the
conventional prepress process. According to industry estimates, CTP unit
shipments worldwide are expected to grow at a compound annual growth rate of
approximately 20% from 1999 through 2003.
The Conventional Prepress Process
Conventional prepress requires highly skilled workers to perform a series of
complex, time-consuming and labor-intensive manual tasks to create each
printing plate. In conventional prepress, text, graphic images and line artwork
are imaged onto film as single and double page "separations." Separations for
each of the four basic colors (cyan, magenta, yellow and black) are used to
produce color printed materials. The separations are manually assembled into
larger 2-page, 4-page, 8-page, 16-page or 32-page "flats," depending on press
size, with each color requiring a separate flat. For high-quality color
printing, the alignment of the assembled separations must be accurate to within
two thousandths of an inch. Alignment is a manual process that is prone to
error and can result in frequent rework. Each of the assembled flats is then
exposed, much like a photographic negative, to create an image on the printing
plate. The exposed plate is processed to develop the image, and then manually
mounted on the press for printing. After mounting, further adjustment of the
plates is required to ensure the accuracy of the final printed product.
The following diagram illustrates the conventional prepress process:
[Diagram, titled "Conventional Prepress," illustrates the multiple steps of the
conventional prepress process. Under the diagram's title, there are 11 small
graphics in a rectangular box. Each small graphic, except the right-most
graphic, is connected to the next by an arrow pointing right. These small
graphics are labeled as follows: "Create Digital Pages," Expose Page Film,"
"Develop Page Film," "Film," "Proof Page," "Assemble Film Flat," "Proof Flat,"
"Expose Plate," "Develop Plate" and "Mount Plate on Press."]
The complexity of conventional prepress limits the ability of commercial
printers to respond to the changing demands of their customers. Conventional
prepress suffers from many shortcomings that limit printers' ability to make
last-minute changes and to tailor output to specific customer requirements on a
cost-effective basis. These shortcomings include process variability, the use
of costly films, paper and hazardous chemicals and idle time for expensive
commercial presses. Growing demand for tighter deadlines, better and more
consistent color quality, shorter print runs, and greater customization of
print jobs has meant that printers using conventional prepress incur costs that
they cannot readily pass on to their customers. As a result, these printers
have experienced reduced operating margins.
The Creo Solution
Our CTP solutions consist of a comprehensive range of products that allow
printers to eliminate numerous steps from the conventional prepress process by
directly transferring computer-generated images and text onto plates,
eliminating the need to create and process film. Our solutions integrate input
devices, which digitize film separations; workflow software, which manages the
flow of data as it is processed and prepared for output; proofing systems,
which are used to check color and layout by creating a digital simulated copy
of what the final printed job will look like; and output devices that transfer
data onto plates for use on a printing press.
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<PAGE>
Our solution streamlines the prepress process, as the diagram below
illustrates:
[Diagram, titled "Creo Solution," illustrates the steps of the Creo Solution.
Under the diagram's title, there are five small graphics in a rectangular box.
Two of the graphics appear on the left side of the rectangle. The left-most
graphic, labeled "Create Digital Pages," is connected on its right side to a
graphic labeled "Workflow Management" by an arrow pointing right. The Workflow
Management graphic is connected on its right side by an arrow traversing
approximately one third of the rectangle. This arrow points to a small graphic
in the right-most third of the rectangle labeled "Thermal Imaging of Proof
and/or plate." The Thermal Imaging of Proof and/or Plate graphic is connected
on its right side by an arrow pointing right to a graphic labeled "Develop
Film." The Develop Film graphic is connected on its right side to a graphic
labeled "Mount Plate to Press."]
The key component of our solution is our patented parallel thermal imaging
head that uses laser beams to precisely imprint heat-sensitive printing plates
and proofing materials, which are then processed and placed on printing
presses. Our thermal head splits the output of a single high-power laser diode
into 240 separate beams. In contrast, most competing CTP systems require a
separate diode for each beam, significantly increasing their cost and
complexity. In 1996, the Graphic Arts Technology Foundation (GATF) awarded
Creo its InterTech Technology Award, given for products predicted to have a
major effect on the graphic communications industry, for the innovation of our
thermal imaging head technology. GATF is a member-supported, nonprofit
technical and educational organization serving the graphic communications
industries.
We were the first to offer a commercial CTP system that transfers data onto
plates wrapped around the outside of a rotating drum, known as external drum
architecture, rather than onto a plate fixed to the inside of a stationary
drum, known as internal drum architecture. Since the imaging head can be
positioned closer to the plate, we believe that external drum technology
produces a higher quality image on the plate, particularly in larger formats.
Many imaging systems on the market now use external drum architecture.
Moreover, since all offset presses are external drum devices, external drum
architecture is uniquely suited for on-press imaging applications such as DOP.
Our solution is unique because it combines external drum architecture with our
multi-beam thermal imaging head. This combination increases imaging throughput
while at the same time allowing the drum to rotate more slowly than is
possible with systems having fewer beams, thus reducing vibration and the need
for precision balancing, enhancing overall plate quality.
In comparison with other commercially available CTP systems, we believe that
our unique combination of technologies delivers:
. more accurate images through sharper pixel resolution;
. greater color consistency;
. improved prepress reliability; and
. faster throughput.
The Creo solution allows printers to respond more quickly and cost-
effectively to demands from their customers for tighter deadlines, better and
more consistent color quality, shorter print runs, and greater customization
of print jobs. At the same time they can benefit from reduced print cycle
times and more flexible scheduling of presses.
The principal features of our CTP solutions are:
End-to-End Prepress Solutions
Our solutions integrate a complete range of Creo products that address the
entire prepress process. Our scanners, workflow management software, proofing
devices, and output devices together comprise a complete and fully integrated
digital prepress system. We do not believe any competitor offers a product
range comparable in breadth, versatility and performance.
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<PAGE>
Open Architecture and Connectivity
Our solutions support industry-standard file formats, readily interface with
a broad range of proprietary data formats, accommodate a wide variety of input
media and are adaptable to emerging file formats and standards such as Adobe
Portable Document Format (PDF). Our equipment is designed to be compatible with
printers' existing prepress equipment, thus avoiding waste and making our
customers' investment decisions easier. For example, our output devices can
image film, for the printers that require this capability.
Modularity, Scalability and Versatility
Our solutions are modular and scalable, with components that can be assembled
in a variety of configurations to meet the needs of customers with varying
print volume and press size. In addition, our output devices can accommodate
the full range of plate sizes, throughput requirements and automation levels.
Knowledgeable and Comprehensive Customer Support
We offer comprehensive pre-sale evaluation, installation, system integration,
training and post-sale support through what we believe is the most
knowledgeable and experienced field service organization in our industry. We
believe that our service and support organization, which maintains the
reliability and performance of our systems and improves the productivity of our
customers, differentiates us from our competitors.
Our Business Strategy
Our objective is to maintain our position as a leading developer and supplier
of innovative digital prepress products and technologies. Our business strategy
consists of the following key elements:
Expand Our Technology Leadership
We intend to continue to make significant investments in research and the
development of innovative, next-generation, market-leading technologies such as
DOP, as well as to apply our existing technologies to new markets such as
packaging printing. We will continue to broaden the range of our product
offerings as well as enhance the features, reliability and price/performance of
our existing CTP products. Our focus on technology leadership has been critical
in building our customer base, and our close contact with key customers, press
manufacturers and leading industry suppliers has been invaluable in the design
process by permitting us to understand and respond to market needs. We are
continuing to strengthen our brand image, which we believe is synonymous with
market-leading CTP technology.
Focus on Customer Success
We will continue to work closely with our customers to ensure that our
systems generate clear economic benefits for them. We work with our customers
during the design process to evaluate the productivity, output quality,
reliability and ease of use of our systems. We also maintain service and
support relationships with substantially all of our customers, and we will
continue to expand our customer service capabilities by hiring additional
service personnel in locations close to our customers. Our customers typically
have been able to achieve full cost recovery within one to three years,
depending on the size of their operations and the configuration of the Creo
products used.
Expand and Leverage Strategic Business Alliances
Our success to date has been due in part to our strategy of establishing
collaborative relationships with leading commercial printers, manufacturers of
printing presses, plates and consumables and others in the commercial printing
industry. Our strategy is to continue to develop and expand these collaborative
relationships to broaden our distribution, product development and
manufacturing capabilities. We believe these strategic relationships allow us
to anticipate market needs, develop products to work optimally with new product
offerings of press and plate manufacturers and enhance market acceptance of our
products.
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<PAGE>
Expand Our Global Market Presence
We intend to expand our market penetration geographically, with a focus on
small to mid-size commercial printers, which generally use 4-page and 8-page
presses. We believe that we currently have approximately 70% market share in
North America and 50% market share in Europe for 16-page and larger CTP
systems. We intend to devote considerable resources to enhancing our
penetration of the 4-page and 8-page market, primarily through our relationship
with Heidelberg. We also intend to expand our presence in the international
market for large-format CTP systems by augmenting our direct sales force and
entering into distribution arrangements with leading vendors of thermal plates.
Products
We provide end-to-end digital solutions for prepress automation, including
input devices, prepress workflow management systems and a variety of proofing
and output devices:
[Diagram titled, "Creo Solution," illustrates Creo's product offerings. The
title "Creo Solution" appears outside the upper left-hand corner of a rectangle
that encompasses a diagram of the products offered by Creo. A graphic labeled
"Digital Files" appears on the left-hand side of the rectangle above a graphic
labeled "Rennaisance Scanner." These two graphics are connected by a bracket.
An arrow pointing right connects the middle of this bracket to a rectangle that
has the words "Workflow Management Systems" in it. There is an arrow below the
Workflow Management Systems rectangle that points to the label "Digital
Proofing." This label sits above a bracket, the left arm of which points to a
small graphic labeled "Virtual Proofing Station" and the right hand of which
points to a small graphic labeled "Proofsetter Spectrum." There is an arrow to
the right of the Workflow Management Systems rectangle. This arrow points to a
bracket. Four arrows emerge from this bracket, all of which point to the right.
The top-most of these four arrows points to a small graphic labeled
"Trendsetter." The arrow below the top-most arrow points to a small graphic
labeled "VLF Trendsetter." The next arrow point to a small graphic labeled
"Platesetter." The lowest arrow points to a small graphic labeled "VLF
Trendsetter."]
Digital Input Devices
Our Renaissance scanners enable CTP-equipped printers to convert archived
film, customer-supplied film and reflective copy into digital data, allowing
them to obtain the benefits of digital workflow. All Renaissance scanners
include Creo software tools for alignment and editing. In 1997, we were awarded
the GATF InterTech Technology Award for our Renaissance scanner. The list
prices of our scanners generally range from $225,000 to $345,000, depending on
configuration and options.
Workflow Management Systems
Our digital workflow management systems incorporate both software and value-
added third-party hardware. They process and archive the vast amounts of data
used by printers to create plates and proofs. By
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<PAGE>
reducing the number of repetitive manual tasks and efficiently integrating all
aspects of prepress, they enhance both productivity and output quality. Our
workflow management systems can be configured for varying prepress workflow
needs, and for both high- and low-volume printers. The list prices of our
workflow systems range from $100,000 to $200,000, depending on configuration
and options.
Proofers
Our proofers create a digital simulated copy of what a final printed job will
look like, permitting confirmation of accuracy and color quality. Our proofing
solution is available both as a stand-alone product, the Proofsetter Spectrum,
and as an optional addition to our Trendsetter family of output devices. The
list price of the Proofsetter Spectrum is $235,000.
CTP Output Devices
Our CTP output devices are available in several formats capable of handling a
variety of plate types and sizes. All of our output devices currently use the
same thermal imaging technology and multi-channel exposure head.
Platesetter. The fully automatic Platesetter is designed for high-quality,
high-volume commercial printers exposing up to 450 plates daily. It enables a
single operator to load up to 600 plates of up to six different sizes at a time
without removing the plates from their shipping cartons. In 1994, the GATF
awarded us its Inter-Tech Technology Award for the Platesetter 3244. In 1996,
we introduced the VLF Platesetter (very large format) to respond to printers'
needs for larger CTP plates designed for wide web presses. The list prices of
the Platesetter generally range from $390,000 for the Platesetter 3244 to
$860,000 for the VLF Platesetter, depending on configuration and options.
Trendsetter. The semi-automatic Trendsetter is designed for high-quality
commercial printers exposing up to 300 plates daily. These printers have less
need for the full automation of the Platesetter. Upgrades to the basic
Trendsetter are available to provide automatic plate handling and to permit
proofing with our Proofsetter Spectrum option. The versatility and multi-
function capability of the Trendsetter makes it particularly attractive to
small and mid-size commercial printers since it provides proofing capabilities
at a modest increase in capital expense. For many printers, the multi-use
Trendsetter can meet all requirements for plates, proofs and film, where
required. Larger printers can use the Trendsetter primarily to image proofs,
while providing peak-period plate-making capacity and backup for their primary
Platesetter. The list prices for Trendsetter output devices generally range
from $135,000 for the Trendsetter 3230 to $550,000 for the VLF Trendsetter,
depending on configuration and options.
Research and Product Development
Our research and product development activities are performed in-house by a
group of engineers and scientists with expertise in a variety of fields,
including software, electronics, mechanics, optics, physics and chemistry.
Product development is organized around core teams with representatives from
all areas of our company. Each core team has the authority to manage all
aspects of its products and projects, including product architecture, core
technology, functionality and testing.
In the fiscal years ended September 30, 1996, 1997 and 1998, our total
research and product development expenditures were $14.7 million, $14.9 million
and $19.1 million, respectively. For the six months ended March 31, 1999, our
total research and product development expenditures were $13.3 million. We have
received funding for our research and development work from media suppliers,
press manufacturers and our customers in connection with specific product
development initiatives undertaken by us at their request. We have also
received funding from the Canadian government through investment tax credits.
From October 1, 1995 through March 31, 1999, we received an aggregate of $26.3
million in research and development funding from these sources.
Our current research and product development efforts are focused on improving
our current product line, including enhancements to our thermal imaging head
technology, developing next generation workflow and
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output devices, including a line of DOP products, and applying our core
technologies to new printing markets and methods such as packaging printing and
flexography.
Workflow Systems
Creo and Heidelberg are co-developing a state-of-the-art family of workflow
and related products that manage the prepress operation. The new system is
designed to fully automate the prepress process by providing intelligent
scheduling and workflow optimization through an open standard, scalable, multi-
user architecture. It is device-independent and extremely flexible, and
integrates easily with most output devices. It is designed for medium and large
commercial printers, is adaptable to both black and white and color printing
and is scalable so that it can accommodate growth in printers' prepress
operations.
Digital Offset Press
We are working with the leading manufacturers of printing presses to develop
advanced DOP systems. A DOP imaging system images digital data directly onto
the press. The DOP technology that we are currently introducing through
Heidelberg uses a plate that is similar to standard CTP plates, which must be
replaced for each new job. We also have under development a new generation of
DOP technology in which the plate cylinder is coated with a polymer and imaged.
After the job has been printed, the plate cylinder is "erased" and a new
coating of polymer is applied, allowing new data to be imaged for the next job.
DOP is expected to further reduce the total cost of prepress and press set-up
for offset printers. This should allow printers to compete more effectively
with alternative printing technologies, such as xerography, that have low set-
up costs and are generally used for short print runs.
Flexography
We have begun applying our knowledge of prepress to the second largest
segment of the printing industry, packaging printing. Package printers use a
variety of printing processes, the most common of which is flexographic
printing. Rather than using the metal plates traditionally used by commercial
printers, flexographic printers primarily use rubber plates for printing a wide
variety of materials such as plastic, film, paper, cardboard and metal. In
1996, revenue for packaging printers in the U.S. was estimated at $55 billion
and flexographic printing represented approximately 60% of this market.
In 1998, we introduced several prototype units of our Thermoflex digital
flexographic platesetter for packaging printers. This device has high
productivity and plate handling features that minimize damage to the expensive
plate material. It can image flexographic plates of any size and thickness
without any reduction in processing speed. Digital flexographic plates offer
significantly higher quality than conventional flexographic plates, and allow
flexographic printers to compete more effectively with both offset and gravure
printers. The Thermoflex can also image processless thermal film using a
proprietary process which improves the performance of low-cost flexographic
plates. In March 1999, the Flexographic Pre-Press Platemakers Association
awarded Creo its Technological Innovator of the Year Award for the Thermoflex.
The list price of the Thermoflex is expected to be in the range of $400,000 to
$495,000, depending on configuration and options.
Our Joint Venture with Heidelberg
In October 1997, we established a joint venture with Heidelberg to develop,
manufacture, market and distribute our 4-page and 8-page CTP and related
workflow management products and consumables worldwide, and to develop
additional prepress products. Heidelberg is the largest manufacturer of
printing presses in the world and the leading supplier of the 4-page and 8-page
sheet-fed printing presses. The 4-page and 8-page printing presses are the type
most commonly used by small and mid-size commercial printers. For the year
ended March 31, 1998, Heidelberg reported total revenues in excess of $3.5
billion, of which approximately $2.3 billion was attributable to sales of these
presses. With offices in more than 160 countries, Heidelberg has substantial
international marketing and distribution channels for commercial printing
presses and prepress equipment, and an extensive customer support and service
organization.
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We expect to realize significant benefits from the joint venture with
Heidelberg. These include:
. access to Heidelberg's worldwide customer base of small and mid-size
commercial printers, through its established marketing and distribution
network;
. access to Heidelberg's extensive service and customer support
organization outside North America;
. shared funding of certain of our research and development projects
relating to joint venture CTP products; and
. cost-effective manufacture of certain CTP products by Heidelberg at its
manufacturing facilities in Kiel, Germany.
Under the agreement with Heidelberg:
. each party provides goods and services to the joint venture at cost, as
defined in the agreement;
. in general, costs and profits are shared equally;
. Heidelberg is the principal manufacturer of our 4-page and 8-page
Trendsetter output devices, although we continue to manufacture a
limited quantity of these products at our facilities in British
Columbia. Manufacturing arrangements are subject to periodic review
based on cost-competitiveness and may be reassigned unless a party is
prepared to subsidize the joint venture for the incremental cost of
retaining its existing manufacturing rights;
. Creo has the right to be the sole supplier of thermal imaging heads for
use with joint venture CTP products;
. North American marketing and distribution of most joint venture products
is undertaken jointly, although certain key accounts are reserved to
Creo; elsewhere, marketing and distribution is undertaken through
Heidelberg's distribution channels;
. prices for joint venture products are established jointly;
. Heidelberg may not sell CTP products of other manufacturers as long as
it markets and distributes joint venture products, and we may not use
third parties to market our CTP products that are not covered by the
joint venture, such as the VLF Trendsetter, without first offering
marketing and distribution rights to Heidelberg;
. in North America, Creo provides customer service and support for our 4-
page and 8-page CTP products; in the rest of the world these functions
are generally performed by Heidelberg. Neither the costs nor the
revenues associated with customer service and support are shared;
. we are the exclusive provider of research and development for joint
venture CTP products and related consumables, and work jointly with
Heidelberg on research and development relating to workflow products;
and
. in general, intellectual property developed in connection with the joint
venture remains the property of the party that developed it, but is
licensed to the joint venture without charge.
The joint venture is co-managed. It does not own any material assets,
maintain any employees or operate its own manufacturing or other operating
facilities. Disputes concerning certain financial matters will be submitted to
the joint binding determination of our respective independent auditors.
Disputes over the interpretation of the joint venture agreement may, as a last
resort, be submitted to binding arbitration. If a dispute arises concerning the
operation or management of the joint venture and the parties cannot reach
agreement on the matter, either party may terminate the joint venture if it
considers that resolution of the disagreement is necessary to the continuation
of the joint venture.
Our agreement with Heidelberg grants broad termination rights to both
parties. For example, either party may terminate the joint venture if the joint
venture fails to achieve, for any rolling 12-month period after
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March 31, 1999, the highest revenue levels in both Europe and North America of
any seller of CTP products that are competitive with the CTP products sold by
the joint venture. Each party also has the right to terminate in certain other
defined events, including:
. the other party becoming bankrupt;
. a 25% or greater ownership interest in the other party being acquired by
another seller of CTP products;
. the other party failing to commit appropriate resources to achieving the
objectives of the joint venture; and
. the other party committing a breach of a material obligation under the
joint venture agreement and, having been given notice of the breach,
failing to remedy it within 45 days.
If the joint venture is terminated, the agreement provides that the parties
will cooperate to ensure that, for certain periods of time following
termination, each party has access to the products, the manufacturing
facilities and the service organization and distribution channels formerly
provided by the other through the joint venture, so that each party can
independently develop the business capabilities previously available through
the joint venture. Specifically:
. we will license Heidelberg to manufacture and distribute our CTP
products, at fair original equipment manufacturer (OEM) prices, for two
years;
. each party will grant the other license for up to three years, relating
to workflow products and components with respect to which it owns the
intellectual property rights, at fair OEM prices; and
. we will complete, on an equal cost-sharing basis, any research and
development obligations assumed by the joint venture prior to
termination.
Sales and Marketing
We sell and support our products through both direct and indirect sales
organizations, including the joint venture with Heidelberg. Our direct sales
organization consists of over 100 people located at our headquarters in
Burnaby, British Columbia, and in regional sales offices in various locations
in the United States, including Boston, Chicago, Los Angeles and San Francisco;
and in Brussels, Belgium; and Sydney, Australia.
Our direct sales organization is responsible for sales worldwide (except in
Japan) of all products not included in the joint venture with Heidelberg. Both
Creo and Heidelberg sell joint venture products in North America. Outside North
America, Heidelberg is the exclusive marketer and distributor of joint venture
products. In Japan, we sell our CTP products through Dainippon Screen Mfg. Co.
Ltd. and Heidelberg.
Production and Assembly
We produce and assemble our Renaissance scanners, Platesetter 3244, VLF
Platesetter and VLF Trendsetter output devices, and all thermal imaging heads
in our three production facilities in British Columbia. We also produce a
limited number of 4-page and 8-page CTP output devices for distribution in
North America. We perform electro-optical assembly, precision mechanics and
electro-mechanical assembly, as well as testing and systems integration at
these facilities. In order to maintain flexibility and reduce costs, we sub-
contract the manufacture and assembly of certain components. All of our output
devices are designed to use the same interchangeable thermal imaging head,
resulting in reduced inventory requirements and increased manufacturing and
servicing efficiencies.
The majority of the 4-page and 8-page Trendsetter output devices for
distribution by the joint venture worldwide are currently assembled at
Heidelberg's manufacturing facility in Kiel, Germany. The joint venture
agreement contemplates periodic reviews of the cost competitiveness of the
manufacturing arrangements and, based on these reviews, manufacturing
responsibility can be reassigned. Nevertheless, a party with
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manufacturing responsibilities can retain them so long as it agrees to
subsidize the joint venture for the incremental cost of manufacturing at its
facility.
We manufacture products based on customer orders, although we purchase some
subassemblies and components prior to receipt of customer orders. Lead times
for the materials and components that we order vary significantly, depending on
factors such as the specific supplier, contract terms and the demand for a
component at a given time.
Customers and Customer Support
More than 900 of our CTP systems have been installed at over 480 customer
sites in 29 countries. Many of the largest commercial printers in North America
have installed our systems at multiple sites. Approximately half of our current
customers are small and mid-size commercial printers, principally in North
America. We expect to expand our penetration of the worldwide small and mid-
size printing market, principally through our joint venture with Heidelberg. We
also intend to increase sales of our large format systems worldwide,
principally through our own direct sales force. In the six months ended March
31, 1999 and in fiscal 1998 no customer accounted for more than 10% of our
revenue. In fiscal 1997, only one customer accounted for more than 10% of our
total revenue.
We provide comprehensive services to our customers including on-site and 24 x
7 on-line service and support. Upon delivery of one of our systems, a team
performs the installation and initial testing procedures and supports the site
until the customer has accepted the system. Our field operations team and
strategically located service representatives provide same-day or next-day on-
site service under support contracts. We also have experienced engineers
connected by modem with each of our systems in North America to provide
immediate remote-line diagnostics and troubleshooting. We also provide
instruction to customers in the use of all of our products, both at their sites
and at our training centers located at our headquarters and at a software
training center near Chicago. Technical news and updates, as well as software
upgrades, are posted on our web site for easy remote access. Heidelberg's
extensive international customer service and support organization supports
sales by the joint venture outside North America.
Intellectual Property
Our success and ability to compete is dependent in part on our ability to
develop and protect our proprietary technology. We file United States and,
where appropriate, foreign patent applications to protect technology,
inventions and improvements important to the development of our business. We
also rely on a combination of copyright, trademark and trade secret rights,
confidentiality agreements and licensing arrangements.
As at March 31, 1999, we held 24 issued United States patents and six issued
foreign patents and had 30 United States and nine foreign patent applications
pending. These issued and pending patents cover various aspects of our products
and processes. The expiration dates of our issued patents range from January
2003 to January 2017.
Our confidentiality and proprietary information agreements with our senior
management, other employees, and others generally provide that all confidential
information developed or made known to such individuals by us during the course
of a relationship with us is to be kept confidential and not disclosed to third
parties, except in specific circumstances. The agreements also generally
provide that all inventions developed by the individual in the course of
rendering service to us belong exclusively to us.
Competition
The market for digital prepress equipment and systems is highly competitive.
It is changing rapidly and is affected by changes in customer requirements, new
product introductions and other market activities of industry participants. We
face direct competition from other manufacturers of prepress input and output
systems. Our principal direct competitors in the prepress automation systems
market are Scitex Corporation Ltd., Agfa-Gevaert N.V., Dainippon Screen Mfg.
Co. Ltd., Barco N.V., and Cymbolic Sciences International, Inc. Certain other
companies offer equipment that competes with specific products or product
capabilities within our product line.
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The principal competitive factors affecting sales of our solutions are price
relative to performance and customer service. Potential customers typically
weigh price against throughput of systems, quality, reliability and cost of
operation. They demand a high level of training, support and service, and
adaptability to their specific requirements and existing equipment.
We also face potential indirect competition from other printing methods,
principally xerography. Xerography has benefited from recent technological
innovations that could make it an economic alternative to offset printing for
very short print runs. Xerography enables different images to be printed on
successive pages and is sometimes described as "on-demand" printing. To the
extent that recent innovations in xerographic technology enable higher quality
color images to be reproduced xerographically in larger volumes and with lower
variable costs, xerography could present an alternative to lithographic
printing at relatively low print volumes. We expect that for the foreseeable
future the cost per page of xerography will continue to be higher than that of
offset lithography, and that these devices will be used primarily to provide
highly variable or extremely short run printing. At the same time, we believe
that the emergence of a mature DOP technology has the potential to transform
the lithographic offset press into a "short run press" which can compete with
recent innovations in xerographic technology, wherever page to page variation
is not required.
Employees
As at March 31, 1999, we employed 1,237 people full-time. Of these, 371 are
engaged in research and product development, 339 in manufacturing, 298 in
customer support activities, 127 in marketing and sales and 102 in
administration.
We believe we have developed a unique corporate culture that attracts highly
qualified and motivated employees. We emphasize teamwork, flexibility, local
decision making and the free flow of information. Employee turnover is low, and
most of our employees hold either Common Shares or options to acquire Common
Shares. We have never had a work stoppage and no employees are covered by
collective bargaining agreements. We believe our employee relations are
excellent.
Facilities
Our headquarters are located in Burnaby, near Vancouver, in British Columbia,
Canada. We own two adjacent facilities totaling 213,000 square feet housing our
executive and administrative offices, our product development group, a
demonstration facility, customer support response center, customer training
facility, and a thermal head production facility. We also own a 140,000 square
foot production facility in Delta, British Columbia, which includes a modern
assembly area, cleanrooms for integration and product testing and a precision
machine shop with computer controlled equipment. The Delta facility and one of
the two Burnaby facilities are subject to a mortgage, maturing on February 4,
2002, in favor of a Canadian chartered bank. We have regional sales and service
offices in leased premises in various locations throughout the United States.
Our European sales, service and training operations are headquartered in
Brussels, Belgium, under a lease expiring in December 2005.
Legal Proceedings
We are a party to certain legal proceedings in the ordinary course of our
business, including actions relating to our intellectual property rights. We do
not believe that the outcome of any present litigation will have a material
adverse effect on our business, operations or financial condition.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our directors
and executive officers, as of March 31, 1999:
<TABLE>
<CAPTION>
Name and Municipality of Residence
Principal Occupation (other than Creo) Age Position with Creo
-------------------------------------- --- ------------------------------
<C> <C> <S>
46 Chief Executive Officer and
Amos Michelson (1)......................... Director
Vancouver, British Columbia
Daniel Gelbart............................. 52 President and Director
Vancouver, British Columbia
37 Vice President, Sales and
Michael D. Ball............................ Support of Creo Products N.V.
Brussels, Belgium
44 Vice President, Business
N. David Brown............................. Strategy
Vancouver, British Columbia
35 Vice President and Chief
Mark N. Dance.............................. Operating Officer
Vancouver, British Columbia
Philippe H. Favreau........................ 36 Vice President, Manufacturing
Vancouver, British Columbia
33 Vice President, Sales of Creo
Kevin M. Joyce............................. Inc.
Boston, Massachusetts
47 Vice President, Finance, Chief
Thomas A. Kordyback........................ Financial Officer and
Vancouver, British Columbia Secretary
40 Vice President, Business
Robert J. Mielcarski....................... Systems and Technology
Delta, British Columbia
40 General Manager of Creo
Boudewijn P. Neijens....................... Products N.V.
Brussels, Belgium
45 Vice President, Human
B. Darcy O'Grady........................... Resources
Vancouver, British Columbia
37 Vice President, Customer
Michael Rolant............................. Support
Vancouver, British Columbia
51 Chair of the Board and
Raphael H. Amit, Ph.D. (1)(2).............. Director
Vancouver, British Columbia
Professor, University of British Columbia
David A. Bennett (2)....................... 58 Director
Vancouver, British Columbia
Managing Director,
Business Development Bank of Canada
Thomas D. Berman (1)(3).................... 41 Director
Winnetka, Illinois
Executive Director, Brinson Partners, Inc.
John J. Bu (1)(3).......................... 35 Director
Short Hills, New Jersey
Vice President, Goldman, Sachs & Co.
</TABLE>
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<TABLE>
<CAPTION>
Name and Municipality of Residence Position
Principal Occupation (other than with
Creo) Age Creo
---------------------------------- --- --------
<C> <C> <S>
Douglas H. Richardson............... 37 Director
Vancouver, British Columbia
Kenneth A. Spencer, Ph.D. (1)(2).... 55 Director
Vancouver, British Columbia
Corporate Director
</TABLE>
- --------
(1) Member of the Compensation, Nominating and Corporate Governance Committee.
(2) Member of the Audit Committee.
(3) Member of the Finance Committee.
The following is a brief biography of each of Creo's directors, executive
officers and key employees:
Amos Michelson has been our Chief Executive Officer since June 1995 and a
director since March 1992. From August 1991 to June 1995, he was our Vice
President, Business Strategy. For approximately ten years prior to joining us
in 1991, he held various positions with Optrotech Ltd., an Israeli developer
and manufacturer of optical and imaging systems for the printed circuit board
industry, most recently Chief Operating Officer. Mr. Michelson holds a B.Sc. in
electrical engineering from the Technion in Israel and an M.B.A. from the
Stanford Graduate School of Business in the United States.
Daniel Gelbart has been the President of Creo since February 1991 and a
director since our formation in 1985, except for the period from February 1997
to February 1998. From May 1985 until February 1991, Mr. Gelbart was Creo's
Vice President. Mr. Gelbart holds a B.Sc. and an M.Sc. in electrical
engineering from the Technion in Israel.
Michael D. Ball has been Vice-President, Sales and Support, Creo Products
N.V., since May 1998. He joined us in April 1997 and, prior to his appointment
as Vice President, Sales and Support, Creo Products N.V., he was Director,
Sales and Support, of Creo Products, Inc. From June 1994 to April 1997, he
worked in Canada as an independent business and technical support consultant.
From June 1985 to June 1994, he held various sales and management positions
with Digital Equipment of Canada, a manufacturer of computer systems, most
recently as Sales Manager. Mr. Ball holds a B.Comm. from the University of
British Columbia in Canada.
N. David Brown has been our Vice President, Business Strategy since June
1995. He joined Creo in November 1990 and, prior to his appointment as Vice
President, Business Strategy, held various positions, including Vice President,
Product Development from September 1994 until June 1995, Director of Imaging
Products from January 1993 until September 1994, Project Manager from May 1991
until January 1993, and Design Engineer from November 1990 until May 1991.
Prior to joining Creo, Mr. Brown was a co-founder and served as Director of
Product Development with TIR Systems, Inc., a Vancouver, British Columbia-based
manufacturer of lighting systems. Mr. Brown holds a B.A.Sc. in automation
engineering from Simon Fraser University in Canada.
Mark N. Dance became our Chief Operating Officer in October 1997. He joined
us in May 1994, and prior to his appointment as Chief Operating Officer, he
held a variety of positions including Vice President, Operations from January
1997 until October 1997, Vice President, Product Development from June 1995
until December 1996, Product Manager for all CTP products from November 1994
until May 1995, and Project Manager from May 1994 until October 1994. From
April 1986 to May 1994, he worked in Canada for Andronic Devices Ltd., a
developer of surgical and medical automation devices, first as a Senior Project
Engineer and later as the Director of New Product Development. Mr. Dance holds
a B.Sc. in mechanical engineering from the University of British Columbia.
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Philippe H. Favreau has been our Vice President, Manufacturing since June
1996, having previously been Operations Manager since October 1995. From
September 1992 until September 1995, Mr. Favreau worked in France for Schneider
Electrical S.A., a supplier of electrical components. Mr. Favreau is a graduate
in engineering physics from Ecole Polytechnique of Grenoble in France, and
holds an M.Sc. in nuclear sciences from Ecole Polytechnique of Montreal in
Canada and an M.B.A. from the University of Paris in France.
Kevin M. Joyce was appointed Creo's Vice President, Sales for North America
in March 1997. From February 1994 to March 1997, he was Creo's Director, Sales
for the Eastern Region. Between 1989 and January 1994, Mr. Joyce worked in
Israel at Optrotech Ltd. Most recently, Mr. Joyce was the Sales Manager of
Optrotech's Graphic Arts Division from July 1993 to January 1994. Mr. Joyce
holds a B.A. in American Studies from St. Michael's College in the United
States.
Thomas A. Kordyback became Creo's Vice President, Finance, Chief Financial
Officer and Secretary in July 1995. From May 1993 until July 1995, he served as
Chief Financial Officer of Telelink Communications Corp., a Canadian paging
systems company. Prior to May 1993, Mr. Kordyback worked in Canada as an
independent business consultant. He holds a B.A. in economics from the
University of Victoria in Canada and holds the Chartered Accountant
designation.
Robert J. Mielcarski has been Creo's Vice President, Business Systems and
Technology since January 1999. He joined Creo in November 1995 and, prior to
his current appointment, he held various positions including Vice President,
Product Development from November 1996 to January 1999, and Product Manager for
DOP from November 1995 to November 1996. From November 1990 until November
1995, Mr. Mielcarski served as Vice President, Research and Development for
Dynapro Systems, Inc., a Canadian developer and manufacturer of industrial
automation systems. Mr. Mielcarski holds a B.Sc. and an M.Sc. in electrical
engineering from the University of British Columbia.
Boudewijn P. Neijens has been the General Manager of our Belgian subsidiary,
Creo Products N.V., since joining us in October 1994. From July 1992 until
September 1994, he was the European Sales and Marketing Director of Optrotech
Ltd. From February 1989 to July 1991, Mr. Neijens served as Desktop Products
Group Manager of Crosfield Electronics Ltd., an English manufacturer of
electronic prepress systems. From March 1983 to January 1989, Mr. Neijens
worked in Belgium for Brepols N.V., Belgium's largest commercial printer, as
the manager of its prepress production department. Mr. Neijens holds an M.A. in
mechanical engineering from the University of Brussels in Belgium and an M.B.A.
from the Institut Superieur d'Etudes Administratives in France.
B. Darcy O'Grady has been our Vice President, Human Resources since June
1996. He joined us in November 1994 and, prior to his appointment as Vice
President, Human Resources, he served as Director, Human Resources. From 1986
to June 1994, Mr. O'Grady was Director, Human Resources of MacDonald Dettwiler
& Associates, a systems engineering company based in Richmond, British
Columbia. Mr. O'Grady holds a B.A. in Economics from Simon Fraser University.
Michael Rolant has been Creo's Vice President, Customer Support since June
1996, having previously served as Creo's Worldwide Customer Service Manager
since he joined us in October 1995. From September 1989 until October 1995, Mr.
Rolant held various positions in Israel and the United States with Orbotech
Ltd., a developer and manufacturer of automated inspection machinery for the
printed circuit board industry, including Regional Operations Manager from
February 1995 to October 1995, Customer Support Co-ordinator from June 1993 to
February 1995, and Senior Systems Specialist from November 1991 to June 1993.
Mr. Rolant holds a B.Sc. in electrical engineering from Tel Aviv University in
Israel and an M.Sc. in management from Lesley College in the United States.
Raphael H. Amit has been the Chair of the Board and has served as one of our
directors since January 1996. Since August 1990, he has been a professor at the
University of British Columbia. In addition, since July 1994, he has been the
Peter Wall Distinguished Professor of Entrepreneurship and Venture Capital at
the
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University of British Columbia. Dr. Amit holds a B.A. and an M.A. in economics
from Hebrew University in Israel, and a Ph.D. in Managerial Economics from the
J.L. Kellogg Graduate School of Management at Northwestern University in the
United States.
David A. Bennett has served as one of our directors since April 1994. Since
June 1992, Mr. Bennett has been a Managing Director of the venture capital
division of the Business Development Bank of Canada. Mr. Bennett holds the
Chartered Accountant designation.
Thomas D. Berman has served as one of our directors since June 1998. Since
September 1990, he has been with Brinson Partners, Inc., an investment
management firm, where he is currently Executive Director in the Private
Markets Group. Mr. Berman holds a S.B. in Electrical Engineering from the
Massachusetts Institute of Technology and an S.M. from the M.I.T. Sloan School
of Management in the United States.
John J. Bu has served as one of our directors since January 1997. Since
August 1991, he has been with Goldman, Sachs & Co., an investment banking firm,
where he is a Vice President in the Principal Investments Area. Mr. Bu holds a
B.A. in History and a B.S. in Finance from the University of Pennsylvania in
the United States, and a J.D. from Harvard University in the United States.
Douglas H. Richardson has served as one of Creo's directors since January
1999 on the nomination of our employees. Mr. Richardson has been the Thermal
Imaging Product Manager since October 1997. Since joining Creo in October 1991
as a Systems Engineer, he has held various positions, including Project Manager
of DOP and Thermal Imaging from September 1993 to July 1995, and Product
Manager of all CTP devices from July 1995 to October 1997. Mr. Richardson holds
a B.Sc. in engineering physics and an M.Sc. in mechanical engineering from the
University of British Columbia.
Kenneth A. Spencer co-founded Creo and has been a director since our
formation in 1985, except for the period from January 1996 to January 1997.
From May 1985 to June 1995, he was our Chief Executive Officer, and from May
1985 to January 1996, he also served as the Chair of our board of directors.
Mr. Spencer is a member of the board of directors of Spectrum Signal
Processing, Inc., a publicly traded company specializing in digital signal
processing. Dr. Spencer holds a B.Sc. and Ph.D. in electrical engineering from
the University of British Columbia and an M.B.A. from Simon Fraser University.
Executive officers are appointed annually by the board of directors and serve
until their successors are appointed and qualified. There are no family
relationships among any of our officers or directors.
Creo does not have employment agreements with its executive officers.
However, we have entered into post-termination two-year non-competition
agreements with Messrs. Brown, Dance, Gelbart, Kordyback and Michelson.
Creo's board of directors
Creo's directors are elected at our annual meeting of shareholders and serve
until their successors are elected or appointed, unless they resign or are
removed earlier. Our Articles of Incorporation provide for a board of directors
of a minimum of two and a maximum of nine directors. The board currently
consists of eight directors. Under the CBCA, a majority of our directors and
any committee of the board of directors must be composed of resident Canadians.
Messrs. Amit, Bennett, Berman, Bu, Gelbart, Michelson, Richardson and Spencer
were elected to the board of directors pursuant to certain provisions of the
Shareholders Agreement among Creo and certain of its principal shareholders.
These provisions of the Shareholders Agreement will terminate upon completion
of this offering.
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Committees of the board of directors
Creo's board of directors has established three committees:
The Compensation, Nominating and Corporate Governance Committee is
responsible for reviewing the terms of employment and compensation arrangements
for our senior executives, succession planning, awards under our 1996 Stock
Option Plan and our Employee Profit Sharing Plan, maintaining a continuous
review of board and committee effectiveness and making recommendations for
nominees to be elected or appointed as directors. The Compensation, Nominating
and Corporate Governance Committee currently consists of directors Michelson,
Amit, Berman, Bu and Spencer.
The Audit Committee is responsible for reviewing and making recommendations
with respect to our independent auditors, the annual audit of our financial
statements and our internal accounting practices and policies. The Audit
Committee currently consists of directors Amit, Bennett and Spencer.
The Finance Committee is responsible for reviewing and making recommendations
to Creo's board of directors concerning the terms and conditions of financings,
risk management and transactions which could materially affect our financial or
corporate structure. The Finance Committee currently consists of directors
Berman and Bu.
Director Compensation
Our directors are not compensated for serving as directors. Our directors are
eligible to participate in our 1996 Stock Option Plan.
Indemnification of Directors and Executive Officers and Limitation of Liability
Creo's by-laws provide that we will indemnify any of our directors, former
directors, officers and former officers, and certain others, against all costs
reasonably incurred by them with respect to any civil, criminal or
administrative action or proceeding to which they are or may be made a party by
reason of having been a director or officer of Creo. The indemnity covers
amounts paid to settle actions or to satisfy judgments. However, Creo may only
indemnify one of these persons, if that person acted honestly and in good faith
with a view to the best interests of Creo, and, in the case of a criminal or
administrative action or proceeding, if the person had reasonable grounds for
believing that his or her conduct was lawful. The CBCA provides that court
approval is required for the payment of any indemnity in connection with an
action brought by or on behalf of Creo. Creo has entered into indemnification
agreements with each director and executive officer. We have been informed
that, in the opinion of the U.S. Securities and Exchange Commission, the
indemnification of directors, officers or persons controlling Creo for
liabilities arising under the United States Securities Act of 1933, as amended,
is against public policy as expressed in that Act and is, therefore,
unenforceable.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation, Nominating and Corporate Governance
Committee are currently directors Michelson, Amit, Berman, Bu and Spencer.
Neither Dr. Amit, Mr. Berman nor Mr. Bu has at any time been an officer or
employee of Creo.
Executive Compensation
In fiscal 1998, Creo paid an aggregate $1,048,123 in cash compensation to the
directors and officers named under the caption "Directors and Executive
Officers," as a group (18 persons).
At March 31, 1999, our directors and officers, as a group, held options to
purchase a total of 847,378 Common Shares, at exercise prices ranging from
C$3.75 to C$17.50 per Common Share. These options are scheduled to expire on
various dates between August 31, 2000 and January 4, 2004.
48
<PAGE>
Summary Compensation Table
The following table sets forth information concerning compensation earned for
services rendered during each of our last three fiscal years by our Chief
Executive Officer and the other four most highly compensated executive officers
(the Named Officers). Except as noted below, there were no long term
compensation awards paid to the Named Officers during the fiscal years. The
annual compensation set forth below excludes perquisites and other personal
benefits because these benefits did not exceed 10% of the total annual salary
and bonus for any of the Named Officers.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- -------------
Securities
Other Annual Under Options
Name and Principal Position Year Salary Bonus Compensation Granted (#)
- --------------------------- ---- ------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Amos Michelson................ 1998 $94,435 $179,897 $4,551 --
Chief Executive Officer 1997 93,782 128,682 4,343 --
1996 86,591 -- 4,359 --
Daniel Gelbart................ 1998 94,435 179,897 4,551 --
President 1997 93,782 128,682 4,343 --
1996 86,591 -- 4,359 --
Kevin Joyce................... 1998 135,095 1,329 600 186
Vice President, Sales of
Creo Inc. 1997 227,201 -- 12,000 7,334
1996 96,422 -- 10,320 113,200
Michael Ball.................. 1998 115,047 -- -- 6,094
Vice President, Sales 1997 85,287 -- -- 4,000
and Support of Creo Products
N.V. 1996 33,936 -- -- --
Boudewijn Neijens............. 1998 82,414 -- 7,254 8,186
General Manager of 1997 86,301 -- 7,377 13,000
Creo Products N.V. 1996 96,140 -- 6,504 12,500(1)
</TABLE>
- --------
(1) Indicates Common Shares awarded to Mr. Neijens.
Option Grants in 1998 Fiscal Year
The table below shows information regarding grants of stock options made to
the Named Officers under the 1996 Stock Option Plan.
<TABLE>
<CAPTION>
% of Total Market Value
Options of Securities
Securities Granted to Underlying
Under Options Employees in Exercise Price Options on the
Name Granted (#) Financial Year (C$/Share) Date of Grant Expiration Date
- ---- ------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Kevin Joyce............. 186 0.02% C$17.50 C$17.50 January 1, 2003
Michael Ball............ 6,094 0.73% C$17.50 C$17.50 January 1, 2003
Boudewijn Neijens....... 8,186 0.98% C$17.50 C$17.50 January 1, 2003
</TABLE>
49
<PAGE>
Fiscal Year-End Option Values
The following table shows, for each of the Named Officers, certain
information relating to unexercised options held as of September 30, 1998. No
options were exercised by the Named Officers during fiscal 1998.
<TABLE>
<CAPTION>
Value of Unexercised In-the-Money
Unexercised Options as at September 30, 1998 (#) Options at September 30, 1998
Name Exercisable/ Unexercisable Exercisable/ Unexercisable (1)
- ---- ----------------------------------------------- ---------------------------------
<S> <C> <C>
Kevin Joyce............. 31,696/81,066 n/a
Michael Ball............ 12,378/0 n/a
Boudewijn Neijens....... 22,186/0 n/a
</TABLE>
- --------
(1) The value of unexercised in-the-money options is not determinable as the
Common Shares were not publicly traded at September 30, 1998.
Employee Benefit Plans
1996 Stock Option Plan
Our 1996 Stock Option Plan provides for the grant of incentive stock options
to employees and nonstatutory stock options to employees and consultants. The
purpose of the plan is to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentives to
employees and consultants and to promote the success of our business.
Our 1996 Stock Option Plan was approved by our board of directors in November
1995 and was approved by our shareholders in January 1996. Unless terminated
earlier by the board of directors, the plan will terminate in November 2005. A
total of 8,000,000 Common Shares have been reserved for issuance under the
plan. As of March 31, 1999, options to purchase 4,595,232 Common Shares were
outstanding, 60,428 Common Shares had been issued upon exercise of options
granted, and 3,344,340 Common Shares remained available for future grant. The
outstanding options are exercisable at prices between C$3.75 and C$17.50 per
share and expire on various dates between January 31, 2001 and January 4, 2004.
A total of 201,588 of the outstanding options vest at various rates between
January 1, 2000 and January 4, 2001. The remaining outstanding options are
fully vested. Options granted under the plan are generally fully vested at the
time of grant.
The plan is administered by our board of directors, which acts on the
recommendation of its Compensation, Nominating and Corporate Governance
Committee. Options may be awarded both as a form of compensation and as an
incentive to selected employees, directors and officers and to other persons
approved by the board or the committee. The board determines the terms of
options granted under the plan, including the number of Common Shares subject
to the option, exercise price, terms and exercisability. Incentive stock
options granted under the plan must have an exercise price equal to at least
100% of the fair market value of the Common Shares on the date of grant and at
least 110% of the fair market value in the case of options granted to an
employee who holds more than 10% of the total voting power of all classes of
our share capital. The exercise price of nonstatutory stock options granted
under the plan is determined by the board of directors. Payment of the exercise
price may be made in cash or other forms of consideration approved by the
board.
The board determines the term of options, which may not exceed ten years or
five years in the case of an option granted to a holder of more than 10% of the
total voting power of all classes of our share capital. Our practice to date
has been to grant options with five-year terms. Each option may be exercised
during the lifetime of the optionee only by the optionee.
The board determines when options become exercisable. The plan provides that,
except as otherwise specified by the board, options generally must be exercised
within three months after the termination of the optionee's status as an
employee or consultant of Creo, and our practice has been to grant options that
must be exercised within 30 days after the later of the completion of our
initial public offering and the date of the optionee's termination, but in no
event later than the expiration of the option's term. As of March 31, 1999,
50
<PAGE>
former employees held options to purchase up to 421,700 Common Shares. These
options will expire 30 days after completion of this offering. The plan
provides that in the case of an optionee whose employment or consulting
relationship terminates because of death or disability, his or her options must
be exercised no later than 12 months in the case of the optionee's death or six
months in the case of the optionee's disability after his or her termination,
but in no event later than the expiration of the option's term.
If we merge with or into another corporation, each outstanding option may be
assumed or an equivalent option substituted by the successor corporation.
However, if the successor corporation does not agree to assume or substitute an
option, then the options will terminate on the completion of the merger.
The board of directors has the authority to amend or terminate the plan and,
to the extent required by law, Creo will seek shareholder approval of
amendments to the plan. However, no amendment will affect options already
granted without the holder's consent. In addition, shareholder approval is
required to increase the number of shares reserved for issuance under the plan
and to change the designation of the class of persons eligible to be granted
options under the plan.
Employee Profit Sharing Plan
We have a profit sharing plan for our employees. Under the plan a certain
percentage of our annual profits may be set aside for distribution among our
eligible employees. The amount set aside under the plan is determined by the
Compensation, Nominating and Corporate Governance Committee of our board of
directors. In any fiscal year, that amount may not be greater than 12% of base
earnings. Base earnings are defined as net income before taxes and profit
sharing, less 12% of average shareholders' equity during the year. Three
quarters of the amount set aside is shared equally among all eligible
employees, and the remaining quarter may be distributed at the discretion of
the board of directors. An aggregate of $1,079,381 was distributed under the
plan for the fiscal year ended September 30, 1998.
401(k) Plan for U.S. resident employees
Creo maintains a 401(k) Plan to provide those of our employees who are
residents of the United States with a tax preferential savings and investment
program. Employees may begin to participate in the 401(k) Plan on the first of
the month following three months of continuous service from their date of hire.
Employees may elect to reduce their current compensation up to the lesser of
15% of eligible compensation or the statutorily prescribed annual limit and
have such reduction contributed to the 401(k) Plan. The 401(k) Plan permits,
but does not require, additional matching contributions to the 401(k) Plan by
the Company on behalf of the participants, to a maximum of 5% of the
participant's current compensation. In the fiscal year ended September 30,
1998, Creo contributed an aggregate amount of $228,062 to the 401(k) Plan.
Contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are generally not taxable to the employees until
withdrawn, and contributions by Creo are deductible by Creo when made. The
trustee under the 401(k) Plan, at the direction of each participant, invests
the assets of the 401(k) Plan in selected investment options.
Registered Retirement Savings Plans for Canadian resident employees
Each year Creo contributes an amount equal to 5% of the gross salary of those
employees who are Canadian residents to these employees' individual tax-
deferred Registered Retirement Savings Plans. In the fiscal year ended
September 30, 1998, the aggregate amount of these contributions was $1,151,624.
Contributions by Creo are deductible by Creo when made.
51
<PAGE>
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN MATERIAL TRANSACTIONS
The following are the only material transactions Creo has entered into since
October 1, 1995 in which any of our directors or executive officers or any
holder of 5% or more of our Common Shares, or any of their respective
associates or affiliates, has had any material interest:
In November 1995, entities affiliated with Goldman, Sachs & Co. (the GS
Group) purchased an aggregate of 2,962,962 units from Creo at a purchase price
of $6.75 per unit. Each unit consisted of one Common Share and a warrant to
purchase one Common Share at an exercise price of $6.75. In November 1998, the
GS Group exercised all of the warrants by paying the exercise price in cash. GS
Group is a holder of more than 5% of our Common Shares and John Bu, a Vice
President of Goldman, Sachs & Co., is a member of our board of directors.
In January 1998, Creo granted an option to purchase 10,000 Common Shares to
Raphael Amit, the Chair of the Board of Directors. The option is exercisable at
C$7.50 per Common Share and expires on January 1, 2003. In November 1997, we
issued 6,334 Common Shares to Dr. Amit in consideration for consulting services
rendered to Creo valued at C$110,845.
In May 1997, entities for which Brinson Partners, Inc. acts as investment
adviser (the Brinson Group) purchased an aggregate of 1,595,800 Common Shares
from Creo at a purchase price of $7.50 per share and an aggregate of 670,868
Common Shares from certain selling shareholders at the same purchase price. The
Brinson Group is a holder of more than 5% of our Common Shares and Thomas D.
Berman, an Executive Director of Brinson Partners, Inc., is a member of our
board of directors.
In May 1997, Creo sold 13,334 Common Shares for cash at a price of $7.50 per
share to Arie Rosenfeld, who at the time was a member of Creo's board of
directors. In April 1997, we granted Mr. Rosenfeld an option to purchase 12,000
Common Shares. The option is exercisable at $7.50 per share and expires on
April 30, 2002. Mr. Rosenfeld resigned as a director in March 1999.
We have entered into indemnification agreements with our officers and
directors which are described in "Management--Indemnification of Directors and
Executive Officers and Limitation of Liability."
Investment Banking Services Agreement
In November 1995, Creo entered into an Investment Banking Services Agreement
with Goldman, Sachs & Co. (Goldman), which provides Goldman a right of first
refusal to provide Creo with any investment banking services we may require.
The right of first refusal expires in November 2000. If Goldman declines to
exercise its right or if we cannot reach agreement concerning the terms of its
engagement, we may engage another investment bank on terms no less favorable to
us than those last offered by Goldman. Any agreement Creo enters into with
another investment bank must contain a provision giving Goldman the right to be
appointed a co-managing dealer in connection with any offering of securities by
Creo. Goldman has waived both its right of first refusal and its right to be
appointed a co-managing dealer with respect to this offering.
Registration Rights
Certain holders of our Common Shares have the right in certain circumstances
to require Creo to register their shares under the Securities Act. See
"Description of Share Capital--Registration Rights."
52
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership
of our Common Shares as of March 31, 1999, and as adjusted to reflect the sale
of Common Shares in this offering, by:
. each person or group of affiliated persons known by us to own more than
5% of our Common Shares;
. each of our directors;
. each of the Named Officers;
. all directors and executive officers as a group; and
. all other selling shareholders.
Percentage of ownership is calculated as required by Commission Rule 13(d)-
3(d)(1). To our knowledge and except as otherwise indicated, the persons named
in the table have sole voting and investment power with respect to all Common
Shares held by them subject to community property laws. Unless otherwise
indicated, the address of each of the persons named below is the address of our
principal office, 3700 Gilmore Way, Burnaby, British Columbia, Canada V5G 4M1.
As of March 31, 1999, there were 28,027,854 Common Shares outstanding.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior to This Offering After This Offering
--------------------------- ---------------------------
Number of Number of Number of
Shares Shares Shares
Outstanding Offered in this Outstanding
Beneficial Owner (1) Percent Offering (1) Percent
- ------------------------ --------------- ---------- --------------- --------------- ----------
5% Shareholders
- ---------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
The Goldman
Sachs Group, Inc. (2).. 5,925,924 21.1% 338,586 5,587,338 17.4%
Entities for which
Brinson Partners, Inc.
acts as investment
advisor (3)............ 2,266,668 8.1% -- 2,266,668 7.1%
Business Development
Bank of Canada (4)..... 1,750,594 6.2% 100,023 1,650,571 5.2%
Entities affiliated with
Star Ventures (5)...... 1,535,490 5.5% 87,733 1,447,757 4.5%
Meir Barel (5).......... 1,535,490 5.5% 87,733 1,447,757 4.5%
Entities affiliated with
Evergreen Canada
Israel Investments Ltd.
(6).................... 1,490,682 5.3% 82,990 1,407,692 4.4%
<CAPTION>
Executive Officers and
Directors
- ----------------------
<S> <C> <C> <C> <C> <C>
Amos Michelson.......... 1,846,658 6.6% -- 1,846,658 5.8%
Daniel Gelbart (7)...... 3,459,332 12.3% 197,654 3,261,678 10.1%
Raphael Amit (8)........ 63,000 * -- 63,000 *
David A. Bennett (4).... 1,750,594 6.2% 100,023 1,650,571 5.2%
Thomas D. Berman (3).... 2,266,668 8.1% -- 2,266,668 7.1%
John Bu (2)............. 5,925,924 21.1% 338,586 5,587,338 17.4%
Douglas H. Richardson
(9).................... 52,238 * -- 52,238 *
Kenneth A. Spencer
(10)................... 1,720,074 6.1% 98,279 1,621,795 5.1%
Michael D. Ball (11).... 27,584 * -- 27,584 *
Kevin M. Joyce (12)..... 38,762 * -- 38,762 *
Boudewijn P. Neijens
(13)................... 50,802 * -- 50,802 *
All directors and
officers as a group
(18 individuals) (14).. 17,816,244 62.1% 734,542 17,081,702 52.2%
<CAPTION>
Other
- -----
<S> <C> <C> <C> <C> <C>
The Gilde IT Fund B.V.
(15)................... 866,942 3.1% 49,534 817,408 2.6%
HarbourVest
International Private
Equity
Partners II--Direct
Fund L.P. (16)......... 747,014 2.7% -- 747,014 2.3%
Entities affiliated with
Technology
Crossover Ventures
(17)................... 545,456 1.9% 31,165 514,291 1.6%
David Pritchard (18).... 154,518 * 8,829 145,689 *
Rachel Mayer (10)....... 145,200 * 8,296 136,904 *
Unicycle Trading
Company, L.P. (19)..... 73,616 * 4,206 69,410 *
Interstock Anstalt fur
Vermogens und Trust
Verwaltungen (20)...... 17,516 * 1,001 16,575 *
</TABLE>
53
<PAGE>
- --------
* less than 1%.
(1) "Beneficial ownership," as used in this table, means sole or shared power
to vote or direct the voting of Common Shares, or the sole or shared power
to dispose, or direct a disposition, of such Common Shares. A person who
has the right to acquire a Common Share within 60 days of March 31, 1999,
is deemed to have "beneficial ownership" of that Common Share for the
purposes of this table. The Common Shares to which such a right applies
are deemed outstanding for computing the percentage ownership of the
person holding these rights, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Consists of 3,718,096 Common Shares beneficially owned by GS Capital
Partners II, L.P., 1,478,096 Common Shares held by GS Capital Partners II
Offshore, L.P., 137,140 Common Shares held by Goldman, Sachs & Co.
Verwaltungs GmbH, 313,764 Common Shares held by Bridge Street Fund 1995,
L.P. and 278,828 Common Shares held by Stone Street Fund 1995, L.P. The
address of The Goldman Sachs Group, Inc. is 85 Broad Street, New York, New
York 10004. John Bu, a director of Creo, is a Vice President of Goldman,
Sachs & Co. Mr. Bu disclaims any beneficial interest in these Common
Shares.
(3) Brinson Partners, Inc. is the investment adviser to the Virginia
Retirement System, which beneficially owns 2,000,000 Common Shares, BVCF
III L.P., which beneficially owns 229,276 Common Shares and the Brinson
MAP Venture Capital Fund III, which beneficially owns 37,392 Common
Shares. Brinson Partners, Inc. disclaims any beneficial interest in these
Common Shares. The address of Brinson Partners, Inc. is 209 South LaSalle
Street, Chicago, Illinois 60604-1295. Thomas D. Berman, a director of
Creo, is an Executive Director of Brinson Partners, Inc. Mr. Berman
disclaims any beneficial interest in these Common Shares.
(4) The address of Business Development Bank of Canada is 505 Burrard Street,
Vancouver, British Columbia, Canada V7X 1V3. David A. Bennett, a director
of Creo, is a Managing Director of the Business Development Bank of
Canada. Mr. Bennett disclaims any beneficial interest in these Common
Shares.
(5) Includes 275,374 Common Shares held by SVE STAR Ventures Enterprises
No. II, a German Civil Law Partnership (with limitation of liability) (SVE
II); 738,954 Common Shares held by SVE STAR Ventures Enterprises No. III,
a German Civil Law Partnership (with limitation of liability) (SVE III);
61,214 Common Shares held by SVE STAR Ventures Enterprises No. IIIA, a
German Civil Law Partnership (with limitation of liability) (SVE IIIA);
and 130,614 Common Shares held by SVM STAR Ventures Management GmbH Nr. 3
(STAR Germany). STAR Germany has the sole power to vote or direct the
vote, and the sole power to dispose or direct the disposition of, the
Common Shares held by SVE II, SVE III and SVE IIIA. Also includes 197,600
Common Shares held by D.G. Dan-Gal Ltd. (Dan-Gal) and 131,734 Common
Shares owned by STAR Management of Investments (1993) Limited Partnership
(STAR Israel Partnership). SVM STAR Ventures Capital Management Ltd. (STAR
Israel) has the sole power to vote or direct the vote, and the sole power
to dispose or direct the disposition of the Common Shares held by Dan-Gal
and STAR Israel Partnership. Meir Barel has the sole power to direct the
actions of STAR Germany and STAR Israel. Dr. Barel disclaims beneficial
ownership of the Common Shares held by any of the entities mentioned,
except to the extent of any pecuniary interest therein. Dr. Barel's
address is c/o SVM STAR Ventures Management GmbH Nr. 3, Possartstr. 9,
Munich, Germany.
(6) Consists of 538,730 Common Shares owned by Evergreen International
Investments N.V., 237,266 Common Shares beneficially owned by Evergreen
Capital Markets Ltd., 159,200 Common Shares beneficially owned by
Periscope I Fund LP, 40,800 Common Shares owned by AB Shaked Lavan Ltd.,
25,460 Common Shares owned by Evergreen Canada-Israel Management Ltd., and
489,226 Common Shares owned by Yarok AZ Ltd. The shares of Evergreen
Canada Israel Investments Ltd. are publicly traded on the Tel Aviv Stock
Exchange. Evergreen Canada Israel Investments Ltd. disclaims any
beneficial interest in the Common Shares owned by Yarok AZ Ltd., Evergreen
Capital Markets Ltd., and Periscope I Fund LP. The address of Evergreen
Canada Israel Investments Ltd. is 96 Rothschild Boulevard, Tel Aviv,
Israel.
54
<PAGE>
(7) Includes 3,174,800 Common Shares owned directly and 139,332 Common Shares
owned indirectly by Mr. Gelbart, and 145,200 Common Shares held by Rachel
Mayer, over which Mr. Gelbart exercises voting power. Mr. Gelbart
disclaims beneficial interest in such 145,200 Common Shares.
(8) Includes 20,000 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(9) Includes 35,404 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(10) Consists of 439,780 Common Shares held directly and 1,280,294 Common
Shares held indirectly by Mr. Spencer.
(11) Includes 25,184 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(12) Consists of 38,762 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(13) Includes 36,302 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(14) Includes 675,378 Common Shares issuable upon exercise of options
exercisable within 60 days after March 31, 1999.
(15) The address of the Gilde IT Fund B.V. is Newtonlaan 91, 3508 AB Utrecht,
The Netherlands.
(16) The address of HarbourVest International Private Equity Partners II Direct
Fund L.P. is One Financial Centre, 44th Floor, Boston, Massachusetts
02111.
(17) Consists of 505,430 Common Shares beneficially owned by Technology
Crossover Ventures, L.P., and 40,026 Common Shares beneficially owned by
Technology Crossover Ventures, C.V. The address of Technology Crossover
Ventures is 56 Main Street, Suite 210, Millburn, New Jersey, 07041.
(18) From April 1989 to July 1995, Mr. Pritchard was Creo's Chief Financial
Officer and from July 1995 to December 1996 was Creo's Chief Operating
Officer. Mr. Pritchard's address is 1119 Lenora Road, Bowen Island,
British Columbia, Canada V0N 1D0.
(19) The address of Unicycle Trading Company, L.P. is 11 Galgaley Haplada St.,
P.O. Box 12600, Herzlia, Pituach, Israel 46733.
(20) The address of Interstock Anstalt fur Vermogens und Trust Verwaltungen is
Herrengasse 21, Postfach 339, 9470 Vaduz, Lichtenstein.
55
<PAGE>
DESCRIPTION OF SHARE CAPITAL
Creo is authorized to issue an unlimited number of Common Shares, without par
value, and an unlimited number of Preferred Shares, without par value. The
following summary of certain provisions of the Common Shares and the Preferred
Shares is not complete and may not contain all the information you should
consider before investing in our Common Shares. You should read our Articles of
Incorporation and by-laws carefully. They are included as an exhibit to the
Registration Statement of which this prospectus is a part.
Common Shares
At March 31, 1999, there were 441 holders of record of our Common Shares, and
28,027,854 Common Shares were issued and outstanding. Holders of Common Shares
are entitled to one vote for each share held on all matters to be voted on by
shareholders, including the election of directors. Creo's Articles of
Incorporation do not provide for cumulative voting in the election of
directors. There are no limitations on the rights of non-resident or foreign
owners of our Common Shares to hold or vote their shares. Subject to
preferences of outstanding Preferred Shares, the holders of Common Shares are
entitled to receive ratably any dividends the board of directors declares out
of funds legally available for the payment of dividends. If Creo is liquidated,
dissolved or wound up, holders of Common Shares are entitled to share ratably
in all assets remaining after payment of our liabilities and any liquidation
preferences of any outstanding Preferred Shares. Holders of our Common Shares
have no pre-emptive rights or rights to convert their Common Shares into any
other securities and there are no redemption or sinking fund provisions with
respect to our Common Shares. All outstanding Common Shares are fully paid and
non-assessable, and the Common Shares to be issued following this offering will
be fully paid and non-assessable.
Preferred Shares
Creo's board of directors is authorized, without further action by the
shareholders, to issue Preferred Shares in one or more series and to set the
number of shares constituting any such series, the voting rights, if any, and
the designations, preferences and relative, participating, optional or special,
and qualifications, limitations or restrictions, including dividend rights and
rates, redemption provisions (including sinking fund provisions), rights of
conversion or exchange, and liquidation preferences. The Preferred Shares as a
class are entitled to priority over the Common Shares if our board of directors
decides to pay any dividends, and if Creo is dissolved, liquidated or wound up,
the Preferred Shares are entitled as a class to priority of return of capital.
Except as required by law or the provisions of any designated series of
Preferred Shares, the holders of Preferred Shares as a class are not entitled
to receive notice of, attend or vote at any meeting of shareholders of the
Company.
If Creo's board of directors so determines, the Preferred Shares may carry
full voting rights with the holders of our Common Shares, or limited voting
rights, and may be convertible into or exchangeable for our Common Shares or
another class or series of Creo's securities, be redeemable, carry the right to
specified participating dividends, which may be fixed or adjustable and may
also be cumulative, and have such other relative rights, preferences and
limitations as Creo's board of directors determines.
If Creo's board of directors issues further Common Shares or Preferred
Shares, this could cause a dilution of the net tangible book value of our
Common Shares and, in the case of Common Shares or Preferred Shares with voting
rights, would dilute the voting power of the existing holders of our Common
Shares.
There are no Preferred Shares outstanding, and we have no current plan to
issue any Preferred Shares.
Modifications, Subdivisions and Consolidations
Under the CBCA, amendment of certain rights of holders of a class of shares,
including Common Shares, requires the approval of not less than two-thirds of
the votes cast by the holders of those shares voting separately as a class at a
special meeting. The CBCA also gives such holders the right to dissent from
such amendment and to require us to pay them the then fair value of their
shares.
56
<PAGE>
Warrants
In May 1997 we issued warrants to purchase 24,598 Common Shares at an
exercise price of $9.38 per share, subject to customary adjustments in certain
defined events. These warrants expire on June 2, 2002, and are exercisable for
Common Shares on a net exercise basis without tender of cash.
Registration Rights
Creo is party to a Shareholders Agreement with certain of its shareholders
who hold an aggregate of 24,824,238 Common Shares. The Shareholders Agreement
provides that if Creo proposes to register any of its securities for
distribution to the public under the securities laws of the United States or
Canada, these shareholders may demand the right to "piggy-back" onto Creo's
registration up to a certain maximum number of Common Shares. Creo must use
reasonable commercial efforts to register Common Shares held by each
shareholder who makes this demand. Subject to certain limitations, Creo is
required by the Shareholders Agreement to pay all offering expenses (excluding
underwriting fees and commissions with respect to the sale of these
shareholders' shares) in connection with such registration.
In addition to the "piggy-back" registration rights described above under the
Shareholders Agreement, a shareholder or shareholders holding, in the
aggregate, not less than 3% of the outstanding Common Shares, may demand that
Creo register all or a part of the shares beneficially owned by such
shareholder or shareholders, but in no event less than that number of Common
Shares having a market value of C$5,000,000. If such a demand is made, Creo
must notify the other shareholders who are parties to the Shareholders
Agreement and must use reasonable commercial efforts to register Common Shares
held by each shareholder who makes such a demand. Subject to certain
limitations, Creo is required by the Shareholders Agreement to pay all offering
expenses (excluding underwriting fees and commissions with respect to the sale
of these shareholders' shares) in connection with such registration. These
demand registration rights may be exercised at any time up to the sixth
anniversary of our initial public offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our Common Shares in Canada is Montreal
Trust Company of Canada at its principal offices in Toronto, Ontario and
Vancouver, British Columbia, and in the United States is the Bank of Nova
Scotia Trust Company of New York at its principal office in New York, New York.
TAXATION
The following is a summary of the material anticipated tax consequences of an
investment in the Common Shares under U.S. federal income tax laws and, with
respect to an investment by an investor not resident in Canada, under Canadian
tax laws.
The discussion of U.S. federal income tax considerations does not deal with
all possible tax consequences relating to an investment in our Common Shares.
In particular, it does not address either the tax consequences under state,
local and other (e.g., non-U.S.) tax laws, or special circumstances that may
apply to any individual investor. In addition, the U.S. tax summary applies
only to investors who hold the Common Shares as a capital asset within the
meaning of Section 1221 of the United States Internal Revenue Code of 1986, as
amended (U.S. Code), and does not address the tax consequences that may be
relevant to investors in special tax situations (including, for example,
foreign persons, insurance companies, tax-exempt organizations, dealers in
securities or currencies, banks or other financial institutions, investors that
hold our Common Shares as part of a hedge, straddle or conversion transaction,
or investors who own, directly or indirectly, ten percent or more of our
outstanding Common Shares). Further, the U.S. tax summary does not address the
alternative minimum tax consequences of an investment in our Common Shares or
the indirect consequences to investors of equity interests in investors in our
Common Shares. Accordingly, investors in our Common Shares are urged to consult
their own tax advisers as to the specific tax consequences to them of an
investment in our
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<PAGE>
Common Shares, including the applicable federal, state, local, and foreign tax
consequences and any associated information reporting requirements, including
the applicable federal, state, local and foreign tax consequences and any
information reporting requirements associated with the merger. The following
discussion of U.S. federal income tax considerations is based upon an analysis
of the U.S. Code, relevant regulations, current case law and published rulings,
all of which are subject to prospective and retroactive changes.
The following discussion of Canadian federal income considerations is not
exhaustive of all possible Canadian federal income tax considerations and does
not take into account provincial, territorial or foreign tax considerations. It
is not intended to be, nor should it be construed to be, legal or tax advice to
any particular holder of Common Shares. Prospective purchasers of our Common
Shares, including non-resident insurers carrying on business in Canada, are
advised to consult with their advisors with respect to the income tax
consequences to them of an acquisition of Common Shares.
The following discussion of Canadian federal income considerations assumes
that holders of Common Shares hold their Common Shares as capital property,
deal at arm's length with us, are not "financial institutions" as defined in
the Income Tax Act (Canada) (ITA), and do not use or hold and are not deemed to
use or hold their Common Shares in, or in the course of, carrying on a business
in Canada.
The following discussion of Canadian federal income considerations is based
on the current provisions of the ITA and the regulations under the ITA (ITA
Regulations), all proposed amendments to the ITA and Regulations announced by
the Minister of Finance, Canada and the provisions of the Canada-U.S. Income
Tax Treaty (1980) (Treaty). It has been assumed that any proposed amendments to
the ITA and the ITA Regulations will be enacted in substantially their present
form.
The anticipated tax consequences are subject to change, and any such change
may be retroactively effective. If so, this summary may be affected and may not
be relied upon. Further, any variation or difference from the facts or
representations recited herein, for any reason, might affect the following
discussion, perhaps in an adverse manner, and make this summary inapplicable.
In addition, neither our U.S. counsel nor our Canadian tax advisor has
undertaken any obligation to update this discussion for changes in facts or
laws occurring subsequent to the date thereof.
For purposes of this discussion, "U.S. Holder" means a holder of our Common
Shares who is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any state thereof (including the District of Columbia) or an
estate the income of which is subject to United States federal income tax
regardless of its source. The term "non-U.S. Holder" refers to any holder of
our Common Shares other than a U.S. Holder. The summary of Canadian tax
consequences is based upon the advice of Thorsteinssons, Tax Lawyers, Creo's
Canadian tax counsel. The summary of U.S. federal income tax consequences is
based upon the advice of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Creo's U.S. tax counsel.
The summary represents solely the views of our U.S. and Canadian tax advisors
as to the interpretation of existing law and, accordingly, no assurance can be
given that the tax authorities or courts in the U.S. or Canada will agree with
the summary hereafter.
Canadian Federal Income Tax Considerations
In the opinion of Thorsteinssons, our Canadian tax counsel, the following is
at this date a fair and adequate summary of the principal federal income tax
considerations arising under the ITA to an investor who acquires our Common
Shares pursuant to this offering.
Dividends on Our Common Shares
Under the ITA, amounts paid or credited or deemed to be paid or credited on
account or in lieu of payment of, or in satisfaction of, dividends, including
stock dividends, to holders of our Common Shares that
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<PAGE>
are resident in a country other than Canada will be subject to withholding tax
of 25% of the amount of the dividend. The rate of withholding tax may be
reduced pursuant to the terms of a bilateral income tax treaty between Canada
and the country in which a holder of Common Shares is resident.
Under the Treaty, where the recipient of a dividend on the Common Shares is
the beneficial owner of such dividends, does not have a "permanent
establishment" or "fixed base" in Canada and is considered to be a resident of
the United States for purposes of the Treaty, the rate of Canadian withholding
tax on such dividends will generally be reduced to 15% of the amount of such
dividends or, if the recipient is a corporation which owns at least 10% of the
voting stock of the Company, to 5% of the amount of such dividends. Dividends
paid or credited to a holder that is a United States tax-exempt organization,
as described in Article XXI of the Treaty, will not be subject to Canadian
withholding tax.
Disposition of Our Common Shares
A holder of Common Shares will not be subject to tax under the ITA with
respect to a capital gain on the disposition of a Common Share unless the
Common Share is "taxable Canadian property" of the holder as defined by the
ITA, and no relief is afforded under the Treaty. A Common Share will generally
not be taxable Canadian property to a holder provided that the Common Share is
listed on a prescribed stock exchange within the meaning of the ITA on the date
of disposition, and provided such holder, or persons with whom such holder did
not deal at arm's length (within the meaning of the ITA), or any combination
thereof, did not own 25% or more of the issued shares of any of our classes or
series of shares at any time within five years immediately preceding the date
of disposition. Where a Common Share is taxable Canadian property to the
holder, the Treaty will generally exempt the holder from tax in respect of the
disposition of the Common Share provided its value is not, at the time of the
disposition, derived principally from real property situated in Canada. This
relief under the Treat may not be available to a holder who had a "permanent
establishment" or "fixed base" available in Canada during the 12 months
immediately preceding the disposition of the Common Share.
Under the ITA, the disposition of a Common Share by a holder may occur or be
deemed to occur in a number of circumstances including on a sale or gift of
such share or upon the death of the holder. There are no Canadian federal
estate or gift taxes with respect to the purchase or ownership of the Common
Shares.
Repurchase of Our Common Shares by Us
If we repurchase our Common Shares from a holder of our Common Shares (other
than a purchase of our Common Shares by us on the open market in a manner in
which shares would be purchased by any member of the public in the open market)
the amount, if any, by which the amount paid by the Company on the purchase
exceeds the "paid-up capital" with respect to the shares purchased will be
deemed by the ITA to be a dividend paid by us to the holder of our Common
Shares. The paid-up capital of our Common Shares may be less than the holder's
cost of our Common Shares. Any dividend deemed to have been received by a
holder of our Common Shares will be subject to tax treatment described above
under "Dividends on Our Common Shares."
Such a holder of our Common Shares will also be considered to have disposed
of our Common Shares purchased by us for proceeds of disposition equal to the
amount received or receivable by the holder on such purchase, less the amount
of any deemed dividend as described above. As a result, such a holder of our
Common Shares will generally realize a capital gain (or capital loss) equal to
the amount by which such deemed proceeds of disposition, net of any costs of
disposition, exceed (or are exceeded by) the adjusted cost base of such shares.
The treatment of any such capital gain or capital loss will be subject to the
tax treatment described above under "Disposition of Our Common Shares."
Certain Other Considerations
There may be other income tax considerations applicable to a purchaser of our
Common Shares who, for the purposes of the ITA, is neither resident nor deemed
to be resident in Canada, and for the purposes of the Treaty, is not a resident
of the United States. Prospective purchasers of our Common Shares should
consult their own tax advisors.
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<PAGE>
United States Federal Income Tax Considerations
In the opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
our U.S. tax advisors, the following is at this date a fair and adequate
summary of the principal federal income tax considerations arising under the
U.S. Internal Revenue Code of 1986, as amended (the Code), and the regulations
promulgated thereunder, to an investor who acquires Common Shares pursuant to
this Offering.
Taxation of Dividends
Dividends received from us generally will constitute dividends for U.S.
federal income tax purposes and are taxable in the United States as ordinary
income. Distributions in excess of current or accumulated earnings and profits
will be treated first as a non-taxable return of capital, reducing the U.S.
Holder's tax basis in the Common Shares, thus increasing the amount of gain (or
reducing the amount of any loss) which might be realized by such U.S. Holder
upon the sale or exchange of such Common Shares. Any such distributions in
excess of a U.S. Holder's tax basis in the Common Shares will be treated as
capital gain to the U.S. Holder, and will be either long-term or short-term
capital gain, depending upon the U.S. Holder's federal income tax holding
period for the Common Shares. These dividends are not eligible for the
dividends received deduction otherwise allowed to U.S. corporate shareholders
on dividends from U.S. domestic corporations. The amount of any dividend paid
in Canadian dollars will be equal to the U.S. dollar value of the Canadian
dollars on the date of receipt, regardless of whether the U.S. Holder converts
the payment into U.S. dollars. A U.S. Holder should not recognize any foreign
currency gain or loss from receiving the dividend in Canadian dollars if such
foreign currency gain or loss is converted into U.S. dollars on the day
received. If a U.S. Holder does not convert the foreign currency into U.S.
dollars on the date of receipt, however, such Holder may recognize gain or loss
upon a subsequent sale or other disposition of the foreign currency (including
an exchange of the foreign currency for U.S. dollars). Gain or loss, if any,
recognized by a U.S. Holder on the sale or disposition of Canadian dollars will
be U.S. source ordinary income or loss. A U.S. Holder may elect annually either
to deduct Canadian withholding tax (see "--Canadian Federal Income Tax
Considerations") against its income or to credit the withholding taxes as a
credit against its U.S. tax liability, subject to U.S. foreign tax credit
limitation rules. Shareholders should consult with their own tax advisers with
regard to the availability of a U.S. foreign tax credit and the applicability
of the U.S. foreign tax limitations to their particular situations.
Taxation of Capital Gains
A U.S. Holder of Common Shares will generally recognize gain or loss for U.S.
federal income tax purposes upon the sale, exchange or other disposition of
Common Shares in an amount equal to the difference between the amount realized
from such sale, exchange or other disposition and the U.S. Holder's tax basis
for such Common Shares. The gain or loss generally will be capital gain or
loss, and will be long-term capital gain or loss if such U.S. Holder's holding
period for the Common Shares is more than one year. Any such capital gain or
loss will generally be treated as United States source income or loss, as the
case may be, for United States foreign tax credit purposes. The deductibility
of capital losses is restricted and generally may only be used to reduce
capital gains to the extent thereof. However, individual taxpayers may deduct
annually $3,000 of capital losses in excess of their capital gains.
Passive Foreign Investment Companies
Creo may be classified as a "passive foreign investment company" (PFIC) for
United States federal income tax purposes if certain tests are met. In general,
Creo will be a PFIC with respect to a U.S. Holder if, for any taxable year in
which the U.S. Holder held the Common Shares, either (i) 75% or more of Creo's
gross income for the taxable year is passive income; or (ii) on average for the
taxable year, 50% or more of its assets by value produce or are held for the
production of passive income. Passive income for this purpose included, in
general, dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not derived from a
related person), annuities, and gains from assets which would produce such
income other than sales of inventory. For the purpose of the PFIC tests, if a
foreign corporation owns directly or indirectly at least 25% by value of the
stock of another corporation, the foreign corporation is treated as owning its
proportionate share of the assets of the other corporation, and as if it had
received directly
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its proportionate share of the income of such other corporation. The effect of
this special provision with respect to Creo and its direct and indirect
ownership of its subsidiaries is that Creo, for purposes of the income and
assets tests described above, will be treated as owning directly its
proportionate share of the assets of the subsidiaries and of receiving directly
its proportionate share of each of those companies' income, if any, so long as
it owns, directly or indirectly, at least 25% by value of the particular
company's stock.
If Creo were to be classified as a PFIC, a U.S. Holder would be subject to
various adverse U.S. tax consequences. Such adverse consequences include an
interest charge on receipt of certain "excess" dividend distributions by Creo
to the U.S. Holder and on realization of gain on disposition of any of the U.S.
Holder's Common Shares (all of which distributions and gains would be taxable
as ordinary income). Alternatively, a U.S. Holder (i) may be permitted to make
a "qualified electing fund" election in which case, in lieu of the treatment
described in the previous sentence, the U.S. Holder would be required to
include in its taxable income certain undistributed amounts of our income, or
(ii) to elect to mark-to-market the Common Shares and recognize ordinary income
(or ordinary loss) each year with respect to such investment and on the sale or
other disposition of the Common Shares. U.S. Holders should consult their own
tax advisers concerning the status of Creo as a PFIC any time after the date of
this Form F-1, as well as the availability of any such election.
Foreign Personal Holding Companies
Creo will be classified as a foreign personal holding company ("FPHC") if at
any time during a tax year (i) five or fewer individual United States citizens
or residents, directly or indirectly or by attribution, own more than 50% of
the total combined voting power or value of Creo's stock, and (ii) at least 60%
of its gross income (generally 50% for years following the first year it
becomes a FPHC) consists of FPHC income (defined generally to include
dividends, interest, royalties, rents, and certain other types of passive
income). Each United States shareholder in an FPHC is required to include in
gross income, as a dividend, an allocable share of the FPHC's undistributed
FPHC income (generally the taxable income of the FPHC, as specially adjusted).
Based on the nature of Creo's expected income and assets, management does not
expect that Creo should be classified as a PFIC in the foreseeable future.
Based on the ownership of Creo and the nature of Creo's expected income,
management does not expect that Creo should be classified as an FPHC in the
foreseeable future. As noted above, certain U.S. tax consequences depend on the
composition of the income of Creo and its subsidiaries. The tax law is not
entirely clear as to the proper classification of all relevant types of income
which Creo and its subsidiaries may realize. Accordingly, there can be no
assurance that management's expectations described in the preceding section
will be fulfilled.
U.S. Information Reporting and Backup Withholding
Distributions made by us with respect to the Common Shares and gross proceeds
received from the disposition of the Common Shares may be subject to certain
information reporting requirements to the Internal Revenue Service and to a 31%
backup withholding tax. However, backup withholding generally will not apply to
payments made to certain exempt recipients such as a corporation or financial
institution or to a U.S. Holder who furnishes a correct taxpayer identification
number or provides a certificate of foreign status and provides certain other
required information. If backup withholding applies, the amount withheld is not
an additional tax, but is credited against such U.S. Holder's United States
federal income tax liability.
EXCHANGE CONTROLS
Canada has no foreign exchange restrictions on the export or import of
capital or on the remittance of dividends, interest or other payments to a non-
resident holder of our Common Shares, other than the withholding tax
requirements described under "Taxation--Canadian Federal Income Tax
Considerations."
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally
agreed to purchase, and Creo and the selling shareholders have agreed to sell
to such underwriters the respective number of Common Shares set forth opposite
the name of such underwriter below:
<TABLE>
<CAPTION>
Number of
Name Common Shares
---- -------------
<S> <C>
Salomon Smith Barney Inc. .....................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
RBC Dominion Securities Inc....................................
---------
Total........................................................ 5,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the Common Shares included in this offering are
subject to the approval of certain legal matters by counsel and to certain
other conditions. The underwriters are obligated to purchase all of the Common
Shares offered hereby (other than those covered by the over-allotment option
described below) if they purchase any Common Shares.
The offering is being made concurrently in the Canadian provinces of British
Columbia and Ontario and in the United States. Each of the underwriters that is
not registered as a broker-dealer under the U.S. Securities Exchange Act has
agreed that, in connection with the offering of the Common Shares and subject
to certain exceptions, it will not offer or sell any Common Shares in, or to
persons who are nationals or residents of, the United States other than through
one of its United States registered broker-dealer affiliates. Offers and sales
in Canada or to Canadian persons will be made by such of the underwriters or
their affiliates that are investment dealers or brokers duly registered under
the applicable laws of the province of Canada in which such offer or sale is
made pursuant to a prospectus filed with the applicable Canadian securities
regulatory authorities.
With respect to the offering in the United States, the underwriters, for whom
Salomon Smith Barney Inc., Merrill Lynch & Co., and RBC Dominion Securities
Corporation are acting as representatives, initially propose to offer some of
the Common Shares directly to the public at the public offering price set forth
on the cover page of this prospectus, and some of the Common Shares to certain
securities dealers at the public offering price less a concession not exceeding
$ per Common Share. The underwriters may allow, and such dealers may
reallow, a concession not exceeding $ per Common Share to certain brokers
and dealers. After the initial offering of the Common Shares to the public, the
public offering price and other selling terms may from time to time be varied
by the representatives. The representatives have advised Creo and the selling
shareholders that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
The selling shareholders have granted the underwriters an option, exercisable
for 30 days after the date of this prospectus, to purchase up to an aggregate
of 750,000 additional Common Shares at the public offering price, less the
underwriting discount. The underwriters may exercise this option solely to
cover over-allotments, if any, in connection with this offering. To the extent
that the underwriters exercise such option, each of them will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial commitment.
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Creo, each of its officers and directors and certain significant and
substantially all of the non-Canadian holders of its Common Shares have agreed
that for a period of 180 days after the date of this prospectus, they will not,
without the prior written consent of Salomon Smith Barney Inc., sell, dispose
of or hedge any Common Shares or any securities of Creo convertible into or
exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole
discretion may release any of the securities subject to the lock-up agreements
at any time without notice.
At our request, the underwriters have reserved up to 250,000 Common Shares
for sale, at the initial public offering price, to employees, directors and
other persons associated with Creo. The number of Common Shares available for
sale to the general public in the offering will be reduced to the extent such
persons purchase such reserved shares.
Prior to this offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
will be determined by negotiations between us, the selling shareholders and the
representatives. Among the factors to be considered in determining the initial
public offering price will be Creo's record of operations, its current
financial condition, its future prospects, its markets, the economic conditions
in and future prospects for the industry in which Creo competes, Creo's
management, and currently prevailing general conditions in the equity
securities markets, including current market valuations of publicly traded
companies considered comparable to Creo. We cannot assure you, however, that
the prices at which the Common Shares will sell in the public market after this
offering will not be lower than the price at which they are sold by the
underwriters or that an active trading market in the Common Shares will develop
and continue after the offering. The estimated offering price range set forth
on the cover page of the preliminary prospectus is subject to change as a
result of market condition and other factors.
We have applied to have the Common Shares included for quotation on the
Nasdaq National Market under the symbol "CREO" and listed on The Toronto Stock
Exchange under the symbol " ."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Creo and the selling shareholders in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional Common Shares.
<TABLE>
<CAPTION>
Paid by Selling
Paid by Creo Shareholders
---------------------- ----------------------
No No
Exercise Full Exercise Exercise Full Exercise
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Per share...................... $ $ $ $
Total.......................... $ $ $ $
</TABLE>
The expenses of this offering, estimated to be $850,000, will be paid by Creo
on its own behalf and on behalf of the selling shareholders.
In connection with the offering, Salomon Smith Barney Inc. on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of Common Shares in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the Common Shares in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of Common Shares made for the purpose of preventing or retarding a
decline in the market price of the Common Shares while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of the
Common Shares to be higher than the price that otherwise would exist in the
open market in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or in the over-the-counter market, or
otherwise and, if commenced, may be discontinued at any time.
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Pursuant to a policy statement of the Ontario Securities Commission, the
underwriters in Canada may not, throughout the period of distribution, bid for
or purchase Common Shares. The foregoing restriction is subject to exceptions,
on the condition that the bid or purchase not be engaged in for the purpose of
creating actual or apparent active trading in, or raising the price of, the
Common Shares. Such exceptions include a bid or purchase permitted under the
by-laws and rules of The Toronto Stock Exchange relating to market
stabilization and passive market making activities and a bid or purchase made
for and on behalf of a customer where the order was not solicited during the
period of distribution. We have been advised that in connection with the
offering and pursuant to the first exception mentioned above, the underwriters
may over-allot or effect transactions which stabilize or maintain the market
price of the Common Shares at levels other than those which might otherwise
prevail on the open market. These transactions, if commenced, may be
discontinued at any time.
Creo and the selling shareholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the U.S.
Securities Act and Canadian provincial securities legislation, or to contribute
to payments the underwriters may be required to make with respect to any of
those liabilities.
Initial sales of the Common Shares offered in the United States will be
settled in U.S. dollars and initial sales of Common Shares offered in Canada
will be settled in Canadian dollars. Subsequent trading of Common Shares
effected on the Nasdaq National Market will be settled in U.S. dollars and
subsequent trading of Common Shares effected on The Toronto Stock Exchange will
be settled in Canadian dollars, in each case in accordance with the normal
settlement practices of those markets.
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SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurance that a significant public market for our
Common Shares will develop or be sustained after this offering has been
completed. The sale of substantial numbers of Common Shares in the public
market, or the possibility of such a sale, could adversely affect prevailing
market prices for our Common Shares.
Upon completion of the offering, a total of 32,027,854 of our Common Shares
will be outstanding, based on the Common Shares outstanding as of March 31,
1999, and assuming no exercise of the underwriters' over-allotment option or of
any options or warrants.
All of the Common Shares sold in the offering in the United States and Canada
will be freely tradable without restriction under either the Securities Act of
1933, as amended (Securities Act) (except by "affiliates" as defined in Rule
144 under the Securities Act) or applicable Canadian securities laws (except by
"control persons" as defined under such laws).
For the reasons set forth below, we believe that the following restricted
Common Shares and Common Shares issuable upon exercise of options or warrants
will be freely tradable and eligible for resale at the following times and by
the following persons:
<TABLE>
<CAPTION>
Canadian Residents U.S. Residents Other
------------------ -------------- ---------
<S> <C> <C> <C>
On the date of this prospectus.... 0 1,066 1,924
90 days after the date of this
prospectus....................... 0 246 0
180 days after the date of this
prospectus....................... 15,790,925 11,182,419 4,530,836
After 180 days after the date of
this prospectus.................. 60,370 76,952 2,946
</TABLE>
Salomon Smith Barney Inc. has requested that each non-Canadian resident who
holds more than 1,000 Common Shares, options or warrants agree not to dispose
of or hedge any Common Shares for 180 days following the date of this
prospectus. The information contained in this section assumes that all such
shareholders will enter into such 180-day lock-up agreements.
Canadian Resale Restrictions
Upon completion of this offering, Canadian residents will hold 12,251,377
Common Shares and options to purchase 3,599,918 Common Shares, excluding any
Common Shares bought in this offering. Under applicable Canadian securities
laws, all such Common Shares or Common Shares issuable upon exercise of such
options may not be sold or otherwise disposed of for value, except pursuant to
a prospectus, a discretionary exemption or a statutory exemption available only
in specific limited circumstances, until Creo has been a reporting issuer for
at least 12 months in the province in which such shareholder or optionee
resides. Creo will become a reporting issuer in the provinces of British
Columbia and Ontario when it files this prospectus with the securities
regulatory authorities of those provinces and when those authorities issue
receipts for the prospectus. We expect that the receipts will be issued on or
about the date of this prospectus. We intend to apply to these regulatory
authorities for a discretionary exemption that would permit sales of such
Common Shares by residents of these provinces after Creo has been a reporting
issuer for six months. If this discretionary exemption is not granted, we
intend to take other steps to allow such Common Shares to be sold after Creo
has been a reporting issuer for six months.
If the discretionary exemption is granted or other steps taken to allow the
sale of such Common Shares are successful, 12,251,377 Common Shares and
3,541,166 shares exercisable upon outstanding and vested options will be
eligible for resale six months after the date of this prospectus.
65
<PAGE>
U.S. Resale Restrictions
Upon completion of this offering, 10,635,123 Common Shares will be held by
U.S. residents who acquired Common Shares prior to this offering. As a result
of the lock-up agreements and the provisions of Rule 144 and Rule 701 under the
Securities Act, such shares will be available for sale in the public market in
the United States as follows, subject in some cases to Rule 144 limitations:
<TABLE>
<CAPTION>
Eligibility of Restricted Shares
for Sale in Public Market
--------------------------------
<S> <C>
On the date of this prospectus.......... 1,066
90 days after the date of this
prospectus............................. 0
180 days after the date of this
prospectus............................. 10,590,785
After 180 days after the date of this
prospectus............................. 43,272
</TABLE>
Upon completion of this offering, options to purchase 600,962 Common Shares
will be held by existing optionees who are U.S. residents, and warrants to
purchase 24,598 Common Shares will be held by U.S. residents.
We intend to file with the U.S. Securities and Exchange Commission (SEC) a
registration statement on Form S-8/S-3 approximately 180 days after the date of
this prospectus. The S-8/S-3 registration statement will allow holders of
Common Shares who are residents of the United States and countries other than
Canada to resell Common Shares issued under equity incentive arrangements,
Common Shares issued in connection with option exercises and Common Shares
reserved under our 1996 Stock Option Plan.
As a result of the lock-up agreements, the S-8/S-3 registration statement and
the provisions of Rule 144 and Rule 701 under the Securities Act, and the
continued vesting of outstanding options, shares subject to these options and
warrants will be available for sale in the public market in the United States
as follows, subject in some cases to Rule 144 limitations:
<TABLE>
<S> <C>
At the date of this prospectus................................... 0
90 days after the date of this prospectus........................ 246
180 days after the date of this prospectus....................... 591,634
After 180 days after the date of this prospectus................. 33,680
</TABLE>
In general, under Rule 144, as in effect on the date of this prospectus, any
person (including an affiliate of Creo) who has beneficially owned Common
Shares for at least one year will be entitled to sell, in any three-month
period, a number of shares that (together with Common Shares with which such
person's shares must be aggregated) does not exceed the greater of:
. 1% of the then outstanding Common Shares (approximately 320,279 shares
immediately after the offering); and
. the average weekly trading volume of the Common Shares on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which such sale is made.
Sales of restricted securities pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about Creo. Affiliates of Creo must also comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell Common Shares which are not restricted
securities.
Subject to certain limitations on the number and exercise price of options
granted, Rule 701 may be relied upon with respect to the resale of securities
originally issued by Creo to its U.S. employees, directors, officers,
consultants or advisers before the issuer becomes subject to the reporting
requirements of the U.S. Securities Exchange Act of 1934, as amended (Exchange
Act), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to
66
<PAGE>
the reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the 180-day lock-up agreements described above,
beginning 90 days after the date of this prospectus, such securities may be
sold:
. by persons other than affiliates of Creo, subject only to the manner of
sale provisions of Rule 144; and
. by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
Shares held by Non-U.S. Residents and Non-Canadian Residents
Upon completion of the offering, 4,141,354 Common Shares and 394,352 Common
Shares subject to outstanding options will be held by shareholders and
optionees who are neither U.S. residents nor Canadian residents and who
acquired such Common Shares and options prior to this offering. Of the
4,141,354 Common Shares, 1,924 Common Shares will be eligible for immediate
resale on the date of this prospectus and the remaining 4,139,430 Common Shares
will be eligible upon expiration of the lock-up agreements 180 days after the
date of this prospectus. In addition, 391,406 Common Shares issuable upon
exercise of options will be eligible upon expiration of the lock-up agreements
180 days after the date of this prospectus and 2,946 common shares issuable
upon exercise of options will be eligible for resale after 180 days after the
date of this prospectus.
LEGAL MATTERS
The validity of the Common Shares offered hereby and certain other matters of
Canadian law relating to the offering are being passed upon for us by Getz
Prince Wells, Vancouver, British Columbia. Certain legal matters relating to
the offering are being passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California, with respect to U.S. law.
Certain legal matters relating to the offering are being passed upon for the
underwriters by Osler, Hoskin & Harcourt, Calgary, Alberta, with respect to
Canadian law, and Munger, Tolles & Olson LLP, Los Angeles, California, with
respect to United States law. Certain legal matters related to United States
and Canadian tax laws are being passed upon for us by our Canadian tax advisors
Thorsteinssons, Tax Lawyers, of Vancouver, British Columbia and by our United
States tax advisors, Wilson Sonsini Goodrich & Rosati, Professional
Corporation. An investment partnership controlled by the partners of Getz
Prince Wells holds 3,200 of our Common Shares.
EXPERTS
Our auditors are KPMG LLP, Chartered Accountants, of Suite 900, 777 Dunsmuir
Street, Vancouver, British Columbia, Canada V7Y 1K3. Prior to June 1998, our
auditors were Price Waterhouse, Chartered Accountants, 601 West Hastings
Street, Vancouver, British Columbia, Canada V6B 5A5. Our consolidated financial
statements as at and for the year ended September 30, 1998 have been included
in this prospectus in reliance upon the report of KPMG LLP, independent
chartered accountants, appearing elsewhere herein and in the registration
statement, and upon the authority of KPMG LLP as experts in accounting and
auditing.
Our financial statements as at and for the years ended September 30, 1997 and
1996, prior to the restatement for the change in amortization policy and
recording of the incentive shares as described in Note 1(l) of the financial
statements were audited by Price Waterhouse, Chartered Accountants, as set
forth in its report with respect thereto, and are included in this prospectus
in reliance upon the authority of Price Waterhouse as experts in accounting and
auditing. Price Waterhouse has not been associated with any of our financial
statements subsequent to September 30, 1997. The change in independent
chartered accountants was effective for fiscal 1998, was approved by Creo's
board of directors and was not due to any disagreement between the Company and
Price Waterhouse. During the period preceding the change in independent
auditors, there were no disagreements with Price Waterhouse on any matter of
accounting principles or practices,
67
<PAGE>
financial statement disclosures, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Price Waterhouse would
have caused them to make reference thereto in their report on the financial
statements for such periods. The audit reports of Price Waterhouse as of and
for the years ended September 30, 1997 and 1996 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form F-1
under the U.S. Securities Act with respect to the Common Shares offered by this
prospectus. This prospectus, which forms a part of the registration statement,
does not contain all the information included in the registration statement.
Certain information is omitted and you should refer to the registration
statement and its exhibits.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the Commission's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549,
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain
copies of such materials from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, at
prescribed rates. You may call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants such as Creo, that file
electronically with the Commission.
You may read and copy any reports, statements or other information that we
file with the Commission at the addresses indicated above, and you may also
access them electronically at the web site set forth above. These Commission
filings are also available to the public from commercial document retrieval
services.
Prior to this offering, we have not been required to file reports under the
U.S. Securities Exchange Act of 1934 (the Exchange Act). Following consummation
of the offering, we will be required to file reports and other information with
the Commission under the Exchange Act and with the Securities Commissions of
the Canadian Provinces of British Columbia and Ontario (the Canadian
Commissions). You are invited to read and copy any reports, statements or other
information that we file with the Canadian Commissions at their respective
public reference rooms. These filings are also electronically available from
the Canadian System for Electronic Document Analysis and Retrieval (SEDAR)
(http://www.sedar.com), the Canadian equivalent of the Commission's electronic
document gathering and retrieval system. Reports and other information about us
should also be available for inspection at the offices of The Toronto Stock
Exchange.
We intend to provide to our shareholders proxy statements and annual reports
prepared in accordance with applicable Canadian law. Our annual reports will
contain audited consolidated financial statements following the end of each
fiscal year, and we will make available quarterly reports containing unaudited
summary consolidated financial information for each of the first three fiscal
quarters of each fiscal year. We intend to prepare such financial statements in
accordance with Canadian GAAP and to include a reconciliation to U.S. GAAP of
the annual consolidated financial statements. As a "foreign private issuer"
under the Exchange Act, we will be exempt from provisions of that Act which
require us to provide proxy statements in prescribed form to shareholders and
which relate to short swing profit reporting and liability.
68
<PAGE>
CREO PRODUCTS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG LLP, Independent Auditors.................................. F-2
Report of Price Waterhouse, Independent Auditors.......................... F-3
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Operations and Retained Earnings (Deficit)..... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Directors of
Creo Products Inc.
We have audited the consolidated balance sheet of Creo Products Inc. as at
September 30, 1998 and the consolidated statements of operations and retained
earnings (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
1998 and the results of its operations and its cash flows for the year then
ended in accordance with generally accepted accounting principles in Canada.
The consolidated financial statements as at September 30, 1997 and for the year
then ended, prior to restatement for the change in amortization policy and
recording of incentive shares as described in note 1(l), were audited by other
auditors who expressed an opinion without reservation on those statements in
their report dated November 20, 1997. We have examined the adjustments that
were applied to restate the 1997 consolidated financial statements and in our
opinion, such adjustments are appropriate and have been properly applied.
Significant differences between Canadian and United States accounting
principles are explained and quantified in note 14 to the consolidated
financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
November 23, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Directors of
Creo Products Inc.
We have audited the consolidated balance sheet of Creo Products Inc. as at
September 30, 1997 and the consolidated statements of operations and (deficit)
and cash flows for the years ended September 30, 1997 and 1996 prior to the
restatement for the change in amortization policy and recording of the
incentive shares as described in note1(l). The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion the consolidated financial statements, prior to the restatement
for the change in amortization policy and recording of the incentive share, as
described in note1(l), present fairly, in all material respects, the financial
position of the Company as at September 30, 1997 and the results of its
operations and its cash flows for the years ended 1997 and 1996 in accordance
with generally accepted accounting principles.
/s/ Price Waterhouse
Chartered Accountants
Vancouver, Canada
November 20, 1997
F-3
<PAGE>
Creo Products Inc.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 30,
-------------------- March 31,
1997 1998 1999
----------- -------- -----------
Restated (unaudited)
(Note 1(l))
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................... $30,652 $ 16,224 $ 37,150
Accounts receivable......................... 20,295 24,385 31,923
Inventories (note 3)........................ 24,313 25,151 27,061
Prepaid expenses............................ 1,764 2,212 3,421
Future income taxes (note 9)................ 692 -- 120
------- -------- --------
Total current assets........................ 77,716 67,972 99,675
Capital assets (note 4)....................... 16,748 34,146 37,215
------- -------- --------
$94,464 $102,118 $136,890
======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
(note 5)................................... $16,661 $ 17,878 $ 17,481
Income taxes payable........................ 1,046 825 2,072
Future income taxes (note 9)................ -- 87 --
Deferred revenue and deposits............... 14,646 13,677 20,787
Current portion of long-term debt (note 6).. 4,680 943 296
------- -------- --------
Total current liabilities................... 37,033 33,410 40,636
Long-term debt (note 6)....................... 6,956 6,660 6,512
------- -------- --------
Total liabilities........................... 43,989 40,070 47,148
Shareholders' equity:
Share capital (note 7)...................... 58,371 58,854 78,917
Retained earnings (deficit)................. (7,896) 3,194 10,825
------- -------- --------
Total shareholders' equity.................. 50,475 62,048 89,742
------- -------- --------
$94,464 $102,118 $136,890
======= ======== ========
Commitments and contingencies (note 12)
Subsequent event (note 15)
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
(Signed) Raphael Amit
_________________________ (Signed) David A.
Director Bennett
_________________________
Director
F-4
<PAGE>
Creo Products Inc.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended September 30, March 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -------
Restated Restated
(note (note
1(l)) 1(l)) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue........... $ 46,210 $ 91,669 $114,652 $53,220 $64,894
Service revenue........... 1,728 3,914 14,196 6,029 13,163
-------- -------- -------- ------- -------
Total revenue............. 47,938 95,583 128,848 59,249 78,057
Cost of sales............... 31,766 53,634 71,217 33,189 40,688
-------- -------- -------- ------- -------
Gross profit................ 16,172 41,949 57,631 26,060 37,369
-------- -------- -------- ------- -------
Operating expenses:
Research and development,
net (note 8)............. 10,683 12,772 6,931 3,233 5,275
Sales and marketing....... 8,757 14,619 22,417 10,101 14,396
General and
administration........... 4,092 6,271 8,937 3,879 3,983
-------- -------- -------- ------- -------
Total operating expenses.. 23,532 33,662 38,285 17,213 23,654
-------- -------- -------- ------- -------
Earnings (loss) from
operations................. (7,360) 8,287 19,346 8,847 13,715
Other income (expense)...... 5 48 (1,580) (799) (593)
-------- -------- -------- ------- -------
Earnings (loss) before
income taxes............... (7,355) 8,335 17,766 8,048 13,122
Income tax expense
(recovery) (note 9)........ (112) 2,498 6,676 2,922 5,491
-------- -------- -------- ------- -------
Net earnings (loss)......... $ (7,243) $ 5,837 $ 11,090 $ 5,126 $ 7,631
======== ======== ======== ======= =======
Earnings (loss) per common
share (note 10):
Basic..................... $ (0.34) $ 0.26 $ 0.44 $ 0.21 $ 0.28
======== ======== ======== ======= =======
Fully diluted............. $ (0.34) $ 0.24 $ 0.41 $ 0.19 $ 0.25
======== ======== ======== ======= =======
Retained earnings (deficit),
beginning of period
as restated (note 1(l)).. $ (6,490) $(13,733) $ (7,896) $(7,896) $ 3,194
Net earnings (loss)......... (7,243) 5,837 11,090 5,126 7,631
-------- -------- -------- ------- -------
Retained earnings (deficit),
end of period.............. $(13,733) $ (7,896) $ 3,194 $(2,770) $10,825
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Creo Products Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Six Months
Years Ended September 30, Ended March 31,
---------------------------------- ----------------
1996 1997 1998 1998 1999
----------- ----------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Restated Restated (unaudited)
(note 1(l)) (note 1(l))
Cash provided by (used
in) operations:
Net earnings (loss).... $ (7,243) $ 5,837 $ 11,090 $ 5,126 $ 7,631
Items not affecting
cash:
Amortization.......... 2,687 3,673 4,996 2,169 2,598
Future income taxes... (195) (380) 779 (99) (207)
Incentive shares
issued............... 521 102 78 78 --
Loss (gain) on
disposal of capital
assets............... 32 46 1 10 (36)
----------- ----------- -------- ------- -------
(4,198) 9,278 16,944 7,284 9,986
Changes in non-cash
working capital:
Accounts receivable... (6,725) (8,760) (4,090) (6,267) (7,538)
Inventories........... (9,419) (5,805) (838) (113) (1,910)
Prepaid expenses...... (132) (634) (448) (973) (1,209)
Accounts payable and
accrued liabilities.. 5,085 6,179 1,217 (903) (397)
Income taxes payable.. 1,245 1,912 (221) 178 1,247
Deferred revenue and
deposits............. (2,216) (2,864) (969) (344) 7,110
----------- ----------- -------- ------- -------
(12,162) (9,972) (5,349) (8,422) (2,697)
----------- ----------- -------- ------- -------
(16,360) (694) 11,595 (1,138) 7,289
Cash provided by (used
in) investing:
Purchase of capital
assets............... (6,772) (4,220) (23,537) (5,602) (5,844)
Proceeds from sale of
capital assets....... 46 57 1,142 952 213
----------- ----------- -------- ------- -------
(6,726) (4,163) (22,395) (4,650) (5,631)
Cash provided by (used
in) financing:
Proceeds from share
issues............... 19,918 24,254 405 25 20,063
Increase in long-term
debt................. 4,901 7,400 -- -- --
Repayment of long-term
debt................. (898) (7,082) (4,033) (2,326) (795)
----------- ----------- -------- ------- -------
23,921 24,572 (3,628) (2,301) 19,268
----------- ----------- -------- ------- -------
Increase (decrease) in
cash and cash
equivalents............ 835 19,715 (14,428) (8,089) 20,926
Cash and cash
equivalents, beginning
of period.............. 10,102 10,937 30,652 30,652 16,224
----------- ----------- -------- ------- -------
Cash and cash
equivalents, end of
period................. $ 10,937 $ 30,652 $ 16,224 $22,563 $37,150
=========== =========== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
Creo Products Inc. (the Company) was incorporated under the laws of
Canada and its principal business activities include the development,
manufacture and distribution of digital prepress equipment for the printing
industry. The Company's principal customers are in the United States,
Europe and Japan.
1.Significant accounting policies
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada, which, in the case of the Company,
materially conform with those established in the United States except as
explained in note 14.
(a)Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, Creo Products N.V., Creo Inc., and Creo Ltd. (to
March 12, 1998, the date of disposal), all of which have been wholly-owned.
Creo Ltd. was disposed of at its carrying value to an unrelated party. All
material intercompany balances and transactions have been eliminated.
Interests in joint ventures are recognized in the Company's consolidated
financial statements using the proportionate consolidation method.
(b)Unaudited financial information
The financial information as at March 31, 1999 and for the six months
ended March 31, 1999 and 1998 is unaudited; however, such financial
information reflects all adjustments (consisting solely of normal recurring
adjustments) required for a fair presentation of the financial information
for the interim periods presented.
(c)Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and notes thereto. A significant area of estimate
relates to the provision for potential retrofits on installed equipment.
Actual results could differ from those estimated.
(d)Cash and cash equivalents
Cash equivalents include short-term deposits, which are all liquid
securities with a term to maturity of three months or less when acquired.
(e)Inventories
Inventories are valued at the lower of cost and net realizable value.
Costs of materials are determined on a weighted average basis. Work-in-
progress and finished goods inventories include materials, direct labor and
production overhead. Inventories are recorded net of any obsolescence
provisions.
(f)Capital assets
Capital assets are stated at cost less applicable tax credits and non-
repayable government grants.
Amortization of capital assets is recorded on a declining-balance basis
at the following annual rates:
<TABLE>
<S> <C>
Building............................ 4%
Equipment........................... 20%
Computer software................... 100%
Furniture and fixtures.............. 20%
</TABLE>
F-7
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
1. Significant accounting policies (continued)
Computer and demo equipment are amortized on a straight-line basis over
three years. Building improvements are amortized on a straight-line basis
over five years.
The Company monitors the recoverability of long-lived assets, based on
factors such as current market value, future asset utilization, business
climate and future undiscounted cash flows expected to result from the use
of the related assets. The Company's policy is to record an impairment loss
in the period when it is determined that the carrying amount of the asset
may not be recoverable. The impairment loss is calculated as the amount by
which the carrying amount of the asset exceeds the undiscounted estimate of
future cash flows from the asset. To March 31, 1999, no impairment losses
have been recorded.
(g)Research and development
Research costs are expensed as incurred. Development costs are expensed
as incurred unless they meet certain criteria under generally accepted
accounting principles for deferral and amortization. The Company has
determined that none of the development costs have met these criteria.
Research and development costs are offset by funding from related
development contracts. Development contracts involve the planning,
development and installation of a product to meet a customer's needs.
Funding from development contracts is recognized on the percentage of
completion basis.
(h)Foreign currency translation
The consolidated financial statements of the Company are presented in
United States (U.S.) dollars. To the extent that the Company generates
funds or incurs costs in other currencies, these transactions are
translated into U.S. dollars at rates which are representative of the
underlying transaction. Accordingly, monetary assets and liabilities are
translated at the rate prevailing at the balance sheet date. Non-monetary
assets and liabilities are recorded at the rate prevailing at the date of
the transaction. Revenues and expenses are translated at an average rate
during the year. Exchange gains and losses are included in income. The
exchange loss for the six months ended March 31, 1999 is $1,142 (six months
ended March 31, 1998 - $861; fiscal 1998 - $1,776; fiscal 1997 - $194;
fiscal 1996 - $516).
(i)Revenue recognition
Revenue from product sales is recognized when title passes to the
customer or upon customer acceptance. Customer acceptance is used as the
criterion for revenue recognition when the product sold does not have an
established sales history to allow management to reasonably estimate
returns and future provisions.
Revenue from service contracts is recognized as the services are
provided.
(j)Investment tax credits
Investment tax credits are accounted for using the cost reduction method
whereby such credits are deducted from the expenditures or assets to which
they relate.
(k)Income taxes
The Company recognizes and measures, as assets and liabilities, income
taxes currently payable or recoverable as well as future taxes which will
arise from the realization of assets or settlement of liabilities at their
carrying amounts, which differ from their tax bases. Future tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which such temporary differences are
expected to be recovered or settled.
F-8
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
1. Significant accounting policies (continued)
(l)Comparative figures
The Company's deficit has been restated for retroactive changes to
capital assets and share capital as outlined in notes 4 and 7(b),
respectively.
<TABLE>
<CAPTION>
Six Months
Years Ended September Ended March
30, 31,
-------------------------- ---------------
1996 1997 1998 1998 1999
------- -------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Deficit, beginning of period
as previously reported...... $(2,083) $ (8,500) $(2,317) $(2,317) $3,194
Adjustment of prior periods'
earnings (note 4)........... (183) (488) (732) (732) -
Adjustment of prior periods'
earnings (note 7(b))........ (4,224) (4,745) (4,847) (4,847) -
------- -------- ------- ------- ------
Deficit, beginning of period
as restated................. $(6,490) $(13,733) $(7,896) $(7,896) $3,194
======= ======== ======= ======= ======
</TABLE>
Certain comparative figures have been reclassified to conform with the
basis of presentation adopted in the current period.
2.Joint Venture
Effective October 1, 1997, the Company entered into a 50% owned
unincorporated joint venture with Heidelberger Druckmaschinen AG
(Heidelberg) with respect to the design, manufacture and marketing of
certain digital prepress equipment. The joint venture has no assets or
liabilities. The consolidated financial statements include the following
amounts representing the Company's proportionate share of the operations of
the joint venture:
<TABLE>
<CAPTION>
Years Ended Six Months
September 30, Ended March 31,
------------------- ---------------
1996 1997 1998 1998 1999
----- ----- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Revenues............................. $ - $ - $35,542 $16,344 $27,140
Cost of sales........................ - - 17,896 8,403 12,804
Research and development............. - - 4,109 1,338 3,157
----- ----- ------- ------- -------
Contribution to earnings before sales
and marketing and general and
administrative expenses............. $ - $ - $13,537 $ 6,603 $11,179
===== ===== ======= ======= =======
<CAPTION>
Years Ended Six Months
September 30, Ended March 31,
------------------- ---------------
1996 1997 1998 1998 1999
----- ----- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Cash Flows
Cash provided by operating
activities.......................... $ - $ - $13,537 $ 6,603 $11,179
===== ===== ======= ======= =======
</TABLE>
F-9
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
3.Inventories
<TABLE>
<CAPTION>
September 30,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Materials................................... $12,227 $ 11,722 $ 11,343
Work-in-progress............................ 7,505 7,240 8,111
Finished goods.............................. 4,581 6,189 7,607
------- -------- --------
$24,313 $ 25,151 $ 27,061
======= ======== ========
4.Capital Assets
<CAPTION>
September 30,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Land........................................ $ 3,403 $ 9,453 $ 9,453
Building.................................... 4,643 11,934 12,393
Building improvements....................... 3,939 5,268 6,281
Equipment................................... 2,889 4,357 4,915
Computer and demo equipment................. 7,795 10,994 13,101
Computer software........................... 1,545 3,347 4,248
Furniture and fixtures...................... 2,278 2,716 3,263
------- -------- --------
26,492 48,069 53,654
Less: accumulated amortization.............. (9,744) (13,923) (16,439)
------- -------- --------
Net book value.............................. $16,748 $ 34,146 $ 37,215
======= ======== ========
During 1998, the Company retroactively adopted the straight-line method
of amortizing its computer and demo equipment, which were previously
amortized on a declining balance basis, in order to better reflect the
utilization of the underlying assets.
As a result of this change, retained earnings at October 1, 1995 have
been reduced by $183, net of future income taxes of $117.
The effect of this change on the six months ended March 31, 1999 is an
increase in accumulated amortization of $nil (six months ended March 31,
1998 - $250; fiscal 1998 - $532; fiscal 1997 - $400; fiscal 1996 - $500)
and a reduction in net earnings for the six months ended March 31, 1999 of
$nil (six months ended March 31, 1998 - $150; fiscal 1998 - $325; fiscal
1997 - $244; fiscal 1996 - $305), net of future income taxes of $nil (six
months ended March 31, 1998 - $100; fiscal 1998 - $207; fiscal 1997 -$156;
fiscal 1996 - $195).
5.Accounts payable and accrued liabilities
<CAPTION>
September 30,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Trade payables.............................. $ 9,033 $ 7,561 $ 7,739
Wages and benefits.......................... 3,420 6,118 6,216
Retrofit liabilities........................ 3,286 3,278 2,730
Royalties................................... 922 921 796
------- -------- --------
$16,661 $ 17,878 $ 17,481
======= ======== ========
</TABLE>
F-10
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
6.Long-term debt
<TABLE>
<CAPTION>
September 30,
-------------- March 31,
1997 1998 1999
------- ------ -----------
(unaudited)
<S> <C> <C> <C>
Western Economic Diversification
Unsecured, interest-free loan repayable in
quarterly installments of $250................ $ 749 $ - $ -
Royal Bank of Canada
First mortgage secured by properties in Delta
and
Burnaby, B.C. Interest at 8.05% per annum
maturing February 4, 2002..................... 7,252 6,956 6,808
Eastman Kodak Company
Unsecured, interest-free loan repayable in
installments on or before September 30, 2006.. 3,635 647 -
------- ------ ------
11,636 7,603 6,808
Less: current portion.......................... 4,680 943 296
------- ------ ------
$ 6,956 $6,660 $6,512
======= ====== ======
</TABLE>
As at March 31, 1999, minimum principal repayments of long-term debt in
the next five fiscal years are approximately as follows (unaudited):
<TABLE>
<S> <C>
1999............................................ $ 148
2000............................................ 296
2001............................................ 296
2002............................................ 6,068
2003............................................ -
------
$6,808
======
</TABLE>
The Company currently has $15 million available through a credit facility
with Royal Bank of Canada at LIBOR plus 1% which has not been drawn upon at
March 31, 1999.
The Company has entered into an interest rate swap agreement with Royal
Bank of Canada which converted the first mortgage floating rate debt at
LIBOR plus 1.5% into debt which has a fixed rate of 8.05% until February 4,
2002. As at March 31, 1999, the swap has an estimated fair market value of
$195 (fiscal 1998 - $341; fiscal 1997 - $78) in favor of Royal Bank of
Canada.
In the six months ended March 31, 1999, the Company incurred interest
expense on long-term debt of $186 (six months ended March 31, 1998 - $270;
fiscal 1998 - $525; fiscal 1997 - $408; fiscal 1996 - $416) which was
charged to operations. In the six months ended March 31, 1999, the Company
paid interest on long-term debt of $263 (six months ended March 31, 1998 -
$274; fiscal 1998 - $605; fiscal 1997 - $338; fiscal 1996 - $416).
F-11
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
7.Share capital
A two-for-one share split of Common Shares took effect on May 4, 1999.
All information relating to Common Shares reflects retroactively this share
split.
(a)Authorized
The authorized capital of the Company consists of unlimited voting
Common Shares without par value and an unlimited number of Preferred
Shares issuable in series.
(b)Issued and outstanding
There have been no Preferred Shares issued. Common Shares issued and
outstanding are as follows:
<TABLE>
<CAPTION>
Number of
Common Stated
Shares Values
---------- -------
<S> <C> <C>
Outstanding, September 30, 1995...................... 18,550,364 $13,576
Issued as incentives to employees................... 98,166 521
Issued for cash..................................... 2,962,962 19,918
---------- -------
Outstanding, September 30, 1996...................... 21,611,492 34,015
Issued as incentives to employees................... 15,500 102
Issued for cash..................................... 3,371,264 24,254
---------- -------
Outstanding, September 30, 1997...................... 24,998,256 58,371
Issued as incentives to employees................... 6,208 78
Issued for cash from share options.................. 47,698 158
Tax benefit of share issue costs.................... - 247
---------- -------
Outstanding, September 30, 1998...................... 25,052,162 58,854
Issued for cash (unaudited)......................... 2,962,962 20,000
Issued for cash from share options (unaudited)...... 12,730 63
---------- -------
Outstanding, March 31, 1999 (unaudited).............. 28,027,854 $78,917
========== =======
</TABLE>
Prior to the 1998 fiscal year, no value was assigned to shares issued
as incentives to employees for no cash consideration. In 1998, the
Company retroactively valued such shares at their estimated fair value
on the date of issue. As a result, the prior years' financial
statements of the Company have been restated to include as compensation
expense, the value of incentive shares issued in each year. The impact
of the restatement is to decrease retained earnings and increase share
capital as at October 1, 1995 by $4,224.
F-12
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
7.Share capital (continued)
(c)Share option plan
The Company has reserved 8,000,000 shares under the 1996 Stock Option
Plan. The plan provides for the granting of share options at the fair
market value of the Company's shares at the grant date. Options
generally vest immediately and have a five year term. Share option
activity for fiscal years 1996, 1997 and 1998 and for the six months
ended March 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted
Number of Average
Common Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding, September 30, 1995...................... - -
Granted............................................. 789,608 $4.80
---------
Outstanding, September 30, 1996...................... 789,608 4.80
Granted............................................. 1,677,518 6.25
---------
Outstanding, September 30, 1997...................... 2,467,126 5.78
Granted............................................. 832,744 11.29
Exercised........................................... (47,698) 3.12
---------
Outstanding, September 30, 1998...................... 3,252,172 7.23
Granted (unaudited)................................. 1,355,790 9.10
Exercised (unaudited)............................... (12,730) 4.98
---------
Outstanding, March 31, 1999 (unaudited).............. 4,595,232 7.79
=========
</TABLE>
<TABLE>
<CAPTION>
Number of
Common
Shares
---------
<S> <C>
Exercisable at:
September 30, 1996............................................ 676,022
September 30, 1997............................................ 2,044,140
September 30, 1998............................................ 2,957,406
March 31, 1999 (unaudited).................................... 4,393,644
</TABLE>
The options outstanding at March 31, 1999 expire between May 31, 1999
and January 4, 2004.
The following table summarizes information about the Company's share
options outstanding at March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number
Outstanding Remaining Average Exercisable Weighted
at March 31, Contractual Exercise at March 31, Average
Range of Exercise Price 1999 Life Price 1999 Exercise Price
------------------------ ------------ ----------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.48.................. 89,584 1.3 $2.48 89,584 $2.48
$ 2.49 - $ 5.00......... 863,708 1.8 4.80 863,708 4.80
$ 5.01 - $ 7.50......... 1,495,238 3.0 6.63 1,323,238 6.63
$ 7.51 - $10.00......... 1,363,438 4.8 9.11 1,341,418 9.11
$10.01 - $12.50......... 783,264 3.8 11.60 775,696 11.60
--------- ---------
4,595,232 3.4 7.79 4,393,644 7.82
========= =========
</TABLE>
F-13
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
7. Share capital (continued)
(d) Warrants
The Company issued warrants to purchase 24,598 shares on or before
June 2, 2002 as consideration for raising capital in 1997. The exercise
price of each warrant is $9.38.
8. Research and development
<TABLE>
<CAPTION>
Years Ended September Six Months
30, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Research and development
expenses.................. $14,698 $14,877 $19,123 $ 8,962 $13,256
Research and development
funding
Development contract
revenue.................. (2,904) (1,405) (8,464) (4,017) (5,928)
Investment tax credits.... (1,111) (700) (3,728) (1,712) (2,053)
------- ------- ------- ------- -------
Research and development,
net....................... $10,683 $12,772 $ 6,931 $ 3,233 $ 5,275
======= ======= ======= ======= =======
</TABLE>
9. Income taxes
Earnings (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Six Months
Years Ended September Ended March
30, 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------- ------ ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Canada......................... $(4,958) $7,010 $12,891 $5,934 $10,966
Foreign........................ (2,397) 1,325 4,875 2,114 2,156
------- ------ ------- ------ -------
Total.......................... $(7,355) $8,335 $17,766 $8,048 $13,122
======= ====== ======= ====== =======
The provision for (recovery of) income taxes consists of the following:
<CAPTION>
Six Months
Years Ended September Ended March
30, 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------- ------ ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Canada......................... $ 69 $1,375 $ 5,369 $2,844 $ 4,913
Foreign........................ 14 1,503 528 177 785
------- ------ ------- ------ -------
Total current.................. $ 83 $2,878 $ 5,897 $3,021 $ 5,698
------- ------ ------- ------ -------
Future:
Canada......................... $ (179) $ (21) $ 1,071 $ (86) $ (219)
Foreign........................ (16) (359) (292) (13) 12
------- ------ ------- ------ -------
Total future................... $ (195) $ (380) $ 779 $ (99) $ (207)
------- ------ ------- ------ -------
Total income tax provision..... $ (112) $2,498 $ 6,676 $2,922 $ 5,491
======= ====== ======= ====== =======
</TABLE>
F-14
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
9. Income taxes (continued)
Income tax rate:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended March
September 30, 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------- ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Combined Canadian
federal/provincial tax rate.. 45.6% 45.6% 45.6% 45.6% 45.6%
Increased (reduced) by:
Manufacturing and processing
credits..................... - (1.3) (5.4) (5.9) (5.8)
Foreign exchange translation
not deducted for tax........ - - 6.5 4.6 1.1
Foreign losses (utilized) not
recognized.................. (17.2) 7.3 (6.5) (4.0) -
Future income tax assets not
recognized.................. (26.6) (21.6) - - -
Foreign tax rate reduction... - (2.7) (1.8) (2.5) (1.0)
Other........................ (3.3) 2.7 (0.8) (1.5) 1.9
------ ------- ------ ------ -------
Effective rate................ (1.5)% 30.0% 37.6% 36.3% 41.8%
====== ======= ====== ====== =======
Temporary differences that give rise to the net future income tax benefit
are as follows:
<CAPTION>
September 30, March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------- ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current future income tax
benefit:
Investment tax credit
revenue..................... $ - $ (329) $ (998) $ (575) $(1,266)
Revenue recognition.......... - 134 31 78 733
Retrofit liability and
other....................... - 899 933 1,521 933
------ ------- ------ ------ -------
Total current future income
tax.......................... $ - $ 704 $ (34) $1,024 $ 400
====== ======= ====== ====== =======
<CAPTION>
September 30, March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------- ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Long-term future income tax
benefit:
Capital assets............... $ 312 $ (12) $ (412) $ (233) $ (583)
Financing costs.............. - - 359 - 303
Operating losses............. - 1,500 - - -
Valuation allowance
Canada....................... - - - - -
Foreign...................... - (1,500) - - -
------ ------- ------ ------ -------
Total long-term future income
tax.......................... $ 312 $ (12) $ (53) $ (233) $ (280)
====== ======= ====== ====== =======
Net future income tax
benefit...................... $ 312 $ 692 $ (87) $ 791 $ 120
====== ======= ====== ====== =======
</TABLE>
In the six months ended March 31, 1999, the Company paid income taxes of
$1,980 (six months ended March 31, 1998 - $975; fiscal 1998 - $1,683;
fiscal 1997 - $270; fiscal 1996 - $115).
F-15
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
9. Income taxes (continued)
As at March 31, 1999, the Company has unused investment tax credits
totaling approximately $5,100 available to reduce future Canadian federal
income taxes. These tax credits expire in varying amounts to 2009.
10. Earnings per Common Share
Basic earnings per Common Share is calculated by dividing the earnings
for the period by the weighted average number of Common Shares outstanding
during the period: six months ended March 31, 1999 - 27,275,538 (six months
ended March 31, 1998 - 24,998,256; fiscal 1998 - 25,024,788; fiscal 1997 -
22,769,212; fiscal 1996 - 21,209,172).
Fully diluted earnings per share is based on the assumptions that all
outstanding options and warrants in note 7 were exercised at the beginning
of the period and that the funds derived therefrom had been invested to
produce an annual return of 3%, after income taxes, for the six months
ended March 31, 1999 (six months ended March 31, 1998 - 4%; fiscal 1999 -
3%; fiscal 1998 - 4%; fiscal 1997 - 3%). The amounts of income imputed,
after income taxes, were $619 for the six months ended March 31, 1999
(six months ended March 31, 1998 - $668; fiscal 1998 - $1,329; fiscal
1997 - $1,559). Fully diluted net loss per share for the 1996 fiscal year
is not shown as it would be anti-dilutive.
11. Financial instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair value due
to their short-term maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value
of its long-term debt approximates fair value. The fair value of the
interest rate swap is disclosed in Note 6.
Significant amounts of the Company's expenditures are denominated in
Canadian dollars. Fluctuations in the exchange rate between Canadian and
U.S. dollars could have a material effect on the Company's business,
financial condition and results of operations. The Company has not entered
into foreign currency contracts or other instruments to mitigate this risk.
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable (note 13).
The Company performs ongoing credit evaluations of its customers' financial
conditions and requires letters of credit or other guarantees whenever
deemed necessary.
12. Commitments and contingencies
The Company is party to certain operating leases under which the future
minimum lease payments as at March 31, 1999 are approximately as follows
(unaudited):
<TABLE>
<S> <C>
1999.............................. $ 752
2000.............................. 1,098
2001.............................. 640
2002.............................. 462
2003.............................. 263
Thereafter........................ 270
------
$3,485
======
</TABLE>
F-16
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
12. Commitments and contingencies (continued)
Total rent expense for the six months ended March 31, 1999 was $736 (six
months ended March 31, 1998 - $408; fiscal 1998 - $843; fiscal 1997 - $803;
fiscal 1996 - $425).
The Company has letters of guarantee with the Royal Bank of Canada
totaling $750 expiring in March 2000.
Year 2000 issues arise because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems, which use certain dates in 1999 to
represent something other than a date. The effects of year 2000 issues may
be experienced before, on, or after January 1, 2000, and, if not addressed,
the impact on operations and financial reporting may range from minor
errors to significant systems failure, which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of year 2000 issues affecting the Company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
13. Segmented financial information
The Company operates in a single reportable operating segment relating to
digital prepress equipment. The Company generated revenue from the
development and sale of digital prepress equipment to customers in the
following geographic segments:
<TABLE>
<CAPTION>
Six Months
Years Ended September 30, Ended March 31,
-------------------------- ---------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Canada.......................... $ 1,810 $ 3,134 $ 3,193 $ 591 $ 1,820
U.S. ........................... 32,715 62,441 71,927 35,942 50,544
Europe.......................... 4,501 15,718 41,655 15,547 22,140
Japan........................... 7,020 9,936 5,316 2,786 1,100
Other........................... 1,892 4,354 6,757 4,383 2,453
-------- -------- -------- ------- -------
$ 47,938 $ 95,583 $128,848 $59,249 $78,057
======== ======== ======== ======= =======
</TABLE>
There were no customers representing 10% or more of total revenue in the
six months ended March 31, 1999, the six months ended March 31, 1998, or
the 1998 fiscal year. There was one customer in 1997 representing
approximately 10% of total revenue. In the 1996 fiscal year, there were
four customers representing approximately 51% (18%, 12%, 11% and 10%
individually) of total revenue.
The Company has capital assets located in:
<TABLE>
<CAPTION>
September 30,
--------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Canada....................................... $14,883 $31,914 $34,820
Other........................................ 1,865 2,232 2,395
------- ------- -------
$16,748 $34,146 $37,215
======= ======= =======
</TABLE>
F-17
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
14. Differences between Canadian and United States accounting principles and
practices
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada (Canadian GAAP)
which differ in certain respects from those principles and practices that
the Company would have followed had its consolidated financial statement
been prepared in accordance with generally accepted accounting principles
in the United States (U.S. GAAP).
(a) Change in accounting policy
Under U.S. GAAP, the change in accounting policy described in note 4,
relating to amortization of capital assets, would be accounted for
prospectively from October 1, 1997 and the cumulative effect of the change
would be disclosed as a separate item in the determination of net earnings.
Since the change disclosed in note 7(b), relating to the issuance of
incentive shares, results in consistency between Canadian GAAP and U.S.
GAAP, no adjustment is required for purposes of this reconciliation.
The effect of these differences would be:
<TABLE>
<CAPTION>
Years Ended September Six Months
30, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
-------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss) under
Canadian GAAP............... $ (7,243) $ 5,837 $11,090 $ 5,126 $ 7,631
Reverse retroactive impact of
change in accounting
policy...................... 305 244 - - -
-------- ------- ------- ------- -------
Earnings (loss) before
cumulative effect of change
in accounting policy under
U.S. GAAP................... (6,938) 6,081 11,090 5,126 7,631
Cumulative effect of change
in accounting policy........ - - (732) (732) --
-------- ------- ------- ------- -------
Net earnings (loss) under
U.S. GAAP................... (6,938) 6,081 10,358 4,394 7,631
Retained earnings (deficit),
beginning of year under U.S.
GAAP........................ (6,307) (13,245) (7,164) (7,164) 3,194
-------- ------- ------- ------- -------
Retained earnings (deficit),
end of year under U.S.
GAAP........................ $(13,245) $(7,164) $ 3,194 $(2,770) $10,825
======== ======= ======= ======= =======
Earnings (loss) per share
Basic earnings per share.... $ (0.33) $ 0.27 $ 0.41 $ 0.18 $ 0.28
======== ======= ======= ======= =======
Diluted earnings per share.. $ (0.33) $ 0.25 $ 0.38 $ 0.16 $ 0.27
======== ======= ======= ======= =======
</TABLE>
The cumulative effect of the change in accounting policy reduced basic
earnings per share for the six months ended March 31, 1998 by $0.03 (fiscal
1998--$0.03) and diluted earnings per share for the six months ended March
31, 1998 by $0.03 (fiscal 1998--$0.03).
Comprehensive earnings (loss) is the same as net earnings (loss) under
U.S. GAAP for all periods presented.
F-18
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
14. Differences between Canadian and United States accounting principles and
practices (continued)
(b) Earnings per share
During 1997, the Company adopted Statement of Financial Accounting
Standard No. 128 (FAS 128), Earnings Per Share for U.S. GAAP purposes.
Diluted earnings per share under U.S. GAAP is based on the weighted average
number of Common Shares outstanding which considers the dilutive effect of
share options and warrants by applying the Treasury Stock method.
The following weighted average number of shares was used for the
computation of diluted earnings per share.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended September 30, March 31,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average shares
used in computation of
basic earnings per
share.................. 21,209,172 22,769,212 25,024,788 24,998,256 27,275,538
Weighted average shares
from assumed conversion
of dilutive options.... - 1,422,132 2,011,202 2,425,437 791,297
---------- ---------- ---------- ---------- ----------
Weighted average shares
used in computation of
diluted earnings per
share.................. 21,209,172 24,191,344 27,035,990 27,423,693 28,066,835
========== ========== ========== ========== ==========
</TABLE>
(c) Joint venture
The accounts of the Company's joint venture investment were
proportionately consolidated (see note 2). Under U.S. GAAP, proportionate
consolidation is not permitted. However, under rules promulgated by the
United States Securities and Exchange Commission (SEC), a foreign
registrant may, subject to the provision of additional information which is
set out in Note 2, continue to apply proportionate consolidation for
purposes of registration and other filings, notwithstanding the departure
from U.S. GAAP. Accordingly, the financial statements have not been
adjusted to restate the accounting under U.S. GAAP.
(d) Stock based compensation
The Company has elected to continue to apply the guidance set out in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its
employee share options. Under APB 25, because the exercise price of the
Company's employee share option equals the estimated fair value of the
underlying share on the date of grant, no compensation cost is recognized.
F-19
<PAGE>
Creo Products Inc.
Notes to Consolidated Financial Statements--(Continued)
Information as at March 31, 1999 and for the six months ended March 31, 1999
and March 31, 1998 is unaudited
(Amounts in thousands of U.S. dollars, except per share amounts)
14. Differences between Canadian and United States accounting principles and
practices (continued)
Pro forma information regarding net earnings (loss) and earnings
(loss) per share is required by Statement of Financial Accounting Standards
No. 123 (FAS 123), Accounting for Stock-Based Compensation, for U.S. GAAP.
Had compensation cost for the Company's share option plan been determined
based on the fair value at the grant date for awards under those plans
consistent with the measurement provisions of FAS 123, the Company's net
earnings (loss) and earnings (loss) per share under U.S. GAAP would have
been adjusted as follows:
<TABLE>
<CAPTION>
Years Ended September Six Months
30, Ended March 31,
------------------------ ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss) - pro
forma......................... $(8,901) $ 1,246 $ 4,906 $ (805) $ 1,206
Basic earnings (loss) per
share - pro forma............. $ (0.42) $ 0.05 $ 0.20 $ (0.03) $ 0.04
Diluted earnings (loss) per
share - pro forma............. $ (0.42) $ 0.05 $ 0.18 $ (0.03) $ 0.04
</TABLE>
Pro forma amounts reflect options granted after the 1995 fiscal year.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option valuation model with the following
assumptions:
<TABLE>
<CAPTION>
Years Ended September Six Months Ended
30, March 31,
----------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Expected dividend yield....... 0% 0% 0% 0% 0%
Expected stock price
volatility................... 45 51 50 50 49
Risk-free interest rate....... 7.8% 5.0% 5.5% 5.5% 6.0%
Expected life of options...... 5 years 5 years 5 years 5 years 5 years
The fair value of the options granted is $6,425 for the six months
ended March 31, 1999 (six months ended March 31, 1998 - $5,199; fiscal
1998 - $5,452; fiscal 1997 - $4,835; fiscal 1996 - $1,963;).
For purposes of pro-forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.
(e) Supplementary information: allowance for doubtful accounts
Accounts receivable are disclosed net of allowance for doubtful
accounts as follows:
<CAPTION>
Years Ended Six Months Ended
September 30, March 31,
----------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Charged to expenses........... $ 1 $ 426 $ 51 $ (45) $ 25
Balance, end of period........ $ 50 $ 391 $ 180 $ 365 $ 362
</TABLE>
15. Subsequent event (unaudited)
The Company has filed a preliminary prospectus and a Registration
Statement on Form F-1 with securities regulatory authorities in the
provinces of British Columbia and Ontario Canada and the United States,
respectively, relating to an issue and sale of the Company's Common Shares.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
Creo Products Inc.
Common Shares
[LOGO OF CREO PRODUCTS INC.]
--------
PROSPECTUS
, 1999
--------
Salomon Smith Barney
Merrill Lynch & Co.
RBC Dominion Securities Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by Creo in connection with the sale of the
Common Shares being registered. All of the amounts shown are estimates except
for the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 23,978
NASD Filing Fee.................................................. 9,125
Nasdaq National Market Listing Fee............................... 95,000
The Toronto Stock Exchange Listing Fee........................... 45,000
Blue Sky Qualification Fees and Expenses......................... 5,000
Printing and Engraving Expenses.................................. 150,000
Legal Fees and Expenses.......................................... 350,000
Accounting Fees and Expenses..................................... 125,000
Transfer Agent and Registrar Fees................................ 20,000
Miscellaneous.................................................... 26,897
--------
Total.......................................................... $850,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 124 of the Canada Business Corporations Act, as amended, provides as
follows:
(1) Indemnification. Except with respect to an action by or on behalf of the
corporation or body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer of the corporation, a
former director or officer of the corporation or a person who acts or acted
at the corporation's request as a director or officer of a body corporate
of which the corporation is or was a shareholder or creditor, and his heirs
and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him with respect to any civil, criminal or
administrative action or proceeding to which he is made a party by reason
of being or having been a director or officer of such corporation or body
corporate, if
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
(2) Indemnification in derivative actions. A corporation may with the approval
of a court indemnify a person referred to in sub-section (1) with respect
to an action by or on behalf of the corporation or body corporate to
procure a judgment in its favor, to which he is made a party by reason of
being or having been a director or an officer of the corporation or body
corporate, against all costs, charges and expenses reasonably incurred by
him in connection with such action if he fulfils the conditions set out in
paragraphs (1)(a) and (b).
(3) Indemnity as of right. Notwithstanding anything in this section, a person
referred to in subsection (1) is entitled to indemnity from the corporation
with respect to all costs, charges and expenses reasonably incurred by him
in connection with the defense of any civil, criminal or administrative
action or
II-1
<PAGE>
proceeding to which he is made a party by reason of being or having been a
director or officer of the corporation or body corporate, if the person
seeking indemnity:
(a) was substantially successful on the merits in his defence of the
action or proceeding; and
(b) fulfils the conditions set out in paragraphs (1)(a) and (b).
(4) Directors' and officers' insurance. A corporation may purchase and maintain
insurance for the benefit of any person referred to in subsection (1)
against any liability incurred by him
(a) in his capacity as a director or officer of the corporation, except
where the liability relates to his failure to act honestly and in good
faith with a view to the best interests of the corporation; or
(b) in his capacity as a director or officer of another body corporate
where he acts or acted in that capacity at the corporation's request,
except where the liability relates to his failure to act honestly and
in good faith with a view to the best interests of the body corporate.
(5) Application to court. A corporation or a person referred to in subsection
(1) may apply to a court for an order approving an indemnity under this
section and the court may so order and make any further order it thinks
fit.
(6) Notice to director. An applicant under subsection (5) shall give the
Director notice of the application and the Director is entitled to appear
and be heard in person or by counsel.
(7) Other notice. On an application under subsection (5), the court may order
notice to be given to any interested person and such person is entitled to
appear and be heard in person or by counsel.
Section 7.02 of Bylaw No. 1 of Creo provide as follows:
7.02. Indemnity. Subject to the limitations contained in the Act, the
Corporation shall indemnify a director or officer, a former director or
officer, or a person who acts or acted at the Corporation's request as
a director or officer of a body corporate of which the Corporation is
or was a shareholder or creditor (or a person who undertakes or has
undertaken any liability on behalf of the Corporation or any such body
corporate), and his heirs and legal representatives, against all costs,
charges and expenses, including an amount paid to settle an action or
satisfy a judgement, reasonably incurred by him with respect to any
civil, criminal or administrative action or proceeding to which he is
made a party by reason of being or having been a director or officer of
the Corporation or such body corporate, if
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
Creo carries liability insurance which provides for coverage for officers and
directors of Creo and its subsidiaries, subject to certain deductibles.
On various dates in 1998 and 1999, Creo entered into indemnification
agreements with its directors and officers providing for limitations on a
director's and officer's liability for judgments, settlements, penalties,
fines, and expenses of defense (including attorneys' fees, bonds and costs of
investigation) arising out of or in any way related to acts of omissions as a
director or an officer, or in any other capacity in which services are rendered
to Creo. Creo believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements among other cases (i) if the director or
officer is not relieved of liability
II-2
<PAGE>
under applicable law, (ii) for violations of certain securities laws, or (iii)
for certain claims initiated by the officer or director. In addition,
indemnification may not be available to directors or officers under Canadian
law if any act or omission by a director or officer amounted to a failure to
act honestly and in good faith with a view to the best interests of Creo and,
in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, if the director or officer did not have
reasonable grounds for believing that his conduct was lawful. Due to the lack
of applicable case law, it is not clear whether indemnification is available in
the case of a breach of securities laws of the United States.
Insofar as indemnification for liabilities arising under the U.S. Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the United States Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by Creo during the last three
years preceding the date hereof involving sales of the Company's securities
that were not registered under the Securities Act:
(a) Between January 6, 1996 and November 21, 1997, Creo issued 18,826
Common Shares to 7 U.S. residents and 133,878 Common Shares to 36 non-
U.S. residents at a price of C$0.0005 per share. These shares were
issued in consideration of these individuals' services to Creo.
(b) On May 29, 1997, Creo issued 2,668,802 Common Shares to 27 U.S.
residents and 664,532 Common Shares to 15 non-U.S. residents at a price
of $7.50 per share.
(c) Between January 1, 1998 and the date hereof, 8 U.S. residents have
exercised options to purchase 2,963,572 Common Shares and 26 non-U.S.
residents have exercised options to purchase 104,146 Common Shares, at
prices ranging from C$3.75 to C$17.50 per share.
(d) On November 20, 1998, entities affiliated with The Goldman Sachs group,
Inc. exercised warrants to purchase 2,962,962 Common Shares at an
exercise price of $6.75 per share.
The issuances to U.S. residents described in Items 15(a) and 15(b) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) under the U.S. Securities Act as transactions by an issuer not
involving a public offering. The issuances to U.S. residents described in Item
15(c) were deemed exempt from registration under the Securities Act in reliance
on Rule 701 promulgated thereunder in that they were offered or sold either
pursuant to a written contract relating to compensation, as provided by Rule
701. In addition, such issuances were deemed to be exempt from registration
under Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering. The issuances described in Item 15(d) were deemed
to be exempt from registration under the Securities Act as transactions by an
issuer not involving a public offering. Each of the securities listed above but
not otherwise described in this paragraph was sold to persons who were neither
nationals nor residents of the United States and no facilities or
instrumentalities of U.S. interstate commerce were used in connection with any
offer or sale thereof.
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Articles of Incorporation of the Registrant
*3.2 By-laws of the Registrant
*4.1 Form of Stock Certificate*
5.1 Opinion and Consent of Getz Prince Wells
*10.1 Agreement dated as at May 4, 1998, between Creo and Heidelberger
Druckmaschinen AG
*10.2 Form of Indemnification Agreement between Creo and each of its
directors and officers
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*10.3 1996 Stock Option Plan and form of Notice of Stock Option Grant and
Option Agreement thereunder (for U.S. and Canadian employees)
*10.4 Shareholders Agreement dated as at April 24, 1994, between Creo and
certain shareholders, with amendments dated as at November 21, 1994;
June 30, 1995; November 2, 1995; March 22, 1996; May 29, 1997
*10.5 Profit Sharing Plan
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP, Chartered Accountants
23.2 Consent of Price Waterhouse, Chartered Accountants
23.3 Consent of Getz Prince Wells (included in Exhibit 5.1)
23.4 Consent of Thorsteinssons, Tax Lawyers
23.5 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
24.1 Power of Attorney (see Page II-5)
</TABLE>
* To be filed by amendment.
(b)Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the Consolidated Financial Statements
or the Notes thereto.
Item 17. Undertakings
(a) The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as at the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of 1933, as amended
(the U.S. Securities Act), the Registrant certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form F-1
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Burnaby, Province of
British Columbia, on the 14th day of May, 1999.
CREO PRODUCTS INC.
/s/ AMOS MICHELSON
By __________________________________
Amos Michelson
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Creo Products Inc., do hereby
constitute and appoint Amos Michelson and Thomas A. Kordyback, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that each
of said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the U.S. Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
Chief Executive Officer and
/s/ AMOS MICHELSON Director May 14, 1999
Amos-Michelson----------(Principal-Executive-Officer)----------
/s/ THOMAS A. KORDYBACK Vice President, Finance, Chief May 14, 1999
----------------------- Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
Thomas A. Kordyback
/s/ DANIEL GELBART President and Director May 14, 1999
-----------------------
Daniel Gelbart
/s/ RAPHAEL H. AMIT Chair of the Board and Director May 14, 1999
-----------------------
Raphael H. Amit
/s/ DAVID A. BENNETT Director May 14, 1999
-----------------------
David A. Bennett
/s/ THOMAS D. BERMAN Director May 14, 1999
-----------------------
Thomas D. Berman
/s/ JOHN J. BU Authorized Representative in the May 14, 1999
----------------------- United States, Director
John J. Bu
</TABLE>
II-5
<PAGE>
Signature Title Date
--------- ----- ----
/s/ DOUGLAS H. RICHARDSON Director May 14, 1999
-------------------------
Douglas H. Richardson
/s/ KENNETH A. SPENCER Director May 14, 1999
-------------------------
Kenneth A. Spencer
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
*3.1 Articles of Incorporation of the Registrant
*3.2 By-laws of the Registrant
*4.1 Form of Stock Certificate
5.1 Opinion and Consent of Getz Prince Wells
*10.1 Agreement dated as at May 4, 1998, between Creo and
Heidelberger Druckmaschinen AG
*10.2 Form of Indemnification Agreement between Creo and each
of its directors and officers
*10.3 1996 Stock Option Plan and form of Notice of Stock
Option Grant and Option Agreement thereunder (for U.S.
and Canadian employees)
*10.4 Shareholders Agreement dated as at April 24, 1994,
between Creo and certain shareholders, with amendments
dated as at November 21, 1994; June 30, 1995; November
2, 1995; March 22, 1996; May 29, 1997
*10.5 Profit Sharing Plan
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP, Chartered Accountants
23.2 Consent of Price Waterhouse, Chartered Accountants
23.3 Consent of Getz Prince Wells (included in Exhibit 5.1)
23.4 Consent of Thorsteinssons, Tax Lawyers
23.5 Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation
24.1 Power of Attorney (see Page II-5)
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 5.1
[Getz Prince Wells Letterhead]
May 14, 1999
Creo Products Inc.
3700 Gilmore Way
Burnaby, B.C.
V5G 4MI Canada
RE: REGISTRATION STATEMENT ON FORM F-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form F-1 filed by you with the
Securities and Exchange Commission on May 14, 1999 (Registration No. 333- )
in connection with the registration under the Securities Act of 1933, as
amended, of up to 5,750,000 Common Shares (the "Shares"), which includes an
option granted to the underwriters to purchase up to an additional 750,000
Shares to cover over-allotments. We understand that you and certain of your
shareholders are selling the Shares to the underwriters for resale to the
public as described in the Registration Statement. As your legal counsel, we
have examined the proceedings taken, and are familiar with the proceedings
proposed to be taken, by you in connection with the sale and issuance of the
Shares.
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below and (ii) assumed that the Shares will be
sold at a price established by the Pricing Committee of the Board of Directors
of the Company.
It is our opinion that, upon completion of the proceedings being taken or
proposed to be taken by us, as your legal counsel, prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states, the Shares will be legally issued, fully paid and non-
assessable when sold in the manner described in the Registration Statement.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
GETZ PRINCE WELLS
/s/ Getz Prince Wells
<PAGE>
Exhibit 11.1
Creo Products Inc.
Computation of Per Share Earnings (Loss)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended September 30, Ended March 31,
------------------------------------------ ---------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Basic:
Net earnings (loss)..... $(2,560) $(5,323) $(7,243) $ 5,837 $11,090 $ 5,126 $ 7,631
Weighted average shares
outstanding............ 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Basic earnings (loss)
per share.............. $ (0.17) $ (0.30) $ (0.34) $ 0.26 $ 0.44 $ 0.21 $ 0.28
======= ======= ======= ======= ======= ======= =======
Fully diluted:
Net earnings (loss)..... $(2,560) $(5,323) $(7,243) $ 5,837 $11,090 $ 5,126 $ 7,631
Add: imputed earnings
from dilutive options,
net of tax effect...... -- -- -- 1,559 1,329 668 619
------- ------- ------- ------- ------- ------- -------
Fully diluted net
earnings (loss)........ $(2,560) $(5,323) $(7,243) $ 7,396 $12,419 $ 5,794 $ 8,250
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............ 15,075 17,848 21,209 22,769 25,025 24,998 27,276
Shares issuable upon
assumed conversion of
dilutive options....... -- -- -- 7,659 5,477 5,501 5,372
------- ------- ------- ------- ------- ------- -------
Fully diluted shares.... 15,075 17,848 21,209 30,428 30,502 30,499 32,648
======= ======= ======= ======= ======= ======= =======
Fully diluted earnings
(loss) per share....... $ (0.17) $ (0.30) $ (0.34) $ 0.24 $ 0.41 $ 0.19 $ 0.25
======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Creo Inc., incorporated under the laws of the State of Washington
Creo Products N.V., incorporated under the laws of Belgium
Creo Products ULC, an unlimited liability company incorporated under the laws
of Nova Scotia, Canada
Creo SRL, a Society with Restricted Liability organized under the laws of
Barbados
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Creo Products Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
May 14, 1999
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form F-1 of our report dated November 20, 1997, which
appears in such prospectus. We also consent to the references to us under the
headings "Experts" in such prospectus.
/s/ Price Waterhouse
Chartered Accountants
Vancouver, British Columbia
May 14, 1999
<PAGE>
EXHIBIT 23.4
[Thorsteinssons, Tax Lawyers]
Creo Products, Inc.
3700 Gilmore Way
Burnaby, B.C.
V5G 4Ml Canada
May 14, 1999
Re: Registration Statement on Form F-1
Ladies and Gentlemen:
We consent to the use of our name wherever appearing in the Registration
Statement on Form F-1 filed by you with the Securities and Exchange Commission
on May 14, 1999 (Registration No. 333- ), including the Prospectus
constituting a part thereof, and any amendments thereto.
Very truly yours,
/s/ THORSTEINSSONS, TAX LAWYERS
_____________________________________
Thorsteinssons, Tax Lawyers
<PAGE>
EXHIBIT 23.5
[Wilson Sonsini Goodrich & Rosati Letterhead]
May 14, 1999
Creo Products Inc.
3700 Gilmore Way
Burnaby, B.C.
V5G 4M1 Canada
Re: Registration Statement on Form F-1
Ladies and Gentlemen:
We consent to the use of our name wherever appearing in the Registration
Statement on Form F-1 filed by you with the Securities and Exchange Commission
on May 14, 1999 (Registration No. 333- ), including the Prospectus
constituting a part thereof, and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI,
P.C.
Wilson Sonsini Goodrich & Rosati, P.C.
