<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-78481
PROSPECTUS
5,000,000 Shares
[LOGO OF CREO PRODUCTS INC.]
Creo Products Inc.
Common Shares
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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 have the option to
purchase up to 750,000 additional common shares from the selling shareholders
to cover over-allotments.
This is an initial public offering of common shares. The common shares have
been approved for quotation on the Nasdaq National Market under the symbol
"CREO" and have been conditionally approved for listing on The Toronto Stock
Exchange under the symbol "CEC".
------------
Investing in the common shares involves risks. See "Risk Factors" beginning
on page 8.
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.
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<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Public Offering Price....................................... $15.00 $75,000,000
Underwriting Discount....................................... $ 1.05 $ 5,250,000
Proceeds to Creo (before expenses).......................... $13.95 $55,800,000
Proceeds to the Selling Shareholders (before expenses)...... $13.95 $13,950,000
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about August 5,
1999.
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Salomon Smith Barney
Merrill Lynch & Co.
RBC Dominion Securities Corporation
July 28, 1999
<PAGE>
[Description of Inside Front Cover]
The top half of the inside front cover features a large circle encapsulating a
smaller circle. The two concentric circles contain four photos of people and
printing processes. A pair of lines forming cross-hares divides the circles at
an angle and extends to divide the page. Below and curving around the bottom
portion of the large circle runs a caption reading, "It is important to us that
Creo be recognized as a company that cares about customer success." Below this
caption and circle are eight line of text reading: "Creo Products Inc. is a
leading developer, manufacturer, and distributor of advanced digital systems
that transfer computer files directly onto printing plates. Our solutions are
designed to enable commercial printers to operate their presses more profitably
and to respond to increasing customer demands for tighter deadlines, higher
color quality and shorter print runs." Centered near the bottom of the page is
the CREO logo.
<PAGE>
[Description of the Gate]
Centered in the top half of the lefthand page of the gate are three
paragraphs of text. The first paragraph states: "In 1994, Creo delivered the
first commercial computer-to-plate system for plate production. Our digital
prepress solutions include a comprehensive line of precision imaging equipment
and workflow management software systems." The second paragraph reads: "Creo
CTP technology accepts digitized text, graphic images and line artwork
directly from desktop publishing and scanning systems. It transfers this data
directly onto proofing media and printing plates without the need for
intermediate films." The third paragraph reads: "In 1997, Creo established a
joint venture with Heidelberger Druckmaschinen AG, the world's largest press
manufacturer, effectively broadening our presence into over 160 countries
worldwide." Below this text is an box labeled "Creo Computer-to-Plate
Solution". Below the label, the caption "Digitization of legacy film"
accompanies a small icon representing a scanner. Immediately below this
caption and icon, the caption "Original digital pages" accompanies an icon of
a computer. An arrow between the two icons points from left to right toward a
second icon of a computer captioned "Digital Prepress." A similar arrow points
to an icon resembling a desktop printer encaptioned "Digital Proofing".
Another arrow continues the progression to a similar icon encaptioned "Digital
Plating." Immediately to the right of this icon is a vertical dotted line with
a final arrow pointing to an icon representing a printing press encaptioned
"Printing"
The top half of the righthand page of the gate features a large circle
encapsulating a smaller circle and four photos of people using computers. A
pair of lines forming cross-hares divides the circles at an angle and extends
to divide entire gate spread. Below and curving around the bottom portion of
the large circle runs a caption reading "Creo advanced workflow management
software is designed for maximum versatility and productivity." Seven small
photophraphs of Creo products with captions follow the outside curve of the
large circle. At the top left, the caption "Renaissance copydot scanning
system" accompanies a photograph of that product. Below that, the caption
"Trendsetter Spectrum digital halftone proofing system" appears below a
photograph of that product. Below this and to the right, the caption
"Trendsetter semi-automatic platemaking system" accompanies a photograph of
that product. Below this and further to the right, the caption "Very Large
Format Trendsetter" appears below that product. Nearing the bottom of the
circle, the caption "Platesetter 3244 fully automated platemaking system"
accompanies that product." To the right appears the caption "ThermoFlex
flexographic platemaking system" with its corresponding product image. Finally
and furthest right, the caption "Very Large Format Platesetter" appears below
a photograph of this product. Centered in the gate near the bottom of the
spread is the CREO logo.
<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 of any date other than the date of this prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Additional Information About Creo........................................ 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Exchange Rate Information................................................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
Management............................................................... 46
Interests of Management and Others in Certain Material Transactions...... 54
Principal and Selling Shareholders....................................... 55
Description of Share Capital............................................. 59
Taxation................................................................. 61
Exchange Controls........................................................ 64
Underwriting............................................................. 65
Shares Eligible for Future Sale.......................................... 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Find More Information...................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
Until August 22, 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.
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
you should consider before buying shares in this offering. You should read the
entire prospectus carefully.
Please also note that, except where otherwise indicated:
. The capitalization information in this prospectus is based upon
information as of March 31, 1999.
. The information in this prospectus takes into account a 2-for-1 stock
split effected in May 1999.
. The information in this prospectus assumes no exercise of the
underwriters' over-allotment option.
. In this prospectus, "Creo," "we," "us," and "our" refer to Creo Products
Inc. and its subsidiaries.
All dollar amounts in this prospectus are stated in U.S. dollars unless
stated otherwise. At March 31, 1999, the noon buying rate in New York City for
cable transfers in Canadian dollars was US$1.00=C$1.5092 as certified for
customs purposes by the Federal Reserve Bank of New York.
Creo Products Inc.
Creo is a leading developer, manufacturer and distributor of comprehensive
"computer-to-plate" digital solutions that automate the prepress phase of
commercial printing, in which master printing plates are created prior to
actual printing. Our computer-to-plate technology transfers digitized text,
graphic images and line artwork from desktop publishing computer systems
directly onto printing plates, eliminating labor-intensive, complex and costly
preparatory steps required by the conventional prepress process. We offer a
comprehensive line of precision imaging equipment, including scanners, proofing
devices and output devices, as well as workflow management software. The
principal features of our solutions are:
. End-to-End Prepress Solutions. Our solutions integrate a complete range
of Creo products that address the entire prepress process.
. Open Architecture and Connectivity. Our solutions support industry-
standard file formats, accommodate a wide variety of input media and are
adaptable to emerging file formats.
. Modularity and Versatility. The components of our solutions are modular
and can be used separately or assembled in a variety of configurations
to meet the needs of customers with varying print volumes and press
sizes.
. Knowledgeable and Comprehensive Customer Support. We offer comprehensive
pre-sale evaluation, installation, system integration, training and
post-sale support through our knowledgeable and experienced field
service organization.
Our computer-to-plate technologies enable 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.
Since 1994, more than 900 of our computer-to-plate imaging systems have been
installed in 29 countries. This is more than twice the number of installed
systems of any of our competitors. Nine of the ten largest commercial printers
in North America are adopting Creo systems as their computer-to-plate solution.
Creo systems are currently used in the production of high-circulation glossy
magazines, including Glamour, Newsweek, Scientific American, Sports Illustrated
and Time, as well as other documents such as color brochures and catalogs.
Although many of the largest commercial printers have begun to adopt
computer-to-plate solutions, we believe the market is still developing,
especially among small and mid-size commercial printers, most of whom have not
adopted computer-to-plate solutions. We believe that less than 20% of
commercial printers in the world
5
<PAGE>
currently use computer-to-plate solutions. According to a June 1999 report
prepared for Creo by Cloud Information Services, an industry research group
based in Nashua, New Hampshire, computer-to-plate unit shipments worldwide are
expected to grow at a compound annual growth rate of over 25% from 1999 through
2003.
We have demonstrated leadership in developing innovative prepress technology.
For example, we were the first to commercialize a fully integrated high-speed
computer-to-plate solution. Our innovations have helped to establish thermal
imaging in which laser beams are used to precisely imprint heat-sensitive
printing plates as the industry standard for computer-to-plate technology. Our
research and development efforts are currently focused on next-generation
digital prepress technology, including digital offset press products, which
transfer digital data directly onto a printing press. As of March 31, 1999, we
held 30 U.S. and foreign patents, and had 39 U.S. and foreign patent
applications pending.
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, to develop, manufacture, market
and distribute our computer-to-plate 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 digital offset
press technology.
Despite our successes, we face many challenges and risks. For example, small
and mid-size commercial printers may not adopt our computer-to-plate solutions
as readily as many of the largest commercial printers have. In addition, we
face intense competition from other manufacturers of computer-to-plate
products, many of which are much larger than we are and have significantly
greater resources and more established distribution channels than ours. See
"Risk Factors."
Our principal office is located at 3700 Gilmore Way, Burnaby, British
Columbia, Canada, V5G 4M1, and our telephone number is (604) 451-2700. This
prospectus contains trademarks and registered trademarks of Creo and of other
companies.
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
Use of proceeds................................. We intend to use the proceeds
of this offering for working
capital and other general
corporate purposes.
Nasdaq National Market symbol................... CREO
Toronto Stock Exchange symbol................... CEC
</TABLE>
We are obligated to issue common shares upon exercise of outstanding options
and warrants in addition to the common shares to be outstanding after the
offering. If and when these options and warrants are exercised, the percentage
of common shares you own will be diluted. The following is a summary of the
additional issuable common shares:
. 4,595,232 common shares issuable upon exercise of outstanding options,
which have a weighted average exercise price of C$11.75 per share; and
. 24,598 common shares issuable upon exercise of outstanding warrants,
which have a weighted average exercise price of $9.38.
6
<PAGE>
Summary Selected Financial Data
Our consolidated financial statements were prepared in accordance with
Canadian GAAP, which differs from United States GAAP. The "As Adjusted" numbers
in the table below reflect the sale of the 4,000,000 common shares offered by
Creo at the public offering price of $15.00 per share and the receipt of net
proceeds from this offering.
<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>
Balance Sheet Data:
Cash and cash equivalents........................................ $ 37,150 $ 92,100
Working capital.................................................. 59,039 113,989
Total assets..................................................... 136,890 191,840
Shareholders' equity............................................. 89,742 144,692
<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 27,424 28,067
</TABLE>
7
<PAGE>
RISK FACTORS
Investing in our common shares involves a high degree of risk. You should
carefully consider the risks described below as well as all the other
information in this prospectus--including our financial statements and related
notes--before investing in our common shares. Our business, operating results
and financial condition could be seriously harmed due to 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.
If our computer-to-plate solutions do not gain broad market acceptance among
small and mid-size printers, our revenues will be flat or will decline.
Adoption of computer-to-plate technology requires commercial printers to make
significant and costly changes to their prepress operations. To date, our
computer-to-plate solutions have been adopted principally by large, multi-plant
commercial printers. Small and mid-size printers may be slower to adopt our
computer-to-plate solutions because of the cost or because of the reluctance of
these printers to interfere with existing relationships with other suppliers of
prepress equipment. If these small and mid-size printers do not adopt our
computer-to-plate solutions, our revenues will be flat or will decline.
If our joint venture with Heidelberg is unsuccessful or is terminated, our
operating costs will increase if we are not able to rechannel our resources
quickly enough, and our revenues will also decline.
Our operating and financial performance depends substantially on our joint
venture with Heidelberg. Since we have a relationship with Heidelberg, we have
not developed for ourselves the manufacturing, marketing, distribution and
customer service and support capabilities that Heidelberg contributes to the
joint venture. For example, we depend on Heidelberg's:
. manufacturing capabilities for most of our 4-page and 8-page computer-
to-plate output devices;
. worldwide marketing and distribution networks for the sale of our
products under the joint venture;
. worldwide service and customer support organization for service support
outside North America; and
. product development funding for products to be commercialized by the
joint venture.
If the joint venture is unsuccessful in these areas, or if it were to
terminate, we would be forced to develop for ourselves additional
manufacturing, marketing, distribution and customer service and support
capabilities to replace those currently provided by Heidelberg. Developing
these capabilities would increase our operating costs and, if we were unable to
develop them quickly enough, our revenues would decline.
For more information about our joint venture with Heidelberg, see "Business--
Our Joint Venture with Heidelberg."
We must continue to overcome significant and increasing competition in the
digital prepress market in order to continue our growth and profitability.
Direct competition among providers of digital prepress solutions is likely to
increase as the demand for these solutions increases. Increased competition is
likely to result in price reductions, reduced gross margins, longer sales
cycles and loss of market share, any of which would seriously harm our business
and results of operations. We cannot be certain that we will be able to compete
successfully against current or future competitors or that competitive
pressures will not seriously harm our business.
We face intense direct competition from other manufacturers of computer-to-
plate products including Scitex Corporation Ltd., Agfa-Gevaert N.V., Dainippon
Screen Mfg. Co. Ltd., Barco N.V. and Cymbolic Sciences International, Inc. Many
of our competitors are substantially larger than we are and have significantly
greater financial, sales and marketing, technical, manufacturing and other
resources and more established
8
<PAGE>
distribution channels. These competitors may be able to respond more rapidly to
new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties in
the industry, such as plate suppliers and press manufacturers, to increase
their ability to rapidly gain market share by addressing the needs of our
prospective customers.
We expect that, as industry standards and customer requirements evolve, our
competitors will continue to improve the performance of their current products
and introduce new products or new technologies that may supplant or provide
lower cost alternatives to our products. Successful new product introductions
or enhancements by our competitors could reduce the sales or market acceptance
of our products and services, perpetuate intense price competition or make our
products obsolete. To be competitive, we must continue to invest significant
resources in research and development, sales and marketing and customer
support. We cannot be sure that we will have sufficient resources to make those
investments or that we will be able to make the technological advances
necessary to be competitive. As a result, we may not be able to compete
effectively against our competitors.
You should not rely on our past results to predict our future performance
because our operating results may fluctuate.
Our past revenue growth rates and other operating results may not be accurate
indicators of our future performance. In addition, 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 computer-to-plate products than
we anticipate or if there is a delay in the release of new products, we may not
be able to quickly reduce our operating expenses in response. Our operating
results could be affected in particular by:
. changes in the capital 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 product sales cycle, especially for our higher priced
and more complex products; and
. fluctuations in the performance of the Heidelberg joint venture, which
could make it difficult for us to predict and control our expenses
associated with the joint venture operations.
Our operating results have fluctuated in the past, and it is likely that in
some future quarter our operating results may be below the expectations of
public market analysts and investors and, as a result, the price of our common
shares may fall.
If we are unable to maintain our supply of key product components that are
produced by a limited number of suppliers, we will not be able to deliver our
products to our customers on a timely basis.
We depend on other companies for some of the key components of our products,
including, most significantly, our thermal imaging heads. Although we have not
experienced problems with the supply of these components in the past, we may in
the future, and we may need to find additional suppliers. Because there is a
limited number of potential suppliers of the components, it may be difficult
for us to find qualified suppliers. In addition, because some of these
components are complex, lead times for production can vary significantly and,
as a result, it may be difficult to replenish our inventories of these
components. A failure to maintain a reliable supply of key components could
cause our operating results to suffer.
9
<PAGE>
Our products may have unforeseen defects, which could harm our reputation,
impede market acceptance of our products and negatively impact our operating
results.
Our products and some of the key components supplied to us by other companies
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, warranty claims by our customers or others
against us, or the loss of credibility with our current and prospective
customers.
In late 1997, a number of the thermal imaging heads installed in our
computer-to-plate output devices failed as a result of environmental conditions
prevailing at some of our customers' sites. This resulted in a design change to
all of our thermal heads and delayed the shipment of our computer-to-plate
output devices for three months. Although this particular incident did not
result in material losses for Creo, a similar incident in the future might hurt
our business because of the loss of customer sales if we were unable to correct
the problem.
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 that we consider adequate,
but a successful claim against us for an amount exceeding our policy limits
would force us to use our own resources to pay the claim, which would result in
a reduction in our working capital available for other uses, as well as an
increase in our expenses and a negative effect on our results of operations.
If we are not able to continue to establish and maintain relationships with
plate suppliers and press manufacturers, our ability to grow our business will
suffer.
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. For example, through our
joint venture, Heidelberg provides us with significant sales, marketing and
distribution capabilities for our products, as well as research and development
resources. In addition, our strategic business alliances with suppliers of
printing plates have allowed us to enhance the compatibility of our technology
with those suppliers' printing plates. If we are unable to maintain these
existing strategic alliances and to establish additional relationships, we
would lose these additional capabilities, our products might be less attractive
to our potential customers and our operating results could be negatively
affected.
Adapting to new technologies, such as digital offset printing technology and to
changing customer preferences, such as greater customization of print jobs,
will cause us to incur substantial costs. If we are unable to adapt to current
and future changes in technology and customer preferences, our products and
services may become obsolete.
The digital prepress market 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. If we
are unable to introduce new products and services that our customers want, our
revenues and other operating results will be negatively affected.
A number of companies, including Creo, are currently working with press
manufacturers to develop products that use next generation digital offset
printing technology as a digital prepress solution. Although the number of
digital offset printing products currently available is limited, it is likely
that new digital offset printing products will be introduced. Although we
expect that various digital prepress technologies, including computer-to-plate
technology, will co-exist for the foreseeable future, digital offset printing
products could in
10
<PAGE>
time replace or provide lower-cost alternatives to our existing computer-to-
plate solutions, causing them to become obsolete. In addition, recent
innovations in xerography, the printing process used in most office copiers,
could make it a more economic alternative to offset printing for short print
runs.
Although 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 these 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, which
could delay product introductions and could increase our costs.
If outside funding of our research and product development activities were to
decline, we would be forced to reduce those activities or to divert our own
resources away from other uses in order to fund our research and development
activities.
Our investment in research and development has been subsidized in part by
funding received from plate suppliers, press manufacturers and our customers in
connection with specific product development initiatives undertaken at their
request. We also receive investment tax credits for our research and
development activities. During fiscal 1998, Heidelberg, other press and plate
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. Although we do not currently believe
that this outside funding will be reduced or eliminated, it could be reduced or
eliminated in the future, as a result of changes in our relationships with
press and plate suppliers or changes in Canadian Government policy. If these
outside funding sources were to reduce or eliminate the amount of funding
available to us, we would be required to use our own working capital to fund
our research and development activities, or we would be required to reduce
those activities. Our ability to develop new products and technologies is an
important factor in our ability to remain competitive. If we were unable to
fund research and development activities at levels sufficient to develop our
products and technology, it may be difficult for us to remain competitive. If
we are required to divert our own funds from other uses to fund our research
and development activities, the reduction in funding would cause those other
aspects of our business to suffer.
If we are not able to retain our Chief Executive Officer, Amos Michelson, our
President and chief technologist, Daniel Gelbart, and other key personnel, our
business would lose its key executive leadership and our ability to maintain
our competitive position would be jeopardized.
Our ability to maintain our competitive position depends to a significant
extent on the efforts and abilities of our senior management, particularly Amos
Michelson, our Chief Executive Officer, and Dan Gelbart, our President and
chief technologist. We do not have employment agreements with either of these
individuals or any other key executives. Their managerial, technical and other
services would be difficult to replace, and if we lose the services of one or
more of our executive officers, or if one or more of them decide to join a
competitor or otherwise compete directly or indirectly with us, our business
would be seriously harmed. The loss of their services would jeopardize our
ability to maintain our competitive position. In addition, we do not have "key
person" life insurance policies covering any of our employees.
If we are unable to attract and retain sufficient numbers of highly skilled
technical, sales and marketing and other personnel, our operations and
financial results would suffer.
Our ability to develop, market and sell our products and services and to
maintain our competitive position depends on our ability to attract, retain and
motivate highly skilled technical, sales and marketing and other personnel. We
plan to substantially expand our sales and marketing efforts, particularly in
North America, in order to increase market awareness and sales both of joint
venture products and products not covered by the joint venture. We also plan to
increase our research and development personnel to develop new products, and to
increase our customer service and support personnel in North America to support
the growth of our business. 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. If we fail to
recruit or retain these personnel, our ability to develop new products, obtain
new customers and provide an acceptable level of customer service could suffer.
11
<PAGE>
Our intellectual property and proprietary technology, which includes 30 patents
and 39 patent applications, is important to the continued success of our
business. Our failure to protect this proprietary technology may significantly
impair our competitive position.
Our success and ability to compete depend to a significant extent on our
proprietary technology since that is how we attempt to keep others from copying
the innovations that are central to our existing and future products. We
currently rely on copyright and trademark laws, trade secrets, confidentiality
procedures, contractual provisions and patents to protect our proprietary
technology. We may have to engage in litigation in order to protect our patents
and other intellectual property rights, or to determine the validity or scope
of the proprietary rights of others. This kind of litigation can be time-
consuming and expensive, regardless of whether we win or lose. Because it is
critical to our success that we are able to prevent competitors from copying
our innovations, we intend to continue to seek patent and trade secret
protection for our technologies. The process of seeking patent protection can
be long and expensive, and we cannot be certain that any currently pending or
future applications will actually result in issued patents, or that, even if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. Furthermore, others
may develop technologies that are similar or superior to our technology or
design around the patents we own. We also rely on trade secret protection for
our technology, in part through confidentiality agreements with our employees,
consultants and third parties. However, these agreements may be breached and we
may not have adequate remedies for any breach. In any case, others may come to
know about our trade secrets through a variety of methods. In addition, the
laws of some territories in which we manufacture or sell our products may not
protect our intellectual property rights to the same extent as do the laws of
Canada and the United States.
Despite our efforts, our intellectual property rights, particularly our
existing or future patents, may be invalidated, circumvented, challenged,
infringed or required to be licensed to others. 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. We cannot be sure that the steps we take to protect our technology will
prevent misappropriation or infringement. If we fail to protect our technology
so that others may copy or use it, we would be less able to differentiate our
products and our revenues will decline.
If others claim that our products infringe upon their intellectual property
rights, we may be forced to seek expensive licenses, reengineer our products,
engage in expensive and time-consuming litigation or stop marketing the
challenged products.
Litigation regarding intellectual property rights is common in the technology
industry, and for this reason we expect that third-party infringement claims
involving technologies may increase. If an infringement claim is filed against
us, we may be prevented from using certain technologies and may incur
significant costs to resolve the claim.
From time to time we receive letters claiming that we are infringing the
intellectual rights of others, and we may from time to time engage in disputes
over rights concerning intellectual property. Although we believe that our
intellectual property rights are sufficient to allow us to market our existing
products without incurring liability to third parties, we cannot assure you
that our products and services do not infringe on the intellectual property
rights of third parties.
We could incur substantial costs in defending ourselves and our customers
against infringement claims. Litigation could also adversely affect sales of
the challenged product or technology and divert the efforts of our management
and technical personnel. In the event of a claim of infringement, we may be
required to obtain one or more licenses from third parties. We cannot assure
you that we or our customers could obtain necessary licenses from third parties
at a reasonable cost or at all. If we fail to obtain a license where one is
required, we could incur substantial liabilities and be forced to suspend the
marketing of the challenged products.
12
<PAGE>
If we are not able to manage our growth effectively, we may not be able to
maintain or improve our current level of profitability.
We have experienced rapid growth, and plan to continue to expand our
operations. This expansion is expensive and places a significant strain on our
personnel and other resources. For example, over the last three years our
revenue and headcount have grown significantly as shown below:
<TABLE>
<CAPTION>
Revenue Headcount
------------- ---------
(in millions)
<S> <C> <C>
Year ended and as at September 30, 1996.............. $48 586
Year ended and as at September 30, 1997.............. $96 797
Year ended and as at September 30, 1998.............. $129 1,033
Six months ended and as at March 31, 1999............ $78 1,237
</TABLE>
To manage our expanded operations effectively, we will need to further
improve our operational, financial and management systems and successfully
hire, train, motivate and manage our employees. We may not be able to manage
our growth effectively, which would have a negative effect on our
profitability.
Our efforts to increase our presence in markets outside of North America may
result in losses and may not be successful in generating additional revenue.
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, our international operations are influenced
by numerous inherent potential risks, including:
. unexpected changes in regulatory requirements, tax rates or tariffs that
make our products and services more expensive and therefore less
attractive to potential customers;
. challenges in staffing and managing foreign operations, employment laws
and practices in foreign countries, any of which could increase the cost
and reduce the efficiency of operating in foreign countries;
. technology standards that differ from those on which our products are
based, which could require expensive redesign and retention of personnel
familiar with those standards;
. longer accounts receivable payment cycles and possible difficulties in
collecting payments which may increase our operating costs and hurt our
financial performance;
. political and economic instability; and
. fluctuations in currency exchange rates and the imposition of currency
exchange controls. Because substantially all of our revenue is received
in U.S. dollars, appreciation of the U.S. dollar against the currencies
used by our potential customers would make our products more expensive
and therefore less attractive to those potential customers.
Any of these factors could harm our international operations and negatively
affect our financial performance. For example, our sales in Japan for the year
ended September 30, 1997 were $9.9 million. Due primarily to the economic
downturn in Japan, our sales in Japan dropped to $5.3 million for the year
ended September 30, 1998. Our business would suffer if similar economic
conditions were to occur again, in Japan or elsewhere.
13
<PAGE>
Fluctuations in the values of Canadian dollars and Belgian francs will cause
translation gains and losses. These fluctuations may cause our expenses to
increase to levels greater than we anticipate.
Although 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. Appreciation in the value of these currencies relative to the
U.S. dollar will adversely affect our operating results. For example, we
suffered a $1,142,000 loss attributable to foreign currency translation during
the six months ended March 31, 1999. 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 likely continue to cause currency
translation gains and losses.
If our products or the products upon which we depend malfunction because of
"Year 2000" problems, we may be subject to warranty claims and product
liability claims and we could experience a significant disruption in our
business. We could be required to expend significant internal resources on Year
2000 remediation or the Year 2000 problems of our suppliers could cause a delay
in their supplying goods and services to us. Furthermore, Year 2000 problems of
our customers could cause them to delay payment for products that we have
shipped to them.
We depend on proper functioning of computer systems of outside parties such
as suppliers and customers. We also depend on our computer software programs
and operating systems in operating our business. Any computer systems or
components that have date-sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. We have completed our tests on the
product components that could be affected by Year 2000 issues and, based on our
tests, we believe that all of these components are Year 2000 compliant.
However, we cannot assure you that we have identified all of the potential
risks or that our internal systems or those of our suppliers will function
adequately. In addition, we have no assurance that the outside manufacturers
who supply components to us will be Year 2000 compliant with their internal
systems. If they do not, the result could be a system failure or miscalculation
causing disruptions of our operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in our
similar normal business activities. Although we have received written
warranties or other representations from substantially all of our sub-
contractors that their products are Year 2000 compliant, we have no other
Year 2000 related contractual commitments. Moreover, if we were to make a
warranty claim against one of our sub-contractors because of a malfunction
related to the Year 2000, there can be no assurance that the subcontractor
would actually pay our warranty claim. In addition, our customers or potential
customers may be affected by Year 2000 problems that may cause a delay in
payments for products shipped.
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. At this time, we have completed
the process of identifying and remediating information technology systems that
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 Year 2000 data. Despite our Year 2000 compliance
program, there is a possibility that one or more of our products is not Year
2000 compliant. In the event of a failure of one of our products at a customer
site, our normal protocols for customer support would be followed.
If our systems experience "Year 2000" problems, we may be subject to warranty
claims or 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. If our products are adversely affected by
Year 2000 problems in our customers' hardware or software with which our
products interact, our customers or their end users may mistakenly believe that
these problems were caused by our products. These customers and end users could
react by demanding extensive technical support from us or by filing suit
against us, either of which could increase our costs and divert our management
resources.
14
<PAGE>
Our principal shareholders and management own a majority of our common shares
and as a group will be able to exercise significant influence over our affairs.
This concentration of common shares may limit the ability of other shareholders
to have any meaningful role in our affairs.
Following the completion of this offering, our directors, officers and their
affiliates will beneficially own approximately 52.2% of our outstanding common
shares. If these shareholders were to act together, they would 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. The concentration of ownership could make it more difficult for a
third party to acquire control of Creo if these shareholders were to oppose the
change of control transaction. This could prevent our shareholders from
realizing a premium over the market prices for their common shares or from
bringing about a change in management.
There may be no active trading market in our common shares after this offering,
which may make it difficult for you to resell your shares.
There has been no public trading market for our common shares prior to this
offering, and we cannot be sure that an active trading market will develop upon
completion of the offering or, if one does develop, that it will be sustained.
If no public trading market for our common shares develops, or if this market
is not active or sustained, it may be difficult for you to resell your shares
at a price at or above the initial public offering price.
Technology related stock prices are especially volatile, this volatility may
depress our stock prices, and you may not be able to resell your shares at a
price at or above the initial public offering price.
Stock market prices for technology companies have been very volatile, and the
market price of our common shares may be volatile. In particular, the market
prices of the shares of many companies in the technology sector, a sector that
includes Creo, have experienced wide fluctuations that have often been
unrelated to their operating performance. As a result, you may not be able to
resell your common shares at or above the initial public offering price.
Although the market price of our common shares will in part be based on our
operating and financial performance, it may also be based on conditions in the
printing and prepress equipment industry and other factors beyond our control.
A total of 27,014,218, or 84.3%, of our outstanding shares are restricted from
immediate resale but may be sold into our public trading market following the
completion of this offering. This could cause the market price of our common
shares to drop significantly, even if our business is doing well.
After this offering, we will have 32,027,854 common shares outstanding, not
including common shares issuable upon exercise of options and warrants. This
consists of:
. the 4,000,000 common shares we are selling in this offering, which may
be resold in the public market immediately;
. the 1,000,000 common shares being sold by our current shareholders in
this offering, and an additional 13,636 common shares held by our
current shareholders all of which may be resold in the public market
immediately; and
. the remaining 84.3%, or 27,014,218 common shares, of our total
outstanding shares, which will become available for resale in the public
market as shown in the chart below.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
15
<PAGE>
<TABLE>
<CAPTION>
Number of shares / % of
total outstanding Date of availability for resale into public market
----------------------- ----------------------------------------------------
<C> <S>
26,581,316 / 83.0% 181 days after the date of this prospectus due to
(1) statutory restrictions on resale of common
shares by Canadian residents, assuming we are
successful in obtaining the discretionary relief for
which we are applying, and (2) an agreement non-
Canadian shareholders have with the underwriters.
The underwriters may waive the restrictions in this
agreement and allow these shareholders to sell their
shares at any time.
432,902 / 1.4% After the 181st day after the date of this
prospectus due to the requirements of U.S.
securities laws.
</TABLE>
For a more detailed description, see "Shares Eligible for Future Sale."
Since Creo is a Canadian company and most of our assets and key personnel are
located in Canada, you may not be able to enforce any U.S. judgment for claims
you may bring against us, our assets or our key personnel.
We are organized under the federal laws of Canada, our headquarters are in
Canada, most of our directors and officers and some 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, we believe it will be more 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
than if we were a corporation organized under United States law and most of our
assets and key personnel were located in the United States. We cannot assure
you that Canadian courts would enforce:
. liabilities predicated on U.S. federal securities laws determined in
original actions in the Province of British Columbia; or
. 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, we believe you
may be prevented from pursuing remedies under U.S. federal securities laws
against us or them.
Our board of directors could dilute your investment by issuing preferred shares
or common shares. This could also deter an unsolicited proposal to acquire
Creo.
Our board of directors may issue an unlimited number of common shares and an
unlimited number of preferred shares. Furthermore, without further vote or
action by the shareholders, our board of directors may 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 the holders of any preferred shares that may be issued
in the future may be senior to the rights of holders of common shares, which
could preclude holders of common shares from receiving dividends, proceeds of a
liquidation or other benefits. The issuance of preferred shares with special
voting or other rights also could make it more difficult for a third party to
acquire control of Creo by, for example, discouraging an unsolicited
acquisition proposal or a proxy contest.
Your rights as a shareholder could be modified by a vote of less than a
majority of the outstanding common shares because actions can be taken even if
only 20% of the outstanding common shares are present or represented by proxy.
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, 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.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions. We have identified these statements 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 these differences include,
but are not limited to, those discussed above and elsewhere in this prospectus.
USE OF PROCEEDS
Creo will receive net proceeds of $54,950,000 from the sale of the 4,000,000
common shares, 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 for any
material acquisition of, or investment in, any third party, other than our
right to purchase a substantial majority of the capital stock of Creo Ltd., a
former subsidiary, for approximately $18.0 million. We have not currently
decided whether to exercise this option. 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.
ADDITIONAL INFORMATION ABOUT CREO
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.
17
<PAGE>
CAPITALIZATION
The following table presents (1) the actual capitalization of Creo as at
March 31, 1999 and (2) the capitalization on an "As Adjusted" basis, which
reflects the sale of the 4,000,000 common shares offered by Creo at the public
offering price of $15.00 per share, and the receipt of net proceeds from this
offering.
<TABLE>
<CAPTION>
As at March 31,
1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, less current portion....................... $ 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................................................ 78,917 133,867
Preferred shares: unlimited preferred shares, no shares
issued and outstanding, actual and as adjusted.......... -- --
Retained earnings.......................................... 10,825 10,825
------- --------
Total shareholders' equity............................... 89,742 144,692
------- --------
Total capitalization..................................... $96,254 $151,204
======= ========
</TABLE>
The outstanding share information in the table above 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 the 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 the sale of the 4,000,000 common
shares offered by Creo under this prospectus, at the public offering price per
common share of $15.00, 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 $144.7
million or approximately $4.52 per common share. This represents an immediate
increase in net tangible book value of $1.32 per common share to existing
shareholders and an immediate dilution of $10.48 per common share to new
investors. The following table illustrates this dilution on a per common share
basis:
<TABLE>
<S> <C> <C>
Public offering price per common share........................... $15.00
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................................. 1.32
-----
Net tangible book value per common share after the offering...... 4.52
------
Dilution in net tangible book value per common share to new
investors....................................................... $10.48
======
Dilution as a percentage of offering price....................... 69.9%
======
</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 the public offering price of $15.00 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 57% $ 2.82
New investors................. 4,000,000 12% 60,000,000 43% $15.00
---------- --- ------------ ---
Total....................... 32,027,854 100% $138,917,000 100% $ 4.34
========== === ============ ===
</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 $4.93. This represents an
immediate dilution in net tangible book value of $10.07 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).. 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............. (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.............. $ (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
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
Net earnings (loss) from
continuing operations.. $(2,406) $(6,468) $(6,938) $ 6,081 $ 10,358 $ 4,394 $ 7,631
Net earnings (loss)..... $(2,469) $(5,231) $(6,938) $ 6,081 $ 10,358 $ 4,394 $ 7,631
Basic earnings (loss)
per share from
continuing operations.. $ (0.16) $ (0.36) $ (0.33) $ 0.27 $ 0.41 $ 0.18 $ 0.28
======= ======= ======= ======= ======== ======= =======
Diluted earnings (loss)
per share from
continuing operations.. $ (0.16) $ (0.36) $ (0.33) $ 0.25 $ 0.38 $ 0.16 $ 0.27
======= ======= ======= ======= ======== ======= =======
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 27,424 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,
excluding current
portion................ 2,807 6,405 7,849 6,956 6,660 6,956 6,512
Shareholders' equity.... 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,
excluding current
portion................ 2,807 6,405 7,849 6,956 6,660 6,956 6,512
Shareholders' equity.... 6,100 7,269 20,770 51,207 62,048 55,704 89,742
</TABLE>
The following information should be noted in connection with the selected
consolidated financial data presented above:
. ""Other income (expense)" includes foreign exchange gain and loss,
interest income and interest expense; and
. the "discontinued operations" referred to in the table are the operations
of our data storage business, which we sold in 1994.
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the high and low
exchange rates for Canadian dollars expressed in U.S. dollars, the average of
such exchange rates on the last day of each month during such period, and the
exchange rate at the end of such period, based on the inverse of the noon
buying rate in the City of New York for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30 March 31
------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
High..... US$0.7166 US$0.7023 US$0.7235 US$0.7145 US$0.6341 US$0.6832 US$0.6423
Low...... 0.7731 0.7478 0.7527 0.7513 0.7292 0.7292 0.6724
End...... 0.7457 0.7438 0.7342 0.7234 0.6552 0.7052 0.6626
Average.. 0.7377 0.7270 0.7325 0.7296 0.6894 0.7046 0.6546
</TABLE>
On July 19, 1999, the inverse of the noon buying rate was US$0.6703 per
C$1.00.
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
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 computer-to-plate products
to direct customers and distributors and from fees for service of equipment.
Product revenue is derived from the sale of equipment and related 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 only in countries who are signatories to the North
American Free Trade Agreement. 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
computer-to-plate products 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
equally revenue and expenses related to the computer-to-plate products,
workflow products and consummables designated as part of the joint venture and
generally provide goods and services for the joint venture 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 computer-to-plate 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 some 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 some products. Creo believes that the realization of these benefits over
time will result in increased market penetration for its computer-to-plate
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
22
<PAGE>
operations and financial condition would be materially adversely affected. See
"Risk Factors--If our joint venture with Heidelberg is unsuccessful or is
terminated, our operating costs will increase if we are not able to rechannel
our resources quickly enough, and our revenues also will decline."
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 this 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.
Sales and Marketing. Sales and marketing expenses are primarily attributable
to the salaries, commissions, travel costs, office expenses and support staff
associated with our sales staff. In addition, the costs of trade shows,
advertising and marketing are also included in sales and marketing expenses.
Due to the growth of our business primarily in North America and Europe, we
intend to continue to invest in the expansion of our sales force. Because of
the competitive nature of our business, we do not expect our sales and
marketing expenses to decrease as a percentage of our revenue.
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.
23
<PAGE>
Results of Operations
The following table summarizes historical results of operations as a
percentage of revenue for the periods shown.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, 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>
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 computer-to-plate products both by Creo through direct
sales and by the joint venture. Product revenue from direct sales increased
2.4% from $37.8 million for the six months ended March 31, 1998 from $36.9
million for the six months ended March 31, 1999. 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,
24
<PAGE>
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 a 25.5% increase in the number of production and customer
service staff as well as increased subassembly and component costs and overhead
expenses associated with the increase in both our product sales and our
installed customer 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 per-unit
labor, subassembly and component costs, increased plant capacity utilization,
increased product reliability and increased efficiencies in our service
department.
Research and Development. Gross 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 a 46.0% increase in the number of 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.
Outside 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 outside 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 outside 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 these 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 outside
funding, increased 63.2% to $5.3 million for the six months ended March 31,
1999 from $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 a 49.1% increase in the number of sales and marketing
staff 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
25
<PAGE>
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 computer-to-
plate 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
computer-to-plate 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 computer-to-plate 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 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 a 28.5% increase in the number of
production and customer service staff as well as increased subassembly and
component costs and overhead expenses associated with the increase in both our
product sales and our installed customer base. In 1997, cost of sales was
increased by $1.1 million for retrofit charges. In 1998, retrofit liability had
no impact on cost of sales because the increase in the installed base has been
offset by increased product reliability. 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 per-unit labor, subassembly and component costs, and increased plant
capacity utilization and increased product reliability, 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 a
35.8% increase in the number of 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.
Outside 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
26
<PAGE>
$12.2 million in outside 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 outside
parties and $ 0.7 million received in investment tax credits.
As a result of these 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 a 44.7% increase in the number of sales and
marketing staff in North America and Europe to support the expansion of our
operations, including 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 at 4225 Kincaid Street in Burnaby,
Canada. These facilities were acquired to allow for the future expansion of our
thermal head development and manufacturing capacity.
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.
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 of our computer-to-plate products through
our direct sales force.
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 $7.0 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 a 45.8% increase in
27
<PAGE>
the number of production and customer service staff as well as increased
subassembly and component costs and overhead expenses associated with the
increase in both our product sales and our installed customer base. 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 per-unit 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 a
29.0% increase in the number of research and development staff, 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.
Outside 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 outside funding
received during the year ended September 30, 1997 included $0.7 million in
investment tax credits and $1.4 million received from outside parties.
As a result of these 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 the 55.1% increase
in the number of 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.
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 computer-to-plate products. Product revenue for the
three months ended September 30, 1997 included $3.1 million in sales of
computer-to-plate 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 computer-to-plate
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 computer-to-plate product
sales. We expect that cost of sales will continue to increase as sales of our
computer-to-plate 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 computer-to-plate 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 computer-to-plate product sales. We
expect that our sales and marketing expenses will continue to increase as sales
of our computer-to-plate 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 computer-to-plate 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 computer-to-plate products grow.
Liquidity and Capital Resources
Since we commercialized our first computer-to-plate 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>
Our inventory and accounts payable have remained relatively flat from
September 30, 1997 to September 30, 1998, because the increase in production of
computer-to-plate systems during this period was done by Heidelberg through the
joint venture. The retrofit liability included in accounts payable increased to
$3.2 million as at September 30, 1997 from $2.1 million as at September 30,
1996 due to an increased installed base of products. Since September 30, 1997,
the retrofit liability has not changed significantly as the impact of the
increased installed base has been offset by increased product reliability.
Inventory increased 7.6% during the six months ended March 31, 1999 due to the
increase in the volume of computer-to-plate products that we produced. Our
accounts receivable have increased from September 30, 1997 to March 31, 1999
due to the increase in our sales volumes. Our days receivables outstanding has
decreased slightly during the period due to an increase in our collection
efforts. Accounts payable decreased during the six months ended March 31, 1999
due primarily to a reduction of $548,000 in retrofit liability resulting from
increased product reliability.
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. Of this amount, $5.8 million was spent during the six months
ended March 31, 1999. We have committed $2.3 million in 1999 for the expansion
of our thermal head development and manufacturing facilities located at 4225
Kincaid Street in Burnaby, British Columbia during the last six months of 1999.
In addition, we expect to spend up to $5.9 million on other capital
expenditures during the last six months of 1999, but no specific expenditures
have been committed.
In 1994, we formed Creo Ltd. under the laws of Israel to carry on research
and development work relating to our imaging technologies. In 1997, Creo Ltd.
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 Creo Ltd. 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 Creo Ltd. 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 Creo Ltd.'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
the next two years.
Year 2000 Readiness Disclosure
State of Readiness. We initiated a Year 2000 compliance program for our
products in the summer of 1998. The program focused on two areas:
. the components of Creo products that are provided by sub-contractors; and
. the components of Creo products that we produce ourselves.
We have completed our tests on the product components that could be affected
by Year 2000 issues and, based on our tests, we believe that all of these
components are Year 2000 compliant. Although we have received written
warranties or other representations from substantially all of our sub-
contractors that their products are Year 2000 compliant, we have no other Year
2000 related contractual commitments. Moreover, if we were to make a warranty
claim against one of our sub-contractors because of a malfunction related to
the Year 2000, there can be no assurance that the subcontractor would actually
pay our warranty claim.
31
<PAGE>
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. At this time, we have completed
the process of identifying and remediating information technology systems that
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 Year 2000 data.
Despite our Year 2000 compliance program, there is a possibility that one or
more of our products is not Year 2000 compliant. In the event of a failure of
one of our products at a customer site, our normal protocols for customer
support would be followed.
Heidelberg believes that the products it produces for our joint venture are
Year 2000 compliant apart from a few exceptions that are currently being
addressed.
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
outside manufacturers who supply 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.
Contingency Plans. The most likely worst-case scenario that we may encounter
as a result of a Year 2000 issue is a product failure at one or more of our
customer sites coupled with a parts shortage resulting from one or more of our
suppliers' failing to be Year 2000 compliant. To address the possibility of a
product failure at one or more of our customer sites as a result of a Year 2000
issue, we will have additional customer service and support personnel on hand
in our Response Center during the beginning of the Year 2000 to handle any
unusual increase in customer requirements. To address the possibility of a
parts shortage resulting from one or more of our suppliers' failing to be Year
2000 compliant, Creo has identified other suppliers that could rapidly provide
an alternative source of component parts.
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 other than the
interest rate swap described below. 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 30, 1998 is
$341,000 in favor of the counterparty.
We have not engaged in any currency hedging to minimize the effect of
exchange gains or losses. We are exposed to foreign currency fluctuations on
our monetary asset and liability balances denominated in Canadian dollars and
Belgian francs.
32
<PAGE>
The table below presents the principal cash flows that exist by maturity date
of our long-term debt and details of our interest rate swap as at September 30,
1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 Total
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Fixed rate U.S.$ 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>
33
<PAGE>
BUSINESS
Overview
Creo is a leading developer, manufacturer and distributor of comprehensive
"computer-to-plate" 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 computer-to-plate technology
transfers digitized text, graphic images and line artwork from desktop
publishing computer systems directly onto printing plates, eliminating labor-
intensive, complex and costly preparatory steps required by the conventional
prepress process. We offer a comprehensive line of precision imaging equipment,
including scanners, proofing devices and output devices, 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
computer-to-plate solution and our innovations have established thermal imaging
as the industry standard for computer-to-plate technology. Since 1994, more
than 900 of our computer-to-plate imaging systems have been installed in 29
countries. This is more than twice the number of installations of any of our
competitors. Nine of the ten largest commercial printers in North America are
adopting Creo systems as their computer-to-plate solution. Creo systems are
currently used in the production of 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 computer-to-plate system, which used visible
light to create the image on the plate. In 1995, we commercialized the first
thermal computer-to-plate 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 have been
awarded four Graphic Arts Technology Foundation InterTech Technology Awards,
which are given for products predicted to have a major effect on the graphic
communications industry. The Graphic Arts Technology Foundation is a member-
supported, nonprofit technical and educational organization serving the graphic
communications industries. Creo is a member of The Graphics Arts Technology
Foundation. The Graphics Arts Technology Foundation requires that each member
pay an entry fee of $1,000 to be considered for each award.
We are at the forefront of research and development of digital prepress
technology, including digital offset press products. We believe that digital
offset press technology, which images digital data directly onto a printing
press, will become the next generation of prepress for short-run offset
printing. Our belief is based on the fact that Heidelberg, the largest press
manufacturer in the world, has recently begun shipping a press that uses
digital offset press technology, and the fact that MAN Roland, the second
largest press manufacturer in the world, has publicly demonstrated a digital
offset press. 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. As of March 31,1999, we held 30 United States
and foreign patents and had 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 to develop, manufacture, market and
distribute our computer-to-plate 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. In lithographic offset printing, the images to be printed are formed
on printing plates and the plates are then mounted onto the printing press
cylinders. On the press, only the imaged areas of the plates accept ink. The
inked images are then transferred onto the rubber-
34
<PAGE>
covered surface of another cylinder, and from that surface onto roll or sheet-
fed paper. Lithographic offset printing produces large volumes of high-quality
copies at high speed and low variable cost. According to an industry study
prepared in July 1998 for NPES The Association for Suppliers of Printing,
Publishing and Converting Technologies based in Reston, Virginia, United States
revenues of commercial printers in 1997 exceeded $70 billion. In a report
prepared for us in January 1998, Pira International, an independent center for
printing research based in Leatherhead, England, estimated the non-United
States commercial printing market to be approximately 2.25 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.
Our computer-to-plate solutions address the prepress needs of commercial
printers. In a report prepared for us in November 1997, State Street
Consultants, Inc., an independent consulting firm based in Boston,
Massachusetts, estimated the worldwide market for prepress imaging equipment to
exceed $3 billion in 1995. Although many of the largest commercial printers
have begun to adopt computer-to-plate solutions, we believe the market is still
developing. We believe that less than 20% of commercial printers in the world
currently use computer-to-plate solutions. According to a June 1999 report
prepared for Creo by Cloud Information Services, an industry research group
based in Nashua, New Hampshire, computer-to-plate unit shipments worldwide are
expected to grow at a compound annual growth rate of over 25% from 1999 to
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, digital pages consisting of text, graphic images
and line artwork are created on a computer with word processing and desktop
publishing software. These digital pages are converted into a series of dots
which are then used to create printing plates. After the multi-colored digital
document has been separated into its base component colors (cyan, magenta,
yellow and black), a device called an imagesetter uses light or heat to image
the series of dots onto single or double page films, or separations. Four films
are produced for each page--one for each of the four component colors. Each
film is then developed, much like a photographic negative, to make the latent
image visible.
Proofs are then made by exposing light-sensitive proofing media (usually
coated paper) to the films, in the same sequence that will be used on the
press, similar to the way in which photographic prints are made. The resulting
composite proof simulates the pages that will be finally output from the press,
and any required adjustments can be made to the original files and new films
produced before the printing plates are imaged.
After the pages are proofed, the single or double page films are manually
assembled into 2-page, 4-page, 8-page or 16-page "flats," depending on the
press size, with each of the four colors requiring a separate flat. A proof is
then made of the assembled flats to verify that the individual pages are in the
proper order and that the alignment of the assembled films is accurate. For
high quality color printing, the alignment of the assembled films must be
accurate to within two thousandths of an inch. As a result, alignment is prone
to error and frequently requires rework.
Once the proofs have been approved, each flat is used to expose a light-
sensitive printing plate, similar to the way in which the proofing media were
exposed, creating a positive image on the plate. Each exposed plate is
processed to develop the image, and then manually mounted on the press in the
correct color sequence. After mounting, further adjustment of the plates is
required to ensure the accuracy of the final printed product. Each plate is
then inked with one of the four component colors, and the printing process can
begin. During printing, the four plates will impress the paper sequentially,
and the final composite printed product will look like the original digital
page.
35
<PAGE>
The following diagram illustrates the conventional prepress process:
[Description Conventional Prepress Diagram under "The Conventional Prepress
Process"]
Conventional prepress is a complex and expensive process with many
shortcomings. For example, the large manual component of the conventional
prepress process can lead to inconsistent results, and the conventional process
requires the use of costly films and hazardous chemicals. Moreover, the
frequency of rework results in idle time for expensive commercial presses.
Despite these constraints, printers' customers are increasingly demanding
tighter deadlines, better and more consistent color quality, shorter print runs
and greater customization of print jobs. To meet these demands, printers must
incur additional costs, but cannot readily pass on these costs to their
customers. As a result of the shortcomings of the conventional prepress
process, printers are limited in their ability to meet the needs of their
customers on a cost-effective basis, and have therefore experienced reduced
operating margins.
The Creo Solution
Our computer-to-plate solutions consist of a comprehensive range of products
that transfer computer-generated images and text directly onto printing plates,
eliminating numerous steps from the conventional prepress process, including
the creation and processing of 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, which transfer data onto plates for use on a printing
press.
In the streamlined Creo solution, the digital pages are processed and
separated into their four component colors and the resulting series of dots is
imaged by the Creo output device directly onto thermal printing plates,
eliminating the entire film- and flat-creation process. The plates are then
developed and mounted on the press for printing. The following diagram
illustrates the prepress process using the Creo solution.
[Description of Creo Solution Diagram under "The Creo Solution"]
A rectangle, labeled "Creo Solution," contains 5 small icons in a horizontal
line. Except for the last icon, each icon is connected on its left side
pointing to the icon on its right. Starting from the left and moving right, the
icons are labeled "Create digital pages," "Workflow management," "Image thermal
plates and proofing media," "Develop plates," and "Mount plates on press."
36
<PAGE>
The key component of our solution is our patented thermal imaging head that
uses laser beams to precisely imprint heat-sensitive printing plates and
proofing materials. Our thermal head splits the output of a single high-power
laser into 240 separate beams. In contrast, most competing computer-to-plate
systems use fewer beams for imaging because they require a separate laser to
produce each beam. This significantly increases their cost and complexity. In
1996, the Graphic Arts Technology Foundation awarded Creo an InterTech
Technology Award for the innovation of our thermal imaging head technology.
We were the first to offer a commercial computer-to-plate 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 a plate mounted on an external drum, 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 using digital offset press technology. 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 computer-to-plate systems, we
believe that our unique combination of technologies delivers:
. more accurate images;
. 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 computer-to-plate 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.
Open Architecture and Connectivity
Our solutions support industry-standard file formats, accommodate a wide
variety of input media and are adaptable to emerging file formats. 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 and Versatility
The components of our computer-to-plate solutions are modular and can be used
separately or assembled in a variety of configurations to meet the needs of
customers with varying print volumes and press sizes. For
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example, printers can add different components to increase functionality, and
can add more of the same components to increase capacity. 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
digital offset press technology, 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 computer-to-plate products. Our focus on
technology leadership has been critical in building our customer base, and our
close co-operation 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 computer-to-
plate 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 almost all of our customers, and we will continue to
expand our customer service capabilities by hiring additional service personnel
to be located close to our customers.
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.
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 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 computer-to-plate systems by augmenting our direct
sales force and entering into distribution arrangements with leading vendors of
thermal plates.
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Products
We provide end-to-end digital solutions for prepress automation, which
include input devices, prepress workflow management systems and a variety of
proofing and output devices:
[Description of Creo Solution Diagram under "Products"]
In the upper left corner of a rectangle, there are two small icons. The top
icon is labeled "Digital Files." The icon under the Digital Files Icon is
labeled "Renaissance Scanner." These two icons are connected by a bracket to
their right. An arrow protrudes from the middle of this bracket. The arrow
points right to a rectangle that has the words "Workflow Management Systems"
inside of it. An arrow protrudes from the bottom of the Workflow Management
Systems diagram and points to a bracket labeled "Digital Proofing." The left
prong of the Digital Proofing Bracket points to a small icon labeled "Virtual
Proofing Station." The right prong of the Digital Proofing Bracket points to a
small icon labeled "Proofsetter Spectrum TM." An arrow also protrudes from the
right side of the Workflow Management Systems rectangle. This arrow points to a
four-pronged bracket. Each of these prongs points to a small graphic. Starting
from the top, the four graphics are labeled "Trendsetter TM," "VLF
Trendsetter," "Platesetter," and "VLF Platesetter."
Digital Input Devices
Our Renaissance scanners enable printers to convert archived film, customer-
supplied film and reflective copy into digital data, allowing them to obtain
the benefits of digital workflow management. All Renaissance scanners include
Creo software tools for alignment and editing. In 1997, the Graphics Arts
Technology Foundation awarded us its 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
Creo's digital workflow management systems incorporate both our proprietary
software and third-party software and hardware whose performance we enhance.
Our workflow management systems process and archive the vast amounts of data
used by printers to create plates and proofs. By reducing the number of
repetitive manual tasks and efficiently integrating all aspects of prepress,
these systems enhance both productivity and output quality. Our workflow
management systems can be configured for varying prepress workflow needs, and
for both high-volume and low-volume printers. The list prices of our workflow
systems range from $75,000 to $300,000, depending on configuration and options.
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Digital Proofing Devices
Our Virtual Proofing Station creates an on-screen digital simulated copy of
what a final printed job will look like, permitting confirmation of accuracy
and color quality. Our Proofsetter Spectrum, which creates a hard copy of the
digital proof, is available both as a stand-alone product and as an optional
addition to our Trendsetter output devices. The list price of the Proofsetter
Spectrum is $235,000.
Computer-to-Plate Output Devices
Our CTP output devices are available in several formats capable of handling
virtually all plate types and sizes. All of our output devices currently use
the same thermal imaging technology and multi-channel thermal imaging 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 Graphics
Arts Technology Foundation awarded us an InterTech Technology Award for the
Platesetter 3244. In 1996, we introduced the Very Large-Format Platesetter to
respond to printers' needs for larger computer-to-plate plates designed for
wide web presses that use rolls of paper, rather than individual sheets. The
list prices of the Platesetter generally range from $390,000 for the
Platesetter 3244 to $860,000 for the Very Large-Format 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 since they use fewer plates.
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 and to provide 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 Very Large-Format 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 which they have asked us to undertake. 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 output devices, including a
line of digital offset press products, and applying our core technologies to
new printing markets and methods such as packaging printing and flexography.
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Workflow Systems
Creo and Heidelberg are co-developing a state-of-the-art family of workflow
and related products to 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, multi-user
architecture that can be adapted to fit the needs of any size printer. 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 can accommodate growth
in printers' prepress operations.
Digital Offset Press
We are working with the leading manufacturers of printing presses to develop
advanced digital offset press systems. A digital offset press imaging system
images digital data directly onto the press. The digital offset press
technology that we are currently introducing through Heidelberg uses a plate
that is similar to standard computer-to-plate plates, which is fixed to the
press before being imaged, but which must be replaced each time the image
changes. We also have under development a new generation of digital offset
press 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. Digital offset press technology 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
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 more expensive rubber plates for
printing onto a wide variety of materials including plastic, film, paper,
cardboard and metal. According to a 1996 study prepared for the Graphic Arts
Marketing Information Service of Alexandria, Virginia by Strategies for
Management, Inc., an industry group, the estimated size of the packaging market
at $55 billion and flexography represented approximately 60% of that market.
In 1998, we introduced several prototype units of our Thermoflex digital
flexographic platesetter for packaging printers. This device has high
productivity and incorporates 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 other
printing methods.
The Thermoflex can also image processless thermal film using a proprietary
process which improves the performance of less expensive 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 computer-to-plate
products 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. For the six months ended March 31, 1998,
Heidelberg's revenue associated with the joint venture was $16.3 million. With
offices in more than 160
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countries, Heidelberg has substantial international marketing and distribution
channels for commercial printing presses and prepress equipment, and an
extensive customer support and service organization. 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 some of our research and development projects relating
to joint venture computer-to-plate products; and
. cost-effective manufacture of some computer-to-plate 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;
. Creo has the right to be the sole supplier of thermal imaging heads for
use with joint venture computer-to-plate products;
. North American marketing and distribution of most joint venture products
is done jointly, although Creo has reserved some key North American
accounts for itself; elsewhere, marketing and distribution is done
through Heidelberg's distribution channels;
. prices for joint venture products are established jointly;
. Heidelberg may not sell computer-to-plate products of other manufacturers
as long as it markets and distributes joint venture products, and we may
not use third parties to market our computer-to-plate products that are
not covered by the joint venture, such as the Very Large-Format
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 computer-to-plate 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 computer-to-plate products and related consumables, and we 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 most financial matters will be submitted to the
joint binding determination of our respective independent auditors. To date
there have been no disputes submitted to either parties' auditors for
resolution. If the independence of the auditors would be impaired by their
determining a dispute, they would be prevented from rendering a determination.
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 computer-to-plate products that are competitive with the
computer-to-plate 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 computer-to-plate 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 each party still 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 computer-to-
plate products, at fair original equipment manufacturer prices, for two
years;
. each party will grant the other license for up to three years, relating
to workflow products and components for which it owns the intellectual
property rights, at fair original equipment manufacturer prices; and
. we will complete, on an equal cost-sharing basis, any research and
development obligations undertaken 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; in regional sales offices in various locations in
the United States, including Boston, Chicago, Los Angeles and San Francisco; in
Brussels, Belgium; and in 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 of
North America, Heidelberg is the exclusive marketer and distributor of joint
venture products. In Japan, we sell our computer-to-plate products through
Dainippon Screen Mfg. Co. Ltd. and Heidelberg.
Production and Assembly
We produce and assemble our Renaissance scanners, Platesetter 3244, Very
Large-Format Platesetter and Very Large-Format 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 computer-to-
plate 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
some of the components of our output devices. All of our output devices are
designed to use the same imaging heads, resulting in reduced inventory
requirements and increased manufacturing and servicing efficiencies.
The majority of the 4-page and 8-page Trendsetter output devices to be
distributed 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 each
manufacturing facility and, based on these reviews, manufacturing
responsibility can be reassigned. Nevertheless, a party with manufacturing
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responsibilities can retain them, even if it is not cost competitive, 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 computer-to-plate 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. About 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 are 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 of March 31, 1999, we held 24 issued United States patents and 6 issued
foreign patents and had 30 United States and 9 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 these 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
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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. Other companies offer
equipment that competes with specific products or product capabilities within
our product line.
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 is the printing process used in most
ordinary office copiers, in which an electrostatic image is developed with a
dry powder toner and then transferred to paper. Xerography has benefited from
recent technological innovations that could make it an economic alternative to
offset printing for low volume print runs. Xerography enables different images
to be printed on successive pages and is sometimes described as "on-demand"
printing. If 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 digital offset press technology has the
potential to transform the lithographic offset press into a press that can be
used for short print runs and that 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 mortgaged to a Canadian chartered bank. The
mortgage matures on February 4, 2002. 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 involved from time to time in 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 presents information about 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>
Amos Michelson (1)......................... 46 Chief Executive Officer and
Director
Vancouver, British Columbia
Daniel Gelbart............................. 52 President and Director
Vancouver, British Columbia
Michael D. Ball............................ 37 Vice President, Sales and
Support of Creo Products N.V.
Brussels, Belgium
N. David Brown............................. 44 Vice President, Business
Strategy
Vancouver, British Columbia
Mark N. Dance.............................. 35 Vice President and Chief
Operating Officer
Vancouver, British Columbia
Philippe H. Favreau........................ 36 Vice President, Manufacturing
Vancouver, British Columbia
Kevin M. Joyce............................. 33 Vice President, Sales of Creo
Inc.
Boston, Massachusetts
Thomas A. Kordyback........................ 47 Vice President, Finance, Chief
Financial Officer and
Vancouver, British Columbia Secretary
Robert J. Mielcarski....................... 40 Vice President, Business
Systems and Technology
Delta, British Columbia
Boudewijn P. Neijens....................... 40 General Manager of Creo
Products N.V.
Brussels, Belgium
B. Darcy O'Grady........................... 45 Vice President, Human
Resources
Vancouver, British Columbia
Michael Rolant............................. 37 Vice President, Customer
Support
Vancouver, British Columbia
Raphael H. Amit, Ph.D. (1)(2).............. 51 Chair of the Board and
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.
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.
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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.
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 the
U.S. for 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
47
<PAGE>
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
Digital Offset Press 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 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
48
<PAGE>
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 computer-to-plate 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 Canada Business Corporations Act, 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 in accordance with the 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.
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 Audit Committee is responsible for reviewing and making recommendations
to Creo about independent auditors, the annual audit of our financial
statements and our internal accounting practices and policies.
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.
49
<PAGE>
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 other parties specified by the by-
laws, against all costs reasonably incurred by them for 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 Canada Business Corporations
Act 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 is
against the public policy position expressed by the 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. None
of Dr. Amit, Mr. Berman or Mr. Bu has at any time been an officer or employee
of Creo.
Executive Compensation
In fiscal 1998, Creo paid an aggregate $1,058,472 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.
50
<PAGE>
Summary Compensation Table
The following table presents information concerning compensation earned for
services rendered during each of our last three fiscal years by our Chief
Executive Officer and our other four most highly compensated executive
officers. Except as noted below, there were no long term compensation awards
paid to these five officers during the fiscal years. The annual compensation
presented below excludes perquisites and other personal benefits because these
benefits did not exceed 10% of the total annual salary and bonus for any of
these five 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 145,444 -- 7,929 186
Vice President, Sales of 1997 243,198 -- 12,000 7,334
Creo Inc. 1996 104,422 -- 12,000 113,200
Michael Ball............... 1998 115,047 -- -- 6,094
Vice President, Sales 1997 85,287 -- -- 4,000
and Support of Creo 1996 33,936 -- -- --
Products N.V.
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
our Chief Executive Officer and our other four most highly compensated
executive officers.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
% of Total Market Value Price
Securities Options of Securities Appreciation for
Under Granted to Underlying Option Term
Options Employees in Exercise Price Options on the -----------------
Name Granted (#) Financial Year (C$/Share) Date of Grant 5% 10% Expiration Date
- ---- ----------- -------------- -------------- -------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin Joyce............. 186 0.02% C$17.50 C$17.50 C$899 C$1,987 January 1, 2003
Michael Ball............ 6,094 0.73% C$17.50 C$17.50 C$29,464 C$65,108 January 1, 2003
Boudewijn Neijens....... 8,186 0.98% C$17.50 C$17.50 C$39,579 C$87,459 January 1, 2003
</TABLE>
51
<PAGE>
Fiscal Year-End Option Values
The following table shows information relating to unexercised options held as
of September 30, 1998 by our Chief Executive Officer and our other four most
highly compensated executive officers. No options were exercised by these
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*
- ---- ----------------------------------------------- ---------------------------------
<S> <C> <C>
Kevin Joyce............. 31,696 / 81,066 C$243,046 / C$607,995
Michael Ball............ 12,378 / 0 C$44,511 / C$0
Boudewijn Neijens....... 22,186 / 0 C$97,500 / C$0
</TABLE>
- --------
* The value of unexercised in-the-money options has been determined based on
the fair market value of the common shares as determined by Creo's board of
directors on the date of option grant.
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
purposes of the plan are 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.
The plan was approved by our board of directors in November 1995 and by our
shareholders in January 1996. The plan will terminate in November 2005,
although the board of directors may terminate it earlier. We have reserved
8,000,000 common shares 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 on 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. They expire on
various dates between January 31, 2001 and January 4, 2004. Between January 1,
2000 and January 4, 2001, 201,588 of the outstanding options vest at various
rates. 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 committee. Options may be awarded both as a
form of compensation and as an incentive. The board determines the terms of
options granted under the plan, including the number of common shares that may
be purchased and the exercise price. The exercise price of incentive stock
options must be at least 100% of the fair market value of the common shares on
the date of grant. However, the exercise price of options granted to an
employee who holds more than 10% of the total voting power of all classes of
our share capital must be at least 110% of the fair market value of the common
shares at the date of grant. 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 term of options may not generally exceed ten 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, the maximum term is 5 years. Our practice to date
has been to grant options with five-year terms.
The plan provides that options generally must be exercised within 30 days
after the termination of the optionee's status as an employee or consultant.
There are, however, exceptions. All of our outstanding options provide that if
termination occurred before we completed our initial public offering, the
option must be exercised within 30 days of completion of the offering. As of
March 31, 1999, former employees held options to purchase up to 421,700 common
shares, and these options will expire 30 days after completion of this
52
<PAGE>
offering. The plan further provides that the options of an optionee whose
employment or consulting relationship terminates because of death must be
exercised no later than 12 months after termination. It also provides that the
options owned by an optionee whose employment terminates because of disability
must be exercised within six months after termination. All options expire in
any event on the expiration of their term.
If we merge with or into another corporation, the successor corporation may
agree to assume the outstanding options or substitute equivalent options. If
the successor corporation does not agree to do so the options will terminate on
the completion of the merger.
The board of directors has the authority to amend or terminate the plan. Creo
will seek shareholder approval of amendments to the plan if required by law to
do so. No amendment will affect options already granted without the holder's
consent. Shareholder approval is required to increase the number of shares
reserved 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
Creo maintains a profit sharing plan for eligible employees. Under the plan a
certain percentage of annual profits may be set aside for distribution among
our eligible employees. Employees become eligible to participate in the profit
sharing plan after three months of continuous service. The amount set aside
under the plan is determined by the compensation 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 any amount set aside is shared equally among all eligible
employees. 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. Amos Michelson, our Chief
Executive Officer, and Daniel Gelbart, our President, do not participate in the
profit sharing plan.
401(k) Plan for U.S. resident employees
Creo maintains a 401(k) plan to provide eligible employees who are residents
of the United States with a tax preferential savings and investment program.
Employees become eligible to participate in the 401(k) plan on the first day of
the month following the completion of three months of continuous service.
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 the reduction contributed to the 401(k) plan. The 401(k) plan permits, but
does not require, Creo to make additional matching contributions to the 401(k)
plan on behalf of the eligible participants, subject to a maximum of 5% of the
participant's current compensation. The contributions made by and on behalf of
employees may not exceed the maximum contribution limitation currently equal to
the lesser of 25% of their compensation or $30,000 per year. In the fiscal year
ended September 30, 1998, Creo made an aggregate of $228,062 in matching
contributions to the 401(k) plan. Contributions by employees or by Creo 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 generally
deductible by Creo when made. At the direction of each participant, the trustee
of the 401(k) plan 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
Canadian resident employees to their 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.
53
<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$17.50 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 Creo 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 for this offering.
Registration Rights
Some of our shareholders have the right to require us to register their
shares under the Securities Act. See "Description of Share Capital--
Registration Rights."
54
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents 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:
. persons or groups of affiliated persons known by us to own more than 5%
of our common shares;
. our directors;
. our Chief Executive Officer and our other four most highly compensated
executive officers;
. all of our directors and executive officers as a group; and
. all Creo shareholders selling common shares in this offering.
Percentage of ownership is calculated as required by Commission Rule 13(d)-
3(d)(1). To our knowledge and except as otherwise indicated or provided by
community property laws, the persons named in the table have sole voting and
investment power over all common shares held by them. 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.
"Beneficial ownership," as used in the table below, means sole or shared
power to vote or direct the voting of Creo common shares, or the sole or shared
power to dispose, or direct a disposition, of Creo common shares. In this
table, a person who has the right to acquire a common share within 60 days of
March 31, 1999, has "beneficial ownership" of that common share. The shares
that are acquirable by a person within 60 days of March 31, 1999 are deemed
outstanding when computing the percentage ownership of that person, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person.
<TABLE>
<CAPTION>
Number
of
Number of Shares Beneficially Shares
Shares Beneficially Owned as a Result of Options Offered Shares Beneficially
Owned Prior to Exercisable Within 60 Days of in this Owned After
This Offering March 31, 1999 Offering This Offering
------------------- ----------------------------- -------- -------------------
Number of Number of
Shares Shares
Beneficial Owner Outstanding Percent Number Number Outstanding Percent
- ---------------- ----------- ------- ----------------------------- -------- ----------- -------
5% Shareholders
- ---------------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated
with ................. 5,925,924 21.1% -- 349,479 5,576,445 17.4%
The Goldman Sachs
Group, Inc.
85 Broad Street
New York, New York
10004
Entities using as their
investment advisor.... 2,266,668 8.1% -- -- 2,266,668 7.1%
Brinson Partners, Inc.
209 South LaSalle
Street
Chicago, Illinois
60604-1295
Business Development
Bank of Canada........ 1,750,594 6.2% -- 103,240 1,647,354 5.1%
505 Burrard Street
Vancouver, British
Columbia
Canada V7X 1V3
Entities affiliated
with.................. 1,535,490 5.5% -- 90,554 1,444,936 4.5%
STAR Ventures
c/o SVM STAR Ventures
Management GmbH
Nr. 3, Possartstr. 9
Munich, Germany
Meir Barel............. 1,535,490 5.5% -- 90,554 1,444,936 4.5%
c/o SVM STAR Ventures
Management GmbH
Nr. 3, Possartstr. 9
Munich, Germany
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Number
of
Number of Shares Beneficially Shares
Shares Beneficially Owned as a Result of Options Offered Shares Beneficially
Owned Prior to Exercisable Within 60 Days of in this Owned After
This Offering March 31, 1999 Offering This Offering
------------------- ----------------------------- -------- -------------------
Number of Number of
Shares Shares
Beneficial Owner Outstanding Percent Number Number Outstanding Percent
- ---------------- ----------- ------- ----------------------------- -------- ----------- -------
5% Shareholders
(continued)
- ---------------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated
with................... 1,490,682 5.3% 38,198 85,659 1,405,023 4.4%
Evergreen Canada-Israel
Investments Ltd.
96 Rothschild Blvd.
Tel-Aviv
Israel 65224
<CAPTION>
Executive Officers and
Directors
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Amos Michelson.......... 1,846,658 6.6% -- -- 1,846,658 5.8%
Daniel Gelbart.......... 3,459,332 12.3% -- 204,012 3,255,320 10.2%
Raphael Amit............ 63,000 * 20,000 -- 63,000 *
David A. Bennett........ 1,750,594 6.2% -- 103,240 1,647,354 5.1%
Thomas D. Berman........ 2,266,668 8.1% -- -- 2,266,668 7.1%
John Bu................. 5,925,924 21.1% -- 349,479 5,576,445 17.4%
Douglas H. Richardson... 52,238 * 35,404 -- 52,238 *
Kenneth A. Spencer ..... 1,720,074 6.1% -- 101,441 1,618,633 5.1%
Michael D. Ball......... 27,584 * 25,184 -- 27,584 *
Kevin M. Joyce.......... 38,762 * 38,762 -- 38,762 *
Boudewijn P. Neijens.... 50,802 * 36,302 -- 50,802 *
All directors and
officers as a group
(18 individuals)....... 17,816,244 62.1% 675,378 758,172 17,058,072 52.2%
<CAPTION>
Other
- -----
<S> <C> <C> <C> <C> <C> <C>
K.A. Spencer Investments
Ltd.................... 200,000 * -- 101,441 98,559 *
7432 Tamarind Drive
Vancouver, British
Columbia
Canada V55 3Z9
The Gilde IT Fund
B.V. .................. 866,942 3.1% -- 51,127 815,815 2.5%
Newtenlaan 91
3508 AB Utrecht
The Netherlands
HarbourVest
International Private
Equity
Partners II--Direct
Fund L.P. ............. 747,014 2.7% -- -- 747,014 2.3%
One Financial Centre,
44th Floor
Boston, Massachusetts
02111
David Pritchard......... 154,518 * -- 9,113 145,405 *
1119 Lenora Road
Bowen Island, British
Columbia
Canada VON 1D0
Rachel Mayer............ 145,200 * -- 8,563 136,637 *
Unicycle Trading
Company, L.P........... 73,616 * -- 4,342 69,274 *
11 Galgaley Haplada
Street
P.O. Box 12600
Herzlia, Pituach
Israel 46733
Interstock Anstalt fur
Vermogens und Trust
Verwaltungen........... 17,516 * -- 1,033 16,483 *
Herrengasse 21
Postfach 339
9470 Vaduz
Lichtenstein
</TABLE>
56
<PAGE>
- --------
*less than 1%.
The number of shares beneficially owned prior to this offering by entities
affiliated with The Goldman Sachs Group, Inc. 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.
John Bu, a director of Creo, is a Vice President of Goldman, Sachs & Co. Mr.
Bu disclaims any beneficial interest in the common shares held by entities
affiliated with The Goldman Sachs Group, Inc.
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.
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.
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.
The number of shares beneficially owned prior to this offering by entities
affiliated with STAR Ventures include:
. 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), which also 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.
. 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 for his pecuniary interest in the common
shares.
The number of shares beneficially owned prior to this offering by entities
affiliated with Evergreen Canada-Israel Investments Ltd. consists of:
. 524,630 common shares and 14,100 common shares issuable upon exercise of
options exercisable within 60 days after March 31, 1999 beneficially
owned by Evergreen International Investments N.V.;
57
<PAGE>
. 227,862 common shares and 9,404 common shares issuable upon exercise of
options exercisable within 60 days after March 31, 1999 beneficially
owned by Evergreen Capital Markets Ltd.;
. 159,200 common shares beneficially owned by Periscope I Fund LP;
. 40,800 common shares beneficially owned by AB Shaked Lavan Ltd.;
. 24,866 common shares and 594 common shares issuable upon exercise of
options exercisable within 60 days after March 31, 1999 beneficially
owned by Evergreen Canada-Israel Management Ltd.; and
. 475,126 common shares and 14,100 common shares issuable upon exercise of
options exercisable within 60 days after March 31, 1999 beneficially
owned by Yarok AZ Ltd.
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 number of shares beneficially owned prior to this offering by Daniel
Gelbart include 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 any beneficial interest in the common shares held by Rachel Mayer.
The number of shares beneficially owned prior to this offering by Kenneth A.
Spencer consist of:
. 200,000 common shares beneficially owned by K.A. Spencer Investments
Ltd.;
. 1,080,294 common shares beneficially owned by Velo Investments Ltd.; and
. 439,780 common shares beneficially owned by Mr. Spencer.
Mr. Spencer, a director of Creo, is the President of K.A. Spencer Investments
Ltd and Velo Investments Ltd.
David Pritchard was Creo's Chief Financial Officer from April 1989 to July
1995. From July 1995 to December 1996, Mr. Pritchard was Creo's Chief Operating
Officer.
58
<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 is a summary of the principal characteristics of the common shares
and the preferred shares. It 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 the 28,027,854
outstanding common shares. Each common share carries one vote on all matters to
be voted on by shareholders. There are no limitations on the rights of non-
resident or foreign owners of our common shares to hold or vote their shares.
After satisfying any preferences conferred on the holders of any outstanding
preferred shares, the holders of common shares are entitled to share ratably
in:
. any dividends declared by our board of directors; and
. all assets remaining after our liabilities have been discharged, if Creo
is liquidated, dissolved or wound up.
Our common shares do not carry pre-emptive rights or rights of conversion
into any other securities. All outstanding common shares are fully paid and
non-assessable, and the common shares to be issued in this offering will also
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. 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
. Creo is dissolved, liquidated or wound up, and capital is returned to
the shareholders.
If a series of preferred shares is to be issued, the board of directors has
broad discretion to determine the rights to be attached to the shares in the
series. For example, it can decide:
. the number of shares in the series;
. whether those shares are to have voting rights, and if so, whether the
voting rights are to be full or limited voting rights;
. what dividends are to be paid on those shares and whether those
dividends are to be cumulative; and
. whether the shares in the series are to be convertible into or
exchangeable for other securities and, if so, what the conversion terms
will be.
The net tangible book value of our common shares could be diluted if we issue
further common shares or preferred shares, and the voting power of the existing
holders of our common shares would be diluted if we were to issue additional
common shares or preferred shares having the right to vote.
We have not issued preferred shares in the past and we have no current plan
to issue any.
Modifications, Subdivisions and Consolidations
Under the Canada Business Corporations Act, amendment of the 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
59
<PAGE>
those shares voting separately as a class at a special meeting. The Canada
Business Corporations Act also gives these holders the right to dissent from
the amendment and to require us to pay them the then fair value of their
shares.
Warrants
In May 1997 we issued warrants to purchase 24,598 common shares at an
exercise price of $9.38 per share. These warrants expire on June 2, 2002. They
are exercisable for common shares on a net exercise basis without tender of
cash.
Registration Rights
Creo is party to a shareholders agreement with shareholders who together 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 a
proportion of their common shares. Creo must use reasonable commercial efforts
to register common shares of each shareholder who makes this demand. Creo must
pay all offering expenses (excluding underwriting fees and commissions payable
in connection with the sale of these shareholders' shares) in connection with
the "piggy-back" registration.
In addition to the "piggy-back" registration rights described above, parties
to the shareholders agreement who hold at least 3% of the outstanding common
shares, may demand that Creo register all or a part of the shares provided that
they have a market value of at least C$5,000,000. If a demand of this kind is
made, Creo must notify the other parties to the shareholders agreement and use
reasonable commercial efforts to register the common shares held by each party
who makes such a demand. Creo must pay all offering expenses (excluding
underwriting fees and commissions payable in connection with the sale of these
shareholders' shares) in connection with the 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 American
Securities Transfer & Trust, Inc. at its principal office in Denver, Colorado.
60
<PAGE>
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, for 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 U.S. Internal Revenue Code of 1986, and does not
address the tax consequences that may be relevant to investors in special tax
situations. Investors who may be in special tax situations include, 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, or the sale of, our common shares, including the
applicable federal, state, local, and foreign tax consequences and any
associated information reporting requirements. The following discussion of U.S.
federal income tax considerations is based upon an analysis of the U.S.
Internal Revenue Code, relevant regulations, current case law and published
rulings, all of which are subject to prospective and retroactive changes.
The 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 about the income tax consequences to
them of an acquisition of common shares. The 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), and do not use or hold
their common shares in, or in the course of, carrying on a business in Canada.
The discussion of Canadian federal income considerations is based on the
current provisions of the Income Tax Act and the regulations under the Income
Tax Act, all proposed amendments to the Income Tax Act and the Income Tax Act
regulations announced by the Minister of Finance, Canada and the provisions of
the Canada-U.S. Income Tax Treaty (1980). It has been assumed that any proposed
amendments to the Income Tax Act and the Income Tax Act regulations will be
enacted in substantially their present form.
The anticipated tax consequences may change, and any 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 here, 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 of this offering.
For purposes of this discussion, a "U.S. holder" is 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 of the United States or the District of Columbia or
an estate, on whose income United States federal income tax must be paid
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.
61
<PAGE>
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.
Canadian Federal Income Tax Considerations
In the opinion of Thorsteinssons, our Canadian tax counsel, the following is
at the date of this prospectus a summary of the material anticipated
consequences arising under the Income Tax Act to an investor who acquires our
common shares through this offering and is not a resident in Canada under
Canadian tax laws.
Dividends on Our Common Shares
Under the Income Tax Act, amounts paid or credited on account or instead of
payment of, or in satisfaction of, dividends, including stock dividends, to
holders of our common shares that 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 in accordance with the terms of a
bilateral income tax treaty between Canada and the country in which a holder of
common shares is resident.
Under the Canada-U.S. Income Tax Treaty, when the recipient of a dividend on
the common shares is
. the beneficial owner of the dividend,
. does not have a "permanent establishment" or "fixed base" in Canada, and
. is considered to be a resident of the United States under the Canada-U.S.
Income Tax Treaty,
the rate of Canadian withholding tax on the dividends will generally be reduced
to 15% of the amount of the dividends or, if the recipient is a corporation
which owns at least 10% of the voting stock of Creo, to 5% of the amount of the
dividends. Dividends paid or credited to a holder that is a United States tax-
exempt organization, as described in Article XXI of the Canada-U.S. Income Tax
Treaty, will not have to pay the Canadian withholding tax.
Disposition of Our Common Shares
Generally the disposition of a common share held as capital property will
result in a taxable capital gain (or an allowable capital loss) equal to three-
quarters of the amount by which the proceeds of disposition exceed the adjusted
cost base of the holder of that share. A holder of common shares will not be
required to pay tax for a taxable capital gain on the disposition of a common
share unless the common share is "taxable Canadian property" of the holder as
defined by the Income Tax Act, and no relief is afforded under the Canada-U.S.
Income Tax 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 Income Tax Act on the date of
disposition, and provided the holder, or persons with whom the holder did not
deal at arm's length (within the meaning of the Income Tax Act), or any
combination of these parties, 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 on 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 Canada-U.S. Income Tax Treaty 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 Income Tax Act, the disposition of a common
share by a holder may occur in a number of circumstances including on a sale or
gift of the share or upon the death of the holder.
There are no Canadian federal estate or gift taxes on the purchase or
ownership of the common shares.
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<PAGE>
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 paid by Creo that exceeds the "paid-up capital" of the shares
purchased will be deemed by the Income Tax Act 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. The tax treatment of any
dividend received by a holder of our common shares has been described above
under "Dividends on Our Common Shares."
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 the purchase, less the amount of any
dividend as described above. As a result, this holder of our common shares will
generally realize a capital gain (or capital loss) equal to the amount by which
the proceeds of disposition, net of any costs of disposition, exceed (or are
exceeded by) the adjusted cost base of these shares. The tax treatment of any
capital gain or capital loss has been described above under "Disposition of Our
Common Shares."
Other Considerations
There may be other income tax considerations that are relevant to a purchaser
of our common shares who, under the Income Tax Act, is not a resident in
Canada, and under the Canada-U.S. Income Tax Treaty, is not a resident of the
United States. Prospective purchasers of our common shares should consult their
own tax advisors.
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 the date of this prospectus a
summary of the material United States federal income tax considerations arising
under the U.S. Internal Revenue Code, and the regulations promulgated under the
U.S. Internal Revenue Code, to an investor who acquires common shares under
this offering.
Taxation of Dividends
Distributions received from us will constitute dividends for U.S. federal
income tax purposes and are taxable in the United States as ordinary income
except for distributions in excess of current or accumulated earnings and
profits which 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
the U.S. holder upon the sale or exchange of the common shares. Any non-
dividend 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. Dividends paid by Creo 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 the foreign currency 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, the 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 up to the amount specified by U.S. law.
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 credit limitations to their particular situations.
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<PAGE>
Taxation of Capital Gains
A U.S. holder of common shares will 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
the sale, exchange or other disposition and the U.S. holder's tax basis for the
common shares. In most cases, the gain or loss 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. It is expected that any 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 may only be used to reduce
capital gains, except that individual taxpayers may deduct annually $3,000 of
capital losses in excess of their capital gains.
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 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 other required
information. If backup withholding applies, the amount withheld is not an
additional tax, but is credited against the 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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<PAGE>
UNDERWRITING
Under the terms and conditions stated in the underwriting agreement dated the
date of this prospectus, each of the underwriters named below has agreed to
purchase, and Creo and the selling shareholders have agreed to sell to these
underwriters the respective number of common shares listed opposite the name of
the underwriter below:
<TABLE>
<CAPTION>
Number of
Name Common Shares
---- -------------
<S> <C>
Salomon Smith Barney Inc. ..................................... 2,200,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............. 1,760,000
RBC Dominion Securities Corporation............................ 440,000
CIBC World Markets Corp. ...................................... 75,000
Deutsche Bank Securities Inc. ................................. 75,000
Morgan Stanley & Co. Incorporated ............................. 75,000
Prudential Securities Incorporated ............................ 75,000
Gabelli & Company, Inc. ....................................... 50,000
McDonald Investments Inc., a KeyCorp Company .................. 50,000
Needham & Company, Inc. ....................................... 50,000
The Robinson-Humphrey Company, LLC ............................ 50,000
U.S. Bancorp Piper Jaffray Inc. ............................... 50,000
C.E. Unterburg, Towbin ........................................ 50,000
---------
Total........................................................ 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are not required to
purchase the common shares included in this offering without the approval of
legal matters by counsel and the fulfillment of other conditions specified in
the underwriting agreement. The underwriters are obligated to purchase all of
the common shares offered in this offering (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, Manitoba 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 with specific 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
the underwriters or their affiliates that are investment dealers or brokers
duly registered under the applicable laws of the province of Canada in which
the offer or sale is made through or with a prospectus filed with the
applicable Canadian securities regulatory authorities.
In the United States offering, the underwriters, represented by Salomon Smith
Barney Inc., Merrill Lynch & Co., and RBC Dominion Securities Corporation,
initially propose to offer some of the common shares directly to the public at
the public offering price indicated on the cover page of this prospectus, and
some of the common shares to securities dealers at the public offering price
less a concession not exceeding $0.63 per common share. The underwriters may
allow, and the securities dealers may reallow, a concession not exceeding
$0.10 per common share to 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
65
<PAGE>
price, less the underwriting discount. The underwriters may exercise this
option solely to cover over-allotments, if any, in connection with this
offering. If the underwriters exercise the option, each of them will be
obligated to purchase a number of additional shares approximately proportionate
to the underwriter's initial commitment unless released from doing so by the
terms of the underwriting agreement.
Creo, each of its officers and directors, and holders of significant amounts
of Creo common shares 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. may, in its sole discretion, release any of the securities bound by the
lock-up agreements at any time without notice.
At Creo's request, the underwriters have reserved up to 370,000 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 as these persons
purchase the reserved shares. Creo has agreed to indemnify the underwriters
against liabilities and expenses arising in connection with the sales of these
reserved common 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
was determined by negotiations between Creo, the selling shareholders and the
representatives. Among the factors considered in determining the initial public
offering price were 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. Creo 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.
Creo's common shares have been approved for quotation on the Nasdaq National
Market under the symbol "CREO" and have been conditionally approved for listing
on The Toronto Stock Exchange under the symbol "CEC." The listing on The
Toronto Stock Exchange is subject to Creo's fulfilling all of the requirements
of The Toronto Stock Exchange, including the distribution of the common shares
to a minimum number of public shareholders.
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.................. $ 1.05 $ 1.05 $ 1.05 $ 1.05
Total...................... $4,200,000 $4,200,000 $1,050,000 $1,837,500
</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 bids or
purchases of common shares made to prevent or retard 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
66
<PAGE>
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.
In accordance with 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. Exceptions, however, exist where the bid or
purchase is not made to create the appearance of active trading in, or raising
the price of, the common shares. These 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. Creo has 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 underwriters
against the liabilities and expenses listed in the underwriting agreement,
including liabilities under the Securities Act and Canadian provincial
securities legislation, or to contribute to payments the underwriters may be
required to make for 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.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of substantial numbers of common shares in the public market, or the
possibility of this sale, could adversely affect prevailing market prices for
our common shares.
Upon completion of the offering based on information as of March 31, 1999:
. a total of 32,027,854 of our common shares will be outstanding; and
. options to purchase a total of 4,595,232 common shares and warrants to
purchase a total of 24,598 common shares will be outstanding.
All of the 5,000,000 common shares sold in the offering in the United States
and Canada will be freely tradable without restriction under either the
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 these laws).
For the reasons given below, and subject to the restrictions set forth below,
we believe that the following restricted common shares and common shares
issuable upon exercise of options or warrants will be eligible for resale in
the public market at the following times and by the following persons:
<TABLE>
<CAPTION>
Eligibility for Sale
in the Public Market
----------------------
Shares
Underlying
Restricted Options and
Shares Warrants
---------- -----------
<S> <C> <C>
On the date of this prospectus........................... 13,636 6,018
181 days after the date of this prospectus............... 26,581,316 4,602,816
After 181 days after the date of this prospectus......... 432,902 10,996
</TABLE>
Each of our officers and directors and holders of significant amounts of Creo
common shares and substantially all of the non-Canadian holders of our common
shares have agreed with Salomon Smith Barney Inc. that they will not dispose of
or hedge any common shares for 180 days following the date of this prospectus.
Canadian Resale Restrictions
Under applicable Canadian securities laws, all of the common shares or common
shares issuable upon exercise of options held by Canadian residents may not be
sold or otherwise disposed of for value, except through or with 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 the shareholder or optionee resides. Creo will
become a reporting issuer in the provinces of British Columbia, Manitoba 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 are applying to the regulatory authorities in those
Canadian provinces in which holders of our common shares or options reside for
a discretionary exemption that would permit sales of their shares after 6
months from the date of the receipts for this prospectus. If this discretionary
exemption is not granted, we intend to take other steps to allow the common
shares to be sold after Creo has been a reporting issuer for six months.
If the discretionary exemption is not granted or other steps taken to allow
the sale of our common shares are unsuccessful, 12,251,377 common shares will
be eligible for resale one year after the date of this prospectus.
68
<PAGE>
Other Resale Restrictions
As a result of the lock-up agreements and the provisions of Rule 144 under
the Securities Act, common shares and common shares issuable upon exercise of
options held by non-Canadian residents will be available for sale in the public
market in the United States, subject in some cases to Rule 144 volume
limitations.
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 the
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 the sale is made.
Sales of restricted securities under Rule 144 must also satisfy 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.
We intend to file with the SEC a registration statement on Form S-8/S-3
within 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 issued under our 1996 Stock Option
Plan.
69
<PAGE>
LEGAL MATTERS
Legal matters relating to Canadian law, the offering and the validity of the
common shares offered in this offering are being passed upon for us by Getz
Prince Wells, Vancouver, British Columbia. Legal matters relating to U.S. law
and the offering are being passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. Legal matters relating
to Canadian law and the offering are being passed upon for the underwriters by
Osler, Hoskin & Harcourt, Calgary, Alberta. Legal matters relating to U.S. law
and the offering are being passed upon for the underwriters by Munger, Tolles &
Olson LLP, Los Angeles, California. 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 and in the registration statement in reliance upon the
report of KPMG LLP, independent chartered accountants, 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, 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 Creo 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, financial statement disclosures, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Price
Waterhouse would have caused Price Waterhouse to make reference to them in
their report on the financial statements for the relevant 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.
70
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC 450 Fifth Street, N.W., Washington, D.C. 20549, a
registration statement on Form F-1 under the Securities Act for 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. Some 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 modifies 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, as well as any reports, statements or other
information we file with the SEC at the SEC'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 SEC 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 these materials from the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed
rates. You may call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC 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 SEC.
These SEC 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. Following consummation of the offering, we will
be required to file reports and other information with the SEC under the
Securities Exchange Act and with the Securities Commissions of the Canadian
Provinces of British Columbia, Manitoba and Ontario. 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 (http://www.sedar.com), which is commonly known
by the acronym "SEDAR." The Canadian System for Electronic Document Analysis
and Retrieval is the Canadian equivalent of the SEC's Electronic Document
Gathering and Retrieval system, which is commonly known by the acronym "EDGAR."
Reports and other information about us should also be available for inspection
at the offices of The Toronto Stock Exchange.
As a "foreign private issuer" under the Securities Exchange Act, we intend to
provide to our shareholders proxy statements and annual reports prepared in
accordance with applicable Canadian law. Our annual reports will be available
within 140 days of the end of each fiscal year and will contain our audited
consolidated financial statements. We will also make available quarterly
reports containing unaudited summary consolidated financial information for
each of the first three fiscal quarters of each fiscal year. Our quarterly
reports will be filed within 60 days of the end of each of the three fiscal
quarters. We intend to prepare these financial statements in accordance with
Canadian GAAP and to include a reconciliation to U.S. GAAP in the notes to the
annual consolidated financial statements. 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.
71
<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 shares, 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 in Canada.
/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. Bennett
Director _________________________
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 (unaudited)
(note 1(l)) (note 1(l))
<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
----------- ----------- -------- ------- -------
Restated Restated (unaudited)
(note 1(l)) (note 1(l))
<S> <C> <C> <C> <C> <C>
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. Prior to the change in policy described in note 4, the
Company amortized computer and demo equipment using the declining balance
method at 30% per year.
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. The Company has no obligation to repay the funds
under these 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 sales of pre-press equipment 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 workflow systems is recognized in accordance with AICPA
Statement of Position 97-2, which allows revenue recognition once a sales
arrangement exists, delivery has occurred, the revenue is determinable and
collectibility is probable which is upon acceptance of the system by the
customer.
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.
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)
(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.
(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 Ended
September 30, March 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.
(m) Advertising costs
The Company expenses advertising costs as incurred.
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)
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
---- ---- ------- ------- -------
Gross profit............................ - - 17,646 7,941 14,336
Research and development................ - - 4,109 1,338 3,157
---- ---- ------- ------- -------
Net income.............................. $ - $ - $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>
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
======= ======= =======
</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)
4. Capital Assets
<TABLE>
<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-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)
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-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
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-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)
(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 exercise price of the share options granted during the six months
ended March 31, 1999 equals the estimated fair value of the Company's
common shares at the date of grant. This exercise price was determined
by reference to an independent valuation performed near the date of the
option grant which considered all available and relevant information
about the Company. In determining the exercise price, the Company also
considered the general business developments in the period since the
valuation was completed.
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)
7. Share capital (continued)
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>
(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 Six Months
September 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 Ended
September 30, March 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
======= ====== ======= ====== =======
</TABLE>
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)
The provision for (recovery of) income taxes consists of the following:
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
September 30, March 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
====== ====== ====== ====== =======
Income tax rate:
<CAPTION>
Six Months
Years Ended Ended
September 30, March 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
====== ====== ====== ====== =======
</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)
9. Income taxes (continued)
<TABLE>
<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).
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.
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)
11. Financial instruments (continued)
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>
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.
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)
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>
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.
The Company's accounting policy of using the straight line method of
amortization over 3 years for computer and demo equipment instead of the
declining balance at 30% per year has resulted in lower net income because
the straight line method results in three equal annual amortization charges
of 33 1/3% each, while the declining balance method results in an
amortization charge of 30% of the net book value of the asset in each year.
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)
As a result, in the first year of an asset acquisition, amortization from
an acquired asset will be higher under the straight line method of
amortization over 3 years as compared to the declining balance at 30% per
year.
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. There
is no authoritative literature in Canada that specifies GAAP for the
accounting for incentive shares issued to employees. In practice, this has
resulted in the development of two alternatives. They are the assignment of
value to these shares or of no value to these shares. The Company concluded
in 1998 that a change to the policy described in note 7(b) would be
preferable.
The effect of these differences would be:
<TABLE>
<CAPTION>
Years Ended Six Months
September 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-20
<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)
A reconciliation of retained earnings under Canadian GAAP to retained
earnings under U.S. GAAP is as follows:
<TABLE>
<CAPTION>
September 30
-------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Retained earnings under Canadian GAAP........... 7,896 3,194 10,825
Impact of change in amortization policy......... (732) - -
------ ------ ------
Retained earnings under U.S. GAAP............... 7,164 3,194 10,825
====== ====== ======
</TABLE>
(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.
Under Canadian GAAP, net income is adjusted for the impact of fully
diluted earnings per share by adding to net income the impact of imputed
income that is assumed to result from earnings on the proceeds from the
exercise of outstanding options and warrants. Under U.S. GAAP, no such
adjustment is made to net income in calculating diluted earnings per share.
In addition, under U.S. GAAP, for purposes of determining the weighted
average number of shares outstanding in this calculation the proceeds
deemed to be received on exercise of outstanding dilutive securities are
considered to be applied towards the repurchase of issued common shares.
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) Statement of cash flows
Under U.S. GAAP, no subtotal would be provided in the operating section
of the statement of cash flows.
F-21
<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)
(d) Impairment of long-lived assets
Under Canadian GAAP, an 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. Under U.S. GAAP, an impairment loss is
calculated as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. To March 31, 1999, no impairment losses have
been recorded under Canadian and U.S. GAAP and, accordingly, no material
differences due to these policies have arisen.
(e) 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.
Under U.S. GAAP, unincorporated joint ventures would be accounted for
under the equity method of accounting. The Company believes that it can
rely on the relief granted by the SEC from the application of U.S. GAAP for
joint ventures. The Company believes that the joint venture with Heidelberg
is an operating joint venture since it has a substantive existence through
a contractual arrangement which involves joint decision making, the
allocation of calculated profits and losses for the joint venture in
accordance with the joint ownership percentages, and a lack of limitation
on either party's exposure to the risks and rewards of ownership, and it
operates through separate sales, management, customer and product systems.
(f) 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.
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 Six Months
September 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>
F-22
<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 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 Six Months
September 30, Ended 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
</TABLE>
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.
(g) Supplementary information: allowance for doubtful accounts
Accounts receivable are disclosed net of allowance for doubtful accounts
as follows:
<TABLE>
<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, Manitoba and Ontario, Canada and the United
States, respectively, relating to an issue and sale of the Company's common
shares.
F-23
<PAGE>
[Description of Inside Back Cover]
The top half of the inside back cover features a large circle
encapsulating a smaller circle and three photos of groups of people. A pair of
lines forming cross-hares divides the circles at an angle and extends to divide
the page. Below and curving around the bottom portion of the large circle runs
a caption reading "The Creo team is a diverse and highly skilled group, drawn
together by a common passion for technological innovation and a shared focus on
customer success." Below the caption five lines of horizontal text read, "We
believe Creo has the most knowledgeable and experienced CTP customer support
organization in the industry. Our people are committed to building Creo's
reputation as an industry leader that puts customers first." Centered near the
bottom of the page is the CREO logo.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
Creo Products Inc.
Common Shares
[LOGO OF CREO PRODUCTS INC.]
--------
PROSPECTUS
July 28, 1999
--------
Salomon Smith Barney
Merrill Lynch & Co.
RBC Dominion Securities Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
