SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ending June 30, 2000
CREO PRODUCTS INC.
(Exact name of Registrant as specified in its charter)
3700 Gilmore Way
Burnaby, B.C. Canada V5G 4M1
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F x Form 40-F
--- ---
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934.)
Yes No x
--- ---
<PAGE>
Report to Shareholders
2000 Third Quarter Report
June 30, 2000
<PAGE>
To Our Shareholders
The three months ended June 30, 2000 marked another record quarter for Creo
Products Inc. We reported adjusted* earnings for the three months ended June
30, 2000 of $13.7 million or $0.28 per share (diluted - US GAAP) compared to
$4.7 million or $0.16 per share for the three months ended June 30, 1999.
* The adjusted earnings excludes the effect of goodwill and other intangible
asset amortization, business integration costs and the equity loss from the
investment in Japan. The adjusted earnings is not prepared in accordance with
generally accepted accounting principles (GAAP) because it excludes these
costs.
This quarter was a demanding quarter for our new CreoScitex operating division
requiring extra management bandwidth and attention. Since April 2000, we have
realigned our product road maps and integrated our global sales, marketing and
customer support organizations. We evolved principles of a new company culture
and negotiated an OEM agreement with Heidelberg. We are very proud of the
dedication our employees have shown in the integration of operations,
technologies and cultures. By April 2001, we expect most of the issues related
to the merger to be resolved and as to date the integration has progressed
faster than first anticipated.
We feel the events of this quarter better position us for strong, long-term
growth with the best overall team of people and products in the industry.
General. On April 4, 2000, Creo acquired certain assets of the Scitex Graphic
Business and shares of related subsidiaries for 13,250,000 shares of Creo.
This acquisition was valued at $508.0 million, which has been allocated to the
assets and liabilities acquired along with the related goodwill from the
acquisition. The acquisition was accounted for under the purchase method, with
the results from the operations of the Business acquired being included in the
consolidated financial statements of Creo commencing this quarter.
This is the first quarter that the Company's financial results include the
pre-print division of Scitex Corporation Ltd. acquired on April 4, 2000. The
following comparison is based on the results for the three months ended June
30, 2000 compared to the pro forma consolidation of the actual results of Creo
and the Scitex pre-print division for the quarter
<PAGE>
ended March 31, 2000. The Scitex pre-print division results are extracted from
Scitex Corporation's financial statements for the quarter ended March 31,
2000.
The Statement of Operations this quarter includes business integration costs
of $8.2 million, goodwill and other intangible asset amortization of $18.1
million, and the equity loss from the investment in Japan of $1.0 million. The
following is a pro forma summary of adjusted operations and earnings excluding
these items and has been prepared assuming the took place effective January 1,
2000 (in millions of U.S. dollars):
Three months ended
June 30 March 31
2000 2000
(unaudited) (unaudited)
Revenue $ 162.6 $ 169.8
Cost of sales 91.1 96.8
------- -------
Gross profit 71.5 73.0
Research and development, net 14.2 19.0
Sales and marketing 24.7 24.5
General and administration 17.2 16.7
Other (income) expense 0.1 (1.7)
------- -------
Adjusted operating income 15.3 14.5
Income tax expense (3.8) (4.8)
------- -------
Adjusted net operating income 11.5 9.7
Cash tax recovery from the amortization of
intellectual property 2.2 2.2
------- -------
Adjusted earnings $ 13.7 $ 11.9
======= =======
Adjusted earnings per share - basic under
Canadian and U.S. GAAP $ 0.30
=======
Adjusted earnings per share - fully diluted
under Canadian and U.S. GAAP $ 0.28
=======
Heidelberg Joint Venture. Effective May 18, 2000, the joint venture between
Heidelberg and Creo was terminated, and the companies entered into an original
equipment manufacture (OEM) relationship on those products that were formerly
in the joint venture. Under this OEM relationship, Heidelberg has the right to
continue to manufacture and sell these products for at least the next two
years.
<PAGE>
Under our agreement on the termination of the joint venture, all equipment
orders that were received up to May 17, 2000 were considered joint venture
business and will be accounted for as joint venture revenue when shipped. All
orders received after May 17, 2000 by Heidelberg will be accounted for as OEM
sales, whereby the company will record the full amount of the sale to
Heidelberg. Under this OEM relationship, Heidelberg will no longer continue to
fund R&D expenses on these products.
During Q3, all the shipments of these products were joint venture sales, since
all the orders were received prior to May 18, 2000. If these joint venture
shipments had been accounted for as OEM sales, the revenue of the company
would have increased by $11.5 million, offset by increased cost of sales of
$5.2 million and a reduction in R&D funding of $0.4 million resulting in a net
increase in operating income of $5.9 million.
Revenues. Total revenue for Q3 decreased $7.2 million to $162.6 million from
$169.8 million for the three months ended March 31, 2000 (Q2). This was mainly
due to a decrease in equipment revenue from the joint venture with Heidelberg
of $11.9 million offset by an increase in the non-joint venture products of
$4.7 million. Although the revenue from the joint venture in Q3 was low, we
are entering our fourth quarter with a record level of sales backlog for these
products.
Gross Profit. The gross margin in Q3 increased to 44% from 43% in Q2, due to
our product mix this quarter. In Q3 we sold more large format CTP's and
workflow systems as compared to Q2. The gross profit in Q3 decreased $1.5
million from that of Q2 due to a decrease in overall revenue.
Research and development. Research and development expenses decreased $4.8
million from $19.0 million in Q2 to $14.2 million in Q3. This decrease was due
mainly to a $2.5 million increase in research and development tax credits
resulting from new tax legislation in Canada and a $1.6 million decrease in
R&D expenses in Israel.
Sales and marketing. Sales and marketing expenses increased $0.2 million from
$24.5 million in Q2 to $24.7 million in Q3, due to the increase in sales
levels of the non-joint venture products.
<PAGE>
General and administration. General and administration expenses increased by
$0.5 million from $16.7 million in Q2 to $17.2 million in Q3. This increase
was due mainly to an increase in legal and audit fees.
Income taxes. Income tax expense as a percentage of pre-tax income decreased
from 33% in Q2 to 25% in Q3. This decrease was a result of the operating
structure on the acquisition from Scitex, which resulted in more of our
operations being taxed in jurisdictions with lower tax rates.
The cash tax recovery from the amortization of intellectual property is the
benefit the company will receive for the next five years as a result of the
Scitex acquisition. This intellectual property was acquired through the issue
of shares and therefore did not involve cash, but these tax savings result in
an actual cash tax savings to the company.
Business integration expenses. The business integration expenses consist
mainly of expenses that are related to integration of the Scitex business,
including closing of offices and the termination of the joint venture with
Heidelberg. Management anticipates additional integration expenses in the
future as decisions are made on products, computer systems and certain other
activities that are necessary to integrate the business.
Goodwill and other intangible assets amortization. The preliminary amounts
assigned to goodwill and other intangible assets on the acquisition of the
Scitex pre-print division, Intense Software Inc. and Carmel Graphics Systems
Inc. totals $383.7 million. Under Canadian GAAP, this amount is amortized over
five years. Under U.S. GAAP, the in-process R&D is expensed immediately and
the residual amount is amortized over five years.
Equity loss. In July 2000, we increased our ownership of Nihon CreoScitex of
Japan to 51% and we will consolidate this company starting in the quarter
ending September 30, 2000. In October 2000, we have an option to increase our
ownership to 81% and take over operating control of this company.
<PAGE>
Share capital. As at June 30, 2000, the company had 46,969,587 common shares
outstanding and 6,341,661 options outstanding. The share capital used for the
June 30, 2000 earnings per share calculations are as follows:
Per Pro Forma
Per Consolidated Statement Summary of
of Operations Adjusted Operations
Three Nine Three
months months months
ended ended ended
June 30 June 30 June 30
2000 2000 2000
(unaudited) (unaudited) (unaudited)
Basic shares outstanding 45,948,027 37,010,710 45,948,027
Fully diluted - Canadian GAAP
Net earnings (loss) / Adjusted
earnings $ (10,211,000) $ 2,145,000 $ 13,715,000
Plus: income from options - 3,000 906,000
------------ ---------- -----------
$ (10,211,000) $ 2,148,000 $ 14,621,000
============ ========== ===========
Basic shares outstanding 45,948,027 37,010,710 45,948,027
Plus: dilutive options - 48,000 6,364,555
------------ ---------- -----------
Fully diluted shares
outstanding 45,948,027 37,058,710 52,312,582
============ ========== ===========
Fully diluted EPS $ (0.22) $ 0.06 $ 0.28
============ ========== ===========
Diluted - US GAAP
Net loss / Adjusted
earnings (48,401,000) (36,045,000) 13,715,000
Basic shares outstanding 45,948,027 37,010,710 45,948,027
Plus: dilutive options - - 2,848,397
------------ ---------- -----------
Diluted shares outstanding 45,948,027 37,010,710 48,796,424
============ ========== ===========
Diluted EPS $ (1.05) $ (0.97) $ 0.28
============ ========== ===========
Amos Michelson Tom Kordyback
Chief Executive Officer Chief Financial Officer
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the U.S. Private Securities Litigation Reform Act
of 1995. These statements are based on management's current expectations and
beliefs and are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those described in the forward-
looking statements.
These risks and uncertainties include the following: (1) The expected
advantages for Creo of the transition to an OEM arrangement with Heidelberger
Druckmaschinen AG may be less than expected and may adversely affect Creo's
operating results and financial performance; (2) the expected cost-savings and
synergies from the combination of Creo's business with the Scitex Business
cannot be fully realized or take significantly longer to realize than
expected; (3) revenues from the Scitex Business are lower than expected or
customer attrition and business disruption following the acquisition are
greater than expected; (4) the integration of the Scitex Business into Creo's
operations is more difficult, time-consuming or expensive than anticipated, or
the attrition rate of key employees of the combined business is greater than
expected; (5) technological changes or changes in the competitive environment
adversely affect the products, market share, revenues or margins of the
combined business; or (6) changes in general economic, financial or business
conditions adversely affect the combined business or the markets in which it
operates. These risks and uncertainties as well as other important matters are
described under the caption "Information Regarding Forward-looking Statements"
and elsewhere in our Annual Report on Form 20-F for the fiscal year ended
September 30, 1999, as filed with the U.S. Securities and Exchange Commission.
We do not assume any obligation to update the forward-looking information
contained in this report.
<PAGE>
Creo Products Inc.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
June 30 June 30
2000 1999
(unaudited) (unaudited)
Assets
Current assets
Cash and cash equivalents $ 61,850 $ 42,621
Accounts receivable 153,335 30,137
Other receivables 53,948 5,270
Inventories 140,533 30,232
Income taxes receivable 4,064 -
Future income taxes 18,068 -
------- -------
431,798 108,260
Investments and other assets 37,572 -
Capital assets 102,911 38,209
Goodwill and other intangible assets 365,600 -
------- -------
$937,881 $146,469
======= =======
Liabilities
Current liabilities
Accounts payable $ 84,177 $ 8,428
Accrued liabilities 89,789 12,612
Income taxes payable - 2,792
Deferred revenue and deposits 51,113 21,321
Current portion of long-term debt - 296
------- -------
225,079 45,449
Long-term debt - 6,438
Future income taxes 25,134 -
------- -------
250,213 51,887
Shareholders' Equity
Share capital 661,605 79,045
Contributed surplus 2,164 -
Retained earnings 23,899 15,537
------- -------
Total shareholders' equity 687,668 94,582
------- -------
$937,881 $146,469
======= =======
<PAGE>
Creo Products Inc.
Consolidated Statements of Operations and Retained Earnings
(In thousands of U.S. dollars except earnings per share)
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
(unaudited)(unaudited)(unaudited)(unaudited)
Revenue
Product revenue $ 115,338 $ 36,796 $ 212,909 $ 101,690
Service revenue 36,043 7,524 55,877 20,687
Consumables revenue 11,193 - 11,193 -
-------- -------- -------- --------
162,574 44,320 279,979 122,377
Cost of sales 91,071 23,669 153,115 64,357
-------- -------- -------- --------
71,503 20,651 126,864 58,020
-------- -------- -------- --------
Research and development, net 14,241 4,100 26,601 9,375
Sales and marketing 24,703 7,625 42,982 22,021
General and administration 17,192 2,591 23,582 6,574
Other (income) expense 38 (1,320) (2,076) (727)
-------- -------- -------- --------
Operating income before undernoted
items 15,329 7,655 35,775 20,777
Business integration costs 8,172 - 8,172 -
Goodwill and other intangible assets
amortization 18,124 - 18,124 -
-------- -------- -------- --------
Earnings (loss) before income taxes
and equity loss (10,967) 7,655 9,479 20,777
Income tax expense (recovery) (1,723) 2,943 6,367 8,434
Equity loss 967 - 967 -
-------- -------- -------- --------
Net earnings (loss) $ (10,211) $ 4,712 $ 2,145 $ 12,343
======== ======== ======== ========
Earnings (loss) per common share
- Basic, Canadian GAAP $ (0.22) $ 0.17 $ 0.06 $ 0.45
======== ======== ======== ========
- Basic, U.S. GAAP (note 2) $ (1.05) $ 0.17 $ (0.97) $ 0.45
======== ======== ======== ========
- Fully diluted, Canadian GAAP $ (0.22) $ 0.15 $ 0.06 $ 0.41
======== ======== ======== ========
- Diluted, U.S. GAAP (note 2) $ (1.05) $ 0.16 $ (0.97) $ 0.43
======== ======== ======== ========
Retained earnings, beginning
of period $ 34,110 $ 10,825 $ 21,754 $ 3,194
Net earnings (loss) (10,211) 4,712 2,145 12,343
-------- -------- -------- --------
Retained earnings, end of period $ 23,889 $ 15,537 $ 23,899 $ 15,537
======== ======== ======== ========
<PAGE>
Creo Products Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
(unaudited)(unaudited)(unaudited)(unaudited)
Cash provided by (used in) operations:
Net earnings (loss) $ (10,211) $ 4,712 $ 2,145 $ 12,343
Items not affecting cash:
Amortization 20,981 1,691 24,800 4,289
Equity loss 967 - 967 -
Future income taxes (1,212) 181 (1,877) (26)
Other - (13) 10 (49)
-------- -------- -------- --------
10,525 6,571 26,045 16,557
Changes in non-cash working capital:
Accounts receivable 5,491 1,317 (5,146) (6,310)
Other receivables (9,122) (1,380) (11,650) (2,500)
Inventories 1,317 (3,171) (7,745) (5,081)
Accounts payable 33,460 1,847 35,446 3,074
Accrued liabilities (26,174) 1,712 (27,555) 88
Income taxes (8,324) 659 (7,550) 1,906
Deferred revenue and deposits (1,986) 534 (28) 7,644
-------- -------- -------- --------
(5,338) 1,518 (24,183) (1,179)
-------- -------- -------- --------
5,187 8,089 1,862 15,378
Cash provided by (used in) investing:
Business acquisitions (note 1) (9,886) - (9,886) -
Investments and other assets (67) - (37,138) -
Purchase of capital assets (8,522) (2,683) (17,555) (8,527)
Other 1,094 11 1,094 224
-------- -------- -------- --------
(17,381) (2,672 (63,485) (8,303)
Cash provided by (used in) financing:
Proceeds from shares issued 19,959 128 24,804 20,191
Share-purchase loans 161 - 2,254 -
Repayment of long-term debt - (74) (6,660) (869)
-------- -------- -------- --------
20,120 54 20,398 19,322
-------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents 7,926 5,471 (41,225) 26,397
Cash and cash equivalents,
beginning of period 53,924 37,150 103,075 16,224
-------- -------- -------- --------
Cash and cash equivalents,
end of period $ 61,850 $ 42,621 $ 61,850 $ 42,621
======== ======== ======== ========
Supplementary information:
Taxes paid $ (55) $ 814 $ 5,035 $ 2,794
Interest paid 6 110 145 373
Non-cash transactions:
Common shares issued for business
acquisitions $ 500,763 $ - $ 500,763 $ -
<PAGE>
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars)
1. Business acquisitions
a. The Graphic Arts Business of Scitex Corporation Ltd. ("Scitex Business")
On January 17, 2000, the Company entered into an asset purchase agreement with
Scitex Corporation Ltd. ("Scitex") to acquire the Scitex Business in exchange
for 13,250,000 common shares of the Company. Upon completion of this
transaction, Scitex entered into a five-year standstill agreement which,
amongst other things, included restrictions on acquiring additional shares of
the Company, as well as customary transfer, voting and other restrictions.
The Scitex Business includes shares and assets of various Scitex subsidiaries,
and all of the tangible and intangible assets used in the Scitex Business. In
addition, the Company assumed certain liabilities of the Scitex Business. The
Company completed the acquisition on April 4, 2000.
The acquisition of the Scitex Business has been accounted for using the
purchase method of accounting and the results of operations have been
consolidated since the completion of acquisition. The preliminary purchase
price allocation has been assigned to the specific assets acquired and
liabilities assumed based on estimates and is subject to revision:
Cash $ 18,575
Current assets 250,875
Capital assets 51,238
Other assets 2,495
Goodwill and other tangible assets 364,797
--------
687,980
Current liabilities (168,005)
Future income taxes (11,947)
--------
Purchase price $ 508,028
========
b. Intense Software Inc.
On May 30, 2000, the Company acquired the assets of Intense Software Inc. for
cash of $934 and 467,654 shares of the Company, aggregating approximately $13
million. The majority of the preliminary purchase price allocation has been
assigned to goodwill and other intangibles based on estimates and is subject
to revision. Intense Software Inc. develops and markets software for graphic
designers, business users and printing professionals.
<PAGE>
c. Carmel Graphics Systems Inc.
On May 11, 2000, the Company acquired 100% of the issued shares of Carmel
Graphics Systems Inc. for cash of $4,271 and 115,835 shares of the Company,
aggregating approximately $8.0 million. The majority of the preliminary
purchase price allocation has been assigned to goodwill and other intangibles
based on estimates and is subject to revision. Carmel Graphics Systems Inc.
supplies the business-to-business marketplace with customizable hardware and
software that can be easily integrated as portals into users' corporate
websites. Users typically include desktop publishing, prepress, and print-on-
demand professionals.
2. 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 statements been
prepared in accordance with generally accepted accounting principles in the
United States (U.S. GAAP).
Under Canadian GAAP, the Company amortizes purchased in-process research and
development on a straight-line basis over five years. Under U.S. GAAP, the
Company must expense purchased in-process research and development immediately
upon acquisition since it has no alternative future use. The effect of the
difference would be:
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
(unaudited)(unaudited)(unaudited)(unaudited)
Net earnings (loss) under
Canadian GAAP $ (10,211) $ 4,712 $ 2,145 $ 12,343
Goodwill amortization 45,939 - 45,939 -
Income tax recovery (7,749) - (7,749) -
-------- -------- -------- --------
Net earnings (loss) under
U.S. GAAP $ (48,401) $ 4,712 $(36,045) $ 12,343
======== ======== ======== ========
The income tax recovery is applicable to goodwill amortization.
<PAGE>
Creo Products Inc.
3700 Gilmore Way
Burnaby, BC
V5G 4M1 CANADA
www.creo.com
Contact:
Tracy Rawa, Investor Relations
Tel: +1-604-451-2700
Fax: +1-604-437-9891
Email: [email protected]
