Form 20- F
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
Creo Products Inc.
(Exact name of registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
3700 Gilmore Way
Burnaby, BC Canada V5G 4M1
(Address of principal executive offices)
32,418,694 common shares
(Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 Y
--- ---
<PAGE>
TABLE OF CONTENTS
PART ONE . . . . . . . . . . . .......... . . . . . . . . . . . . . . . .4
1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 4
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . 4
Company Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Products ......................................................... 5
Product Assembly. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Research and Product Development. . . . . . . . . . . . . . . . . . 5
Alliances...........................................................6
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . 7
Customers and Customer Support. . . . . . . . . . . . . . . . . . . 8
Geographic Markets. . . . . . . . . . . . . . . . . . . . . . . . . 8
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . 9
Business and Growth Strategy. . . . . . . . . . . . . . . . . . . . 9
Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Negotiations........................................................9
2. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . 10
Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..10
3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. CONTROL OF THE REGISTRANT. . . . . . . . . . . . . . . . . . . . . . 10
5. NATURE OF THE TRADING MARKET . . . . . . . . . . . . . . . . . . . . 11
6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS. .13
7. TAXATION. .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .13
Canadian Federal Income Tax Considerations. . . . . . . . . . . . . 13
8. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . 15
Five-Year Consolidated Financial Information. . . . . . . . . . . . 15
Quarterly Information . . . . . . . . . . . . . . . . . . . . . . . 16
9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . ...17
Overview............................................................17
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . 22
Results of Operations: Year ended September 30, 1999 to years ended
September 30, 1998 and September 30, 1997. . . . . . . . . . . .. 22
9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK . . . . . 24
10. DIRECTORS AND OFFICERS OF REGISTRANT. . . . . . . . . . . . . . . . 24
11. COMPENSATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . . . 28
12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES. . . 29
13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS. . . . . . . . . . . 30
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . ............31
<PAGE>
14. DESCRIPTION OF SECURITIES TO BE REGISTERED. . . . . . . . . . . . . 31
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . ............31
15. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . 31
16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS .. . . . . . . . . . . . . . . . . 31
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........31
17. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 31
18. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 31
19. FINANCIAL STATEMENTS AND EXHIBITS . . . . . . . . . . . . . . . . . 31
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibits............................................................31
<PAGE>
PART ONE
1. DESCRIPTION OF BUSINESS
Creo Products Inc. ("Creo") is a leading developer, manufacturer and
distributor of comprehensive 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.
Industry Overview
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-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 the industry study, Defining and Segmenting Commercial Printing,
prepared in November 1999 by State Street Consultants Inc., United States
revenues of commercial printers in 1998 exceeded $82 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.
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 us 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.
Company Overview
Creo is a leading developer, manufacturer and distributor of a complete family
of 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. In 1994,
we delivered the first high speed, 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
<PAGE>
the first digital proofing device that allows printers to produce
accurate, high-quality digital proofs with the same imaging equipment used to
image plates.
Since 1994, more than 1,200 of our computer-to-plate imaging systems
have been installed in 32 countries. Many of the largest commercial,
catalog and publication printers in North America use Creo computer-to-plate
solutions. 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 have been awarded four Graphic Arts Technology Foundation InterTech
Technology Awards, given for products predicted to have a major effect on the
graphic communications industry. The Graphic Arts Technology Foundation, of
which Creo is a member, is a member-supported, nonprofit technical and
educational organization serving the graphic communications industries. An
entry fee of $1,000 must be paid to be considered for each award.
Products
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:
(i) input devices, which digitize film separations;
(ii) workflow software, which manages the flow of data as it is
processed and prepared for output;
(iii)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
(iv) 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 printing plates, eliminating
the entire film- and flat-creation process. The plates are then developed and
mounted on the press for printing.
In the year ended September 30, 1999, our workflow software accounted
for 24.6% or $43.8 million of total revenue and our output devices accounted
for 59.1% or $105.4 million of total revenue. This data is not available for
the year ended September 30, 1998 and September 30, 1997. Product sales were
not reviewed by management in this manner.
Product 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 two of our three production facilities in
British Columbia. We also produce a limited number of our 4-page and 8-page
Trendsetter computer-to-plate output devices for distribution in North
America. We perform complex electro-optical and electro-mechanical
assemblies, as well as final testing and system integration at these
facilities. Of these core competencies, we subcontract most of the
electro-mechanical assemblies and buy all components, including optical
components, boards, cables, machines parts, and sheet metal.
The majority of our 4-page and 8-page Trendsetter computer-to-plate
output devices distributed by the joint venture are currently assembled in
Heidelberg's manufacturing plant at Kiel, Germany more particularly described
in the following section.
We manufacture products on orders and purchase components on forecast.
Over the last 5 years, we have built a competitive and highly responsive
network of vendors worldwide.
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
<PAGE>
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 years ended September 30,
1997, 1998 and 1999, our total research and product development expenditures
were $14.9 million, $19.1 million and $31.3 million, respectively.
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, 1996 through September 30, 1999, we
received an aggregate of $31.8 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.
Alliances
In October 1997, we established a joint venture with Heidelberger
Druckmaschinen AG ("Heidelberg") to develop, manufacture, market and
distribute its 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.
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. We expect to continue to realize significant benefits from the
joint venture with Heidelberg. These include:
(i) access to Heidelberg's worldwide customer base of small and mid-size
commercial printers, through its established marketing and distribution
network;
(ii) access to Heidelberg's extensive service and customer support
organization outside North America;
(iii)shared funding of some of our research and development projects relating
to joint venture computer-to-plate products; and
(iv) cost-effective manufacture of some computer-to-plate products by
Heidelberg at its manufacturing facilities in Kiel, Germany.
Under the agreement with Heidelberg:
(i) each party provides goods and services to the joint venture at cost, as
defined in the agreement;
(ii) in general, costs and profits are shared equally;
(iii)Heidelberg is the principal manufacturer of Creo's 4-page and 8-page
Trendsetter output devices, although Creo continues to manufacture a
limited quantity of these products at its facilities in British
Columbia;
(iv) Creo has the right to be the sole supplier of thermal imaging heads for
use with joint venture computer-to-plate products;
(v) 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;
(vi) prices for joint venture products are established jointly;
<PAGE>
(vii)Heidelberg may not sell computer-to-plate products of other manufacturers
as long as it markets and distributes joint venture products, and Creo
may not use third parties to market its 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;
(viii)in North America, Creo provides customer service and support for its
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;
(ix) we are the exclusive provider of research and development for joint
venture computer-to-plate products and related consumables, and work
jointly with Heidelberg on research and development relating to workflow
products; and
(x) 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.
Sales and Marketing
We sell and support our products through both direct and indirect sales
organizations. Our direct sales organization consists of over 125 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.
<PAGE>
Customers and Customer Support
More than 1,200 of our computer-to-plate systems have been installed in
32 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 fiscal 1999 and 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 its 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.
Geographic Markets
We operate in a single reportable operating segment relating to digital
prepress equipment. We generated revenue from the development and sale of
digital prepress equipment to customers in the following geographic segments:
Years Ended September 30,
1999 1998 1997
(in thousands of US dollars)
Canada $ 4,059 $ 3,193 $ 3,134
U.S. 105,953 71,927 62,441
Europe 56,252 41,655 15,718
Japan 2,647 5,316 9,936
Other 9,412 6,757 4,354
-------- -------- --------
$178,323 128,848 95,583
======== ======== ========
Competition
The market for digital prepress equipment and systems is highly
competitive. It is changing rapidly and is affected by changes in customer
requirements, new product introductions and other market activities of
industry participants. We face direct competition from other manufacturers of
prepress input and output systems. Our principal direct competitors in the
prepress automation systems market are Scitex Corporation Ltd., Agfa-Gevaert
N.V., Dainippon Screen Mfg. Co. Ltd., Barco N.V. and Cymbolic Sciences
International, Inc. 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
<PAGE>
from recent technological innovations that could make it an economic
alternative to offset printing for low volume print runs.
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,
invention and improvements important to the development of our business. We
also rely on a combination of copyright, trademark and trade secret rights,
confidentiality agreements and licensing arrangements.
As at September 30, 1999, Creo held 40 U.S. and foreign patents, and had
74 U.S. and 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 2018.
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.
Business and Growth 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 and newspaper 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 digital workflow
and computer-to-plate products. Our focus on technology leadership has been
critical in building our customer base, and our close cooperation 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 digital workflow and
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
<PAGE>
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.
Human Resources
As at September 30, 1999, we employed 1,486 people. Of these, 447 were
engaged in research and product development, 390 in manufacturing, 377 in
customer support activities, 272 in marketing and sales and 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.
Negotiations
As of January 18, 2000, Creo entered into an Asset Purchase Agreement with
Scitex Corporation Ltd. ("Scitex") of Herzlia, Israel, and one of its
subsidiaries, Scitex Development Corp. (the "Sellers"), to acquire all of the
assets of the Sellers' digital prepress and print-on-demand businesses, other
than certain excluded assets (the "Scitex Business")(the "Acquisition"). Creo
will pay for the Scitex Business by issuing 13,250,000 Creo common shares (the
"Share Issuance" or the "Consideration"), representing approximately 26.1% of
the outstanding shares of Creo on a fully diluted basis after giving effect to
the Share Issuance.
Creo's Board of Directors and Management believe that the combined business
will be able to capitalize on strong synergies in technology, products,
service and distribution to create a leading provider of digital prepress
solutions for the graphic arts industry.
Unter the rules of the Nasdaq National Market ("NASDAQ") and the Toronto Stock
Exchange (the "TSE") on which Creo's common shares are traded, the Share
Issuance must be approved by Creo shareholders. This resolution will be voted
on by Creo shareholders at the Annual General and Special meeting on March 30,
2000 at 2:00 pm. The closing of the Acquisition is also subject to regulatory
approvals. Upon completion of the transaction, Scitex will enter into a
five-year standstill agreement, which, amongst other things, includes
restrictions on acquiring additional Creo shares, as well as customary transfer,
voting and other restrictions. The new organization will bring together
approximately 4,200 employees worldwide, of which 1,200 are in Israel, 1,250 in
Canada and 1,750 in operations in the USA, Latin America, Europe, Asia/Pacific,
Japan, the Middle East and Africa.
The closing of the Acquisition will take place on the first day of the month
following the month in which all closing conditions, including shareholder and
regulatory approvals, are satisfied or waived.
2. DESCRIPTION OF PROPERTY
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.
<PAGE>
As at September 30, 1999, the Delta facility and one of the two Burnaby
facilities were mortgaged to a Canadian chartered bank as security for debt.
Subsequent to year-end, the debt was repaid and the mortgage discharged. 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.
3. LEGAL PROCEEDINGS
Creo is from time to time involved in certain routine litigation
incidental to our business. We do not believe that the results of such
litigation will have a materially adverse effect on our business or financial
condition.
4. CONTROL OF THE REGISTRANT
The following table sets forth the number of common shares beneficially
owned or controlled by (1) any person who is know to Creo to own beneficially
more than 10% of Creo's shares, and (2) all directors and executive officers
as a group as at February 17, 2000:
Common Shares
Beneficially Owned Percentage of
Name and Address or Controlled (1) Outstanding Shares
John Bu 5,314,336(2) 16.4
Goldman Sachs & Co.
Short Hills, New Jersey
All directors and officers 16,827,727 50.7
as a group (consisting of
19 persons)
- --------------------
(1) The information as to shares beneficially owned or over which control or
direction is exercised, not being within the knowledge of Creo, has been
furnished by each of the nominees. As used in this table, "beneficial
ownership" means sole or shared power to vote or direct the voting of the
common shares, or the sole or shared power to dispose, or direct a
disposition, of the common shares. A person who has a right to acquire a
common share within 60 days of September 30, 1999 has "beneficial ownership"
of that common share. More than one person may be deemed to have beneficial
ownership of the same securities.
(2) Includes common shares held by the following entities affiliated with The
Goldman Sachs Group, Inc: GS Capital Partners II, L.P. (3,334,368 shares);
GS Capital Partners II Offshore, L.P (1,325,549 shares); Goldman, Sachs &
Co. Verwaltungs GmbH (122,986 shares); Bridge Street Fund 1995, L.P. (281,382
shares); and Stone Street Fund 1995, L.P. (250,051 shares). Mr. Bu
disclaims any beneficial interest in any of these common shares.
5. NATURE OF THE TRADING MARKET
Our common shares are listed on The Toronto Stock Exchange under the
symbol CRE and the Nasdaq National Market Symbol under the symbol CREO.
The following table sets forth the high and low sales prices of the
Shares on the Toronto Stock Exchange and the Nasdaq Stock Market's National
Market for each calendar quarter during the periods indicated:
TSE NASDAQ
(All amounts in (All amounts in
Canadian dollars) US dollars)
High Low High Low
July 29, 1999 to Sept 30, 1999 $41.60 $26.00 $28.38 $16.00
<PAGE>
The following graph compares the cumulative return, as at September 30,
1999, of $100 invested on August 5, 1999, the date of Creo's initial public
offering, in Creo common shares, with the total cumulative return of the TSE
300 Corporate Index and the NASDAQ Total Return Index for the same period,
assuming reinvestment of all dividends.
(For the purpose of this EDGAR filing, this graph has been replaced with a
table outlining the figures represented on the graph. The x-axis consists of
the date, while the y-axes are made up of the share prices.)
Creo Compared With Creo Compared with
the TSE 300 the NASDAQ
Total Return Index
Date Creo TSE 300 Creo NASDAQ
(amounts in (amounts in)
Canadian dollars) (US dollars)
08/05/99 100.00 100.00 100.00 100.00
08/06/99 103.58 99.60 101.40 98.77
08/09/99 110.92 99.38 109.09 98.28
08/10/99 107.34 98.32 105.59 97.24
08/11/99 109.04 100.04 106.29 98.04
08/12/99 116.76 100.12 115.38 98.27
08/13/99 115.25 101.43 115.38 99.78
08/16/99 115.82 102.01 115.74 99.78
08/17/99 113.94 102.12 113.99 101.05
08/18/99 109.79 101.97 108.39 100.35
08/19/99 111.11 102.77 111.19 99.32
08/20/99 113.75 103.22 112.94 99.61
08/23/99 115.82 103.89 113.64 100.70
08/24/99 115.82 103.81 113.29 100.63
08/25/99 124.11 104.58 121.68 100.47
08/26/99 123.73 103.66 120.28 100.25
08/27/99 125.24 102.89 124.48 99.20
08/30/99 123.35 101.93 123.08 96.43
08/31/99 123.35 100.93 122.03 96.93
09/01/99 122.22 101.04 122.03 97.42
09/02/99 122.41 100.01 121.68 95.88
09/03/99 124.29 101.44 122.38 97.64
09/07/99 126.37 102.20 127.27 97.02
09/08/99 135.40 102.15 134.27 96.11
09/09/99 145.01 103.18 141.96 95.91
09/10/99 154.43 103.72 154.90 96.32
09/13/99 151.04 103.06 153.85 95.93
09/14/99 154.43 103.35 155.24 94.65
09/15/99 148.78 102.27 150.35 94.79
09/16/99 139.36 101.61 139.86 93.62
09/17/99 141.24 102.26 143.36 93.73
09/20/99 145.01 102.06 145.45 93.92
09/21/99 142.56 100.16 142.66 92.54
09/22/99 138.79 99.71 139.86 92.74
09/23/99 135.22 98.63 136.36 92.34
09/24/99 129.76 97.93 135.66 92.55
09/27/99 133.71 99.84 132.87 92.15
09/28/99 126.18 99.58 125.87 91.96
09/29/99 123.54 99.60 124.48 92.58
09/30/99 141.24 100.74 137.42 93.44
<PAGE>
We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain any future earnings for the development and
expansion of our business, and therefore we do not currently expect to pay
cash dividends in the foreseeable future.
We believe that there are a substantial number of shareholders who are
residents in the United States.
6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
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 "Item 7: Taxation - Canadian Federal Income Tax
Considerations."
7. TAXATION
The following is a summary of the material anticipated tax consequences
of an investment by an investor not resident in Canada, under Canadian tax
laws.
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, the current administrative and assessing policies of the
Canada Customs and Revenue Agancy, 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.
Canadian Federal Income Tax Considerations
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 reduced by 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.
<PAGE>
Disposition of Our Common Shares
A holder of common shares will not be required to pay tax for a capital
gain on the disposition of a common share unless the common share is "taxable
Canadian property" of the holder as defined by the 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 a U.S. resident holder, the
Canada-U.S. Income Tax Treaty will generally exempt such 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
U.S. resident holder who had a "permanent establishment" or "fixed base"
available in Canada during the 12 months immediately preceding the disposition
of the common share where the common share constitutes business property and
where any gain on the disposition of the share is attributable to such
permanent establishment or fixed base.
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.
All non-Canadian shareholders who dispose of "taxable Canadian property" are
required to file a Canadian tax return reporting their gain or loss on the
disposition and, subject to an applicable tax treaty exemption, pay the
Canadian federal tax due on the disposition. The purchaser is obligated to
withhold 33 1/3% of the gross proceeds on the acquisition of the common shares
from a non-Canadian shareholder except to the extent of the certificate limit
on a clearance certificate obtained by the shareholder under Section 116 of
the Income Tax Act.
A Section 116 clearance certificate is required even where the gain is exempt
from Canadian income tax under a provision of an income tax treaty with
Canada. If the non-Canadian shareholder does not provide a Section 116
clearance certificate to the purchaser, then the purchaser will be required to
withhold and remit to the Canada Customs and Revenue Agancy 33 1/3% of the
proceeds on account of the non-Canadian shareholder's tax obligation, on or
before the end of the month following the date of sale. The shareholder may
then file a Canadian tax return to obtain a refund of excess withholding tax,
if any.
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
and adjusted for any deemed dividends, 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.
<PAGE>
8. SELECTED FINANCIAL DATA
Five-Year Consolidated Financial Information
The following table sets forth selected financial information for the
periods indicated. This selected consolidated financial data should be read
together with the "Management Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements,
including the related notes, included elsewhere in this annual report.
Year Ended September 30,
Statements of Operations Data: 1995 1996 1997 1998 1999
(in thousands of U.S. dollars, except per share data)
Amounts under Canadian GAAP
Revenue:
Product revenue $19,821 $46,210 $91,669 $114,652 $148,433
Service revenue 14 1,728 3,914 14,196 29,890
------- ------- ------- -------- --------
Total revenue 19,835 47,938 95,583 128,848 178,323
Cost of sales 14,867 31,766 53,634 71,217 94,465
------- ------- ------- -------- --------
Gross profit 4,968 16,172 41,949 57,631 83,858
Research and development, net 5,920 10,683 12,772 6,931 13,805
Sales and marketing 4,620 8,757 14,619 22,417 30,373
General and administration 2,502 4,092 6,271 8,937 10,144
------- ------- ------- -------- --------
Earnings (loss) from operations(8,074) (7,360) 8,287 19,346 29,536
Other income (expense) 424 5 48 (1,580) 1,358
------- ------- ------- -------- --------
Earnings (loss) before income
taxes (7,650) (7,355) 8,335 17,766 30,894
Income tax expense (recovery) (1,090) (112) 2,498 6,676 12,334
Earnings (loss) from discontinued
operations 1,237 -- -- -- --
------- ------- ------- -------- --------
Net earnings (loss) $(5,323) $(7,243) $ 5,837 $ 11,090 $ 18,560
------- ------- ------- -------- --------
Basic earnings (loss) per
share $ (0.30) $ (0.34) $ 0.26 $ 0.44 $ 0.65
======= ======= ======= ======== ========
Fully diluted earnings (loss)
per share $ (0.30) $ (0.34) $ 0.24 $ 0.41 $ 0.59
======= ======= ======= ======== ========
Shares used in per share calculation:
Basic 17,848 21,209 22,769 25,025 28,419
======= ======= ======= ======== ========
Fully diluted 17,848 21,209 30,428 30,502 32,376
======= ======= ======= ======== ========
Other Financial Data:
Research and development,
gross $ 9,238 $14,698 $14,877 $ 19,123 $ 31,269
Research and development,
funding 3,318 4,015 2,105 12,192 17,464
------- ------- ------- -------- --------
Research and development,
net $ 5,920 $10,683 $12,772 $ 6,931 $ 13,805
======= ======= ======= ======== ========
Amounts under U.S. GAAP
Net earnings (loss) from
continuing operations $(6,468) $(6,938) $ 6,081 $ 10,358 $ 18,560
Net earnings (loss) $(5,231) $(6,938) $ 6,081 $ 10,358 $ 18,560
Basic earnings (loss) per
share from continuing
operations $ (0.36) $ (0.33) $ 0.27 $ 0.41 $ 0.65
======= ======= ======= ======== ========
Diluted earnings (loss) per
share from continuing
operations $ (0.36) $ (0.33) $ 0.25 $ 0.38 $ 0.62
======= ======= ======= ======== ========
Basic earnings (loss) per
share $ (0.29) $ (0.33) $ 0.27 $ 0.41 $ 0.65
======= ======= ======= ======== ========
Diluted earnings (loss) per
share $ (0.29) $ (0.33) $ 0.25 $ 0.38 $ 0.62
======= ======= ======= ======== ========
Shares used in per share calculation:
Basic 17,848 21,209 22,769 25,025 28,369
======= ======= ======= ======== ========
Diluted 17,848 21,209 24,191 27,036 29,880
======= ======= ======= ======== ========
<PAGE>
Year Ended September 30,
Balance Sheet Data: 1995 1996 1997 1998 1999
(in thousands of U.S. dollars, except per share data)
Amounts under Canadian GAAP
Cash and cash equivalents $10,102 $10,937 $30,652 $16,224 $103,075
Working capital 2,249 13,243 40,683 34,562 123,535
Total assets 39,524 59,592 94,464 102,118 220,155
Long-term debt, excluding
current portion 6,405 7,849 6,956 6,660 6,364
Shareholders' equity 7,086 20,282 50,475 62,048 159,956
Amounts under U.S. GAAP
Cash and cash equivalents $10,102 $10,937 $30,652 $16,224 $103,075
Working capital 2,132 12,931 40,215 34,562 123,535
Total assets 39,707 60,080 95,196 102,118 220,155
Long-term debt, excluding
current portion 6,405 7,849 6,956 6,660 6,364
Shareholders' equity 7,269 20,770 51,207 62,048 159,956
Quarterly Information
The following table summarizes selected quarterly financial information
for our ten most recent fiscal quarters. 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 present.
Quarter-to-quarter comparisons of our financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
Three months ended
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
1997 1998 1998 1998 1998 1999 1999 1999
(unaudited)
(in thousands of U.S. dollars)
Amounts under Canadian GAAP
Revenue:
Product $22,557 $30,663 $30,835 $30,597 $31,065 $33,829 $36,796 $46,743
Service 2,354 3,675 3,037 5,130 5,484 7,679 7,524 9,203
------- ------- ------- ------- ------- ------- ------- -------
Total 24,911 34,338 33,872 35,727 36,549 41,508 44,320 55,946
Cost of sales 14,575 18,614 18,325 19,703 19,471 21,217 23,669 30,108
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 10,336 15,724 15,547 16,024 17,078 20,291 20,651 25,838
Research and
development,
net 2,098 1,135 1,611 2,087 2,033 3,242 4,100 4,430
Sales and
marketing 4,532 5,569 5,723 6,593 6,785 7,611 7,625 8,352
General and
administration 1,680 2,199 2,189 2,869 2,035 1,948 2,591 3,570
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss)
from operations 2,026 6,821 6,024 4,475 6,225 7,490 6,335 9,486
Other income
(expense) (504) (295) (278) (503) (332) (261) 1,320 631
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss)
before income
taxes 1,522 6,526 5,746 3,972 5,893 7,229 7,655 10,117
Income tax
expense
(recovery) 552 2,370 2,219 1,535 2,523 2,968 2,943 3,900
------- ------- ------- ------- ------- ------- ------- -------
Net earnings
(loss) $ 970 $ 4,156 $ 3,527 $ 2,437 $ 3,370 $ 4,261 $ 4,712 $ 6,217
======= ======= ======= ======= ======= ======= ======= =======
<PAGE>
9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Creo is 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 digital prepress 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 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 CTP products, workflow
products and consumables 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 CTP products have increased since the commencement of the
joint venture; however, our product revenue growth rate has decreased compared
to prior periods. This decrease is due to the transfer to the joint venture of
the right to sell 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.
As the joint venture continues to be 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 our digital prepress products and corresponding
improvements in Creo's product revenue growth.
<PAGE>
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 32.3% of our total revenue for 1999 and 27.6% for 1998. If our
joint venture were to terminate or fail to achieve the benefits that we expect
to occur, our business, results of operations, and financial condition would
be materially affected. See "Information regarding forward-looking
statements."
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 two years ended September 30, 1999, Heidelberg has
provided $11.3 million in research and development funding, representing 22.4%
of our gross research and development expenses for the period.
As at September 30, 1999, Creo held 40 U.S. and foreign patents, and had
74 U.S. and foreign patent applications pending.
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 their 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 is 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 Creo's 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 15 to the consolidated financial statements.
Impact of Recently Issued Accounting Standard
In addition to the U.S. GAAP differences referred to in note 15 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. The implementation of FAS 133 was
delayed by FAS 137,which indicates implementation shall be effective for
fiscal years beginning after June 15, 2000. 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,
<PAGE>
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.
Information Regarding Forward-looking Statements
Certain statements made by us in this annual report, including without
limitation certain statements contained in the section of this annual report
entitled "Management Discussion and Analysis of Financial Condition
and Results of Operations" which are not historical facts, are so-called
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These include statements about
management's expectations, beliefs, intentions or strategies for the future,
which are indicated by words such as "anticipates," "intends," "believes,"
"estimates," "forecasts," "expects" or similar words. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the United States Private Securities Litigation Reform Act of
1995.
Forward-looking statements are not guarantees of future performance. All
forward-looking statements reflect management's current views with respect to
future events and are subject to certain risks, uncertainties, and
assumptions. Some, but not all, of the important factors that could cause
actual results, performance or achievements to be materially different from
those expressed or implied by these forward-looking statements are outlined
below. Other risks and uncertainties are identified and discussed elsewhere in
this annual report and from time to time in our filings with Canadian and
United States regulatory authorities.
Our computer-to-plate solutions have thus far been adopted principally
by mid-sized to large commercial printers. While we have demonstrated some
success in persuading smaller printers to adopt our solutions, we will have to
continue this effort to ensure revenue growth.
As a result of our joint venture with Heidelberg we have not developed
for ourselves the manufacturing, marketing, distribution and customer service
and support capabilities that Heidelberg contributes. If the joint venture
were to terminate or otherwise become unsuccessful we would be forced to
develop these additional capabilities. This would increase our operating costs
and, if we were unable to develop these capabilities quickly enough, our
revenues would decline.
As demand for digital prepress solutions increases, direct competition
among providers of these solutions is likely to intensify, and this in turn is
likely to result in price reductions, reduced gross margins, longer sales
cycles and reduced market share, all of which would seriously harm our
business and results of operations. We face intense direct competition from
other manufacturers of computer-to-plate products, many of whom are
substantially larger than we are and have significantly greater financial,
sales and marketing, technical, manufacturing and other resources and more
established distribution channels. In addition, 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. For example, recent innovations in
xerographic technology could result in xerography becoming an economic
alternative to offset printing for very short print runs.
Our past revenue growth rates and other operating results may not be
accurate indicators of our future performance. 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 joint-venture
operations.
Because there is a limited number of potential suppliers of certain key
components of our products, including our thermal imaging heads, it may be
difficult for us to find qualified suppliers or to replenish our inventories
of these components on a timely basis, and this could cause our operating
results to suffer.
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 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 development efforts, warranty claims by our customers
or others against us, or the loss of credibility with our current and
prospective customer.
<PAGE>
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 revenues 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.
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, and our strategic alliances with suppliers of
printing plates have allowed us to enhance the compatibility of our technology
with their products. If we are unable to maintain our existing strategic
alliances and to establish new ones, we would lose these additional
capabilities, our products might be less attractive to our potential customers,
and our operating results will be negatively affected.
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. We may not
be successful in introducing and selling profitably new products or services
that our customers want, and if we are not 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 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.
If outside funding of our research and development activities is reduced
or eliminated for any reason, we would be required to use our own working
capital to fund these activities, or to reduce them. If we were unable to
fund our research and development 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.
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 Financial Officer; and Dan Gelbart, our
President and Chief Technology Officer. Their managerial, technical, and other
services would be difficult to replace, and if we lose the services of one or
more of the 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. In addition, 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. 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.
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 that we own or
license. 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. Moreover,
litigation regarding intellectual property rights is common in the technology
industry. If an infringement claim is filed against us, we may be prevented
from using certain technologies and we could incur substantial costs in
defending ourselves and our customers against the claim. 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 an
infringement claim, we may be required to obtain one or more licenses from
third parties, which may not be obtainable 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.
<PAGE>
If we are unable 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 expect to continue to expand our operations. This expansion
is expensive and places a significant strain on our personnel and other
resources. To manage expanded operations effectively we will have to improve
our operational, financial and management systems and hire, train, motivate
and manage our employees. Our profitability could be adversely affected if we
are unable to manage our growth effectively.
Our continuing efforts to increase our presence in markets outside North
America require considerable management time and attention, and financial
resources, and may not be successful to the degree that we expect.
Additionally, international operations are influenced by numerous inherent
potential risks, including unexpected changes in regulatory requirements, tax
rates or tariffs that may make our products and services more expensive and
therefore less attractive to potential customers; longer accounts receivable
payment cycles and possible difficulties in collecting payments; 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.
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. To date, we have not
established any currency hedging to minimize the effect of these foreign
currency translation 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.
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. While, based on our tests,
we believe that all of our product components are Year 2000-compliant, it is
possible that we may not have identified all of the potential Year 2000 risks
or that either 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. If one of our products at a customer site
should fail, 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.
<PAGE>
The Year 2000 Issue
We are critically dependent on the continuous operation of computer-based
systems within our operations and those of third parties. Although we
currently anticipate that the actions described herein are sufficient to deal
with the Year 2000 issue and will be completed in good time, failure to do so
(including the failure of third parties and contingency plans) could have a
material adverse impact on our business, results of operations and financial
condition.
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 September 30,
1999, we had $123.5 million in working capital and $103.1 million in cash and
short-term deposits. Our operations used cash of $0.7 million for 1997, and
generated cash of $11.6 million for 1998 and $25.5 million for 1999. Our
inventory and accounts payable have remained relatively flat for 1997 and 1998
because the increase in production of computer-to-plate systems during this
period was done by Heidelberg through the joint venture. Inventory increased
28.2% during 1999 due to the increase in the volume of computer-to-plate
products that we produced. Accounts payable increased during 1999 due
primarily to the increase in our business activity. Our accounts receivable
have increased from 1997 to 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. As at September 30, 1999, we had
deferred revenues and deposits of $19.0 million, and total borrowings of $6.7
million which are secured by a first mortgage on our Canadian office and
production facilities. Subsequent to September 30, 1999, we repaid this
mortgage in full. Upon making this repayment, we had no long-term debt
outstanding.
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 September 30, 1999, there were no borrowings
outstanding under the credit facility. Our net capital expenditures for 1999
were $12.5 million, compared to $22.4 million in 1998 and $4.2 million in
1997. Our capital expenditures have related primarily to the purchase of
equipment and land for engineering, production and service support facilities.
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 acquire
up to 58% of the outstanding shares until June 30, 2007 for a maximum total
consideration of $8 million. 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 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.
As of January 18, 2000, Creo has entered into an Asset Purchase Agreement with
Scitex. For a discussion of this transaction, see Part One, Item 1,
Description of Business: Negotiations. If completed, this Acquisition could
materially impact Creo's revenues, assets and liabilities. At the time of
this filing, the close of this Acquisition was not finalized due to pending
shareholder and regulatory approvals.
Results of Operations: Year ended September 30, 1999 to years ended September
30, 1998 and September 30, 1997
Revenue
Total revenue increased 38.4% to $178.3 million for 1999 from $128.8
million for 1998 and $95.6 million for 1997. Product revenue increased 29.5%
to $148.4 million for 1999 from $114.7 million for 1998 and $91.7
million for 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 32.3% of our total
revenue for 1999 and 27.6% for 1998. Service revenue increased 110.6% to $29.9
million for 1999 from $14.2 million for 1998 and $3.9 million for 1997. As
substantially all of our customers contract for service support, this increase
in service revenue
<PAGE>
was due to the substantial increase in the installed base of our equipment.
Revenue from our North American customers accounted for $110.6 million, or 61.7%
of total revenue, for 1999, compared to $75.1 million, or 58.3% of total
revenue, for 1998 and $65.6 million, or 68.6% of the total revenue, for 1997.
Revenue from our European customers accounted for $56.3 million, or 31.5% of
total revenue, for 1999, compared to $41.7 million, or 32.3% of total revenue,
for 1998 and $15.7 million, or 16.4% of total revenue, for 1997. Revenue from
our Japanese customers accounted for $2.6 million, or 1.5% of total revenue,
for 1999, compared to $5.3 million, or 4.1% of total revenue, for 1998 and $9.9
million, or 10.4% of total revenue, for 1997. The decrease in Japanese sales
is primarily due to depressed economic conditions in the region.
Cost of Sales
Cost of sales increased 32.6% to $94.5 million for 1999 from $71.2
million for 1998 and $53.6 million for 1997. This increase was primarily due
to a 44.4% 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 slightly as a percentage of total
revenue to 53.0% for 1999 from 55.3% for 1998 and 56.1% for 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 63.5% to $31.3 million
for 1999 from $19.1 million for 1998 and $14.9 million for 1997. This increase
was primarily due to a 51.0% increase in the number of research and
development personnel. Gross research and development expenses increased as a
percentage of total revenue to 17.5% for 1999 from 14.8% for 1998 and 15.6%
for 1997. This increase was due to the large number of new products we have in
development, especially in the area of software. Outside funding of our
research and product development activities increased 43.2% to $17.5 million
for 1999 from $12.2 million for 1998 and $2.1 million for 1997. The $17.5
million in outside funding during 1999 included $5.4 million received from
media suppliers and press manufacturers, $7.2 million received from the joint
venture and $4.9 million in investment tax credits. The $12.2 million in
outside funding received during 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 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
increased 99.2% to $13.8 million for 1999 from $6.9 million for 1998 and $12.8
million for 1997. Net research and development expenses increased as a
percentage of total revenue to 7.7% for 1999 from 5.4% for 1998. The net
research and development expenses in 1997 were 13.4% of total revenue.
Sales and Marketing
Sales and marketing expenses increased 35.5% to $30.4 million, or 17.0%
of total revenue for 1999 from $22.4 million, or 17.4% of total revenue for
1998 and $14.6 million, or 15.3% of total revenue for 1997. This increase was
primarily due to a 35.5% increase in the number of sales and marketing staff
in North America and Europe to support the expansion of our operations,
including the joint venture.
General and Administration
General and administration expenses increased 13.5% to $10.1 million, or
5.7% of total revenue for 1999 from $8.9 million, or 6.9% of total revenue for
1998, and $6.3 million, or 6.6% of total revenue for 1997. This increase was
primarily due to the growth of our business.
Income Taxes
Income tax expense increased to $12.3 million for 1999 from $6.7 million
for 1998 and $2.5 million for 1997. This increase was primarily due to the
increase in our profitability. Our effective tax rate of 39.9% for 1999 was
below the statutory rate of 45.6% due to Canadian manufacturing and processing
tax credits and the fact that a portion of our profits were earned in foreign
jurisdictions with tax rates lower than those of Canada.
<PAGE>
9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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, 1999 is
$57,000 in favor of the counterparty. Subsequent to year-end, we repaid our
floating rate debt and terminated the interest rate swap. Upon making this
repayment, we had no long-term debt outstanding.
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.
10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table presents information about our directors and
officers, as of September 30, 1999:
Name and Municipality
of Residence
Principal Occupation Director/
(other than Creo) Officer since Age Position with Creo
Amos Michelson (1) 1992 47 CEO and Director
Vancouver, British Columbia
Daniel Gelbart (4) 1985 53 President, CTO and
Vancouver, British Columbia Director
Michael D. Ball (5) 1996 38 VP, Business Development
Vancouver, BC
N. David Brown 1995 45 VP, Business Strategy
Vancouver, British Columbia
Mark N. Dance 1996 36 VP and COO
Vancouver, British Columbia
Philippe H. Favreau 1995 37 VP, Manufacturing
Vancouver, British Columbia
Kevin M. Joyce 1997 34 VP, Sales of Creo Inc.
Boston, Massachusetts
Thomas A. Kordyback 1995 48 VP, Finance, CFO and
Vancouver, British Columbia Secretary
<PAGE>
Robert J. Mielcarski 1996 41 VP, Business Systems and
Delta, British Columbia Technology
Boudewijn P. Neijens 1994 41 General Manager of Creo
Brussels, Belgium Products N.V.
B. Darcy O'Grady 1994 46 VP, Human Resources
Vancouver, British Columbia
Michael Rolant 1995 38 VP, Customer Support
Vancouver, British Columbia
Raphael H. Amit, Ph.D. (1)(2) 1996 52 Chair of the Board and
Vancouver, British Columbia Director
Professor, The Wharton School,
University of Pennsylvania
Dave Bennett (6) 1994 59 Director
Vancouver, BC
Managing Director, Business
Development Bank of Canada
Thomas D. Berman (3) 1998 42 Director
Winnetka, Illinois
Executive Director, Brinson
Partners, Inc.
John J. Bu (1)(3) 1997 36 Director
Short Hills, New Jersey
Managing Director, Goldman, Sachs &
Co.
Douglas H. Richardson 1996 38 Director of Technology,
Vancouver, British Columbia Imaging and Media and
Director
Kenneth A. Spencer,
Ph.D. (1)(2)(7) 1985 56 Director
Vancouver, British Columbia
Corporate Director
Charles Young (1) 1999 47 Director
Vancouver, British Columbia
President, Marin Investments Ltd.
- -------------------------
(1) Member of the Compensation, Nominating and Corporate Governance Committee.
(2) Member of the Audit Committee.
(3) Member of the Finance Committee.
(4) Mr. Gelbart did not serve as a director during the period February 1997 to
February 1998.
(5) Mr. Ball resigned from Creo subsequent to September 30, 1999.
(6) Mr. Bennett resigned from the Board of Directors subsequent to September
30, 1999.
(7) Mr. Spencer did not serve as a director during the period January 1996 to
January 1997.
<PAGE>
The following is a brief biography of each of Creo's directors and
executive officers:
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 and Chief Technology Officer 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, Business Development, since
July 1999. He joined us in April 1997 and, prior to his appointment as Vice
President, Business Development, he was Vice President, Sales and Support,
Creo Products N.V. and 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. Subsequent
to September 30, 1999, Mr. Ball resigned from Creo to pursue other business
opportunities.
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 Corp., a
Canadian paging systems company. Prior to May 1993, Mr. Kordyback worked in
Canada as an independent business consultant. He holds a B.A. in economics
from the University of Victoria in Canada and holds the Chartered Accountant
designation.
Robert J. Mielcarski has been Creo's Vice President, Business Systems
and Technology since January 1999. He joined Creo in November 1995 and, prior
to his current appointment, he held various positions including Vice
President, Product Development from November 1996 to January 1999, and Product
Manager for DOP from November 1995 to November 1996. From November 1990 until
November 1995, Mr. Mielcarski served as Vice President, Research and
Development for Dynapro Systems, Inc., a Canadian developer and manufacturer
of
<PAGE>
industrial automation systems. Mr. Mielcarski holds a B.Sc. and a 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 a 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 and is currently serving a one year
leave as Robert B. Goergen Professor at the Wharton School, University of
Pennsylvania. 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.
Dave 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. Subsequent to September 30, 1999, Mr.
Bennett resigned from our Board of Directors to attend to other business
commitments.
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 Managing Director in the Principal Investments Area. Mr. Bu
holds a B.A. in History and a B.S. in Finance from the University of
Pennsylvania in the United States, and a J.D. from Harvard University in the
United States.
Douglas H. Richardson has served as one of Creo's directors since
January 1999 on the nomination of our employees. Mr. Richardson has been the
Thermal Imaging Product Manager since October 1997. Since joining Creo in
October 1991 as a Systems Engineer, he has held various positions, including
Project Manager of DOP and Thermal Imaging from September 1993 to July 1995,
and Product Manager of all CTP devices from July 1995 to October 1997. Mr.
Richardson holds a B.Sc. in engineering physics and an M.Sc. in mechanical
engineering from the University of British Columbia.
Kenneth A. Spencer co-founded Creo and has been a director since our
formation in 1985, except for the period from January 1996 to January 1997.
From May 1985 to June 1995, he was our Chief Executive Officer, and from May
1985 to January 1996, he also served as the Chair of our board of directors.
Mr. Spencer is a member of the board of directors of Spectrum Signal
Processing, Inc., a publicly traded company specializing in digital signal
<PAGE>
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.
11. COMPENSATION OF DIRECTORS AND OFFICERS
Compensation of Directors
Creo's directors do not receive any compensation for serving as
directors, but are eligible to participate in Creo's 1996 Stock Option Plan.
This policy is currently under review by the Compensation, Nominating and
Corporate Governance Committee of the Board of Directors. No options were
granted to non-employee directors in fiscal 1999. During fiscal 1999, Douglas
Richardson, a director and employee of Creo, was awarded options in his
capacity as an employee to purchase 5,846 common shares at a price of C$13.75
per share at any time prior to January 4, 2004.
Indemnification of Directors and Officers and Insurance
Creo's By-laws provide that Creo will indemnify any of our directors,
former directors, officers and former officers, and certain other persons,
against all costs reasonably incurred by them in any civil, criminal or
administrative proceeding to which they are or may be made a party by reason
of being or having been a director or officer of Creo. The indemnity covers
amounts paid to settle actions or to satisfy judgments, but may only be paid
if the person claiming the indemnity has acted honestly and in good faith with
a view to Creo's best interests and, in the case of a criminal or civil
proceeding, if the person had reasonable grounds for believing that his or her
conduct was lawful. Payment of any indemnity in connection with an action
brought by or on behalf of Creo requires prior court approval. We have also
entered into indemnification agreements with each of our directors and
officers.
Creo has purchased insurance for the benefit of our directors and
officers against any liability incurred by them as directors and officers,
subject to certain limitations contained in the CBCA and in the insurance
policy. In fiscal 1999, the policy provided coverage to directors and
officers in the aggregate amount of $10,000,000 in any policy year, subject to
a deductible of $50,000 per occurrence and $75,000 on an aggregate basis in
respect of any loss by Creo. The annual premium under this insurance policy
is $39,555 and is paid by Creo.
Executive Compensation
In fiscal 1999, Creo paid an aggregate $2,009,447 in cash compensation to the
directors and officers named under the caption "Directors and Officers of
Registrant," as a group (19 persons).
The following table sets out compensation information for the fiscal
years ended September 30, 1999, September 30, 1998 and September 30, 1997 for
Creo's Chief Executive Officer and our four other most highly compensated
executive officers. 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 the named executive
officers.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Name and Other Annual Securities Under
Principal Position Year Salary Bonus Compensation Options Granted (#)
Amos Michelson 1999 105,382 371,582 4,610 --
Chief Executive 1998 94,435 179,897 4,551 --
Officer 1997 93,782 128,682 4,343 --
<PAGE>
Dan Gelbart 1999 105,382 371,582 4,610 --
President and Chief1998 94,435 179,897 4,551 --
Technology Officer 1997 93,782 128,682 4,343 --
Kevin Joyce 1999 201,618 -- 6,000 --
Vice President, 1998 145,444 -- 7,929 186
Sales, Creo Inc. 1997 243,198 -- 12,000 7,334
Michael Ball 1999 124,313 -- 4,075 --
Vice President, 1998 115,047 -- -- --
Business 1997 85,287 -- -- --
Development
Boudewijn Neijens 1999 94,173 -- 6,434 14,116
General Manager, 1998 82,414 -- 7,254 8,186
Creo Products, 1997 86,301 -- 7,377 13,000
N.V.
12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
1996 Stock Option Plan
Creo's 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 Creo's business.
The Plan is administered by Creo's Board of Directors, which acts on the
recommendation of our Compensation, Nominating and Corporate Governance
Committee (the "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. The exercise price of nonstatutory stock options granted
under the Plan is determined by the Board. Payment of the exercise price may
be made in cash or other forms of consideration approved by the Board, which
is also authorized to establish vesting schedules. The term of options may
not exceed ten years. Creo's practice to date has been to grant options with
five-year terms.
Options granted under the plan are generally fully vested at the time of
grant, but 204,956 of the 4,206,526 options outstanding at September 30, 1999
vest on various dates between January 4, 2000 and January 4, 2001. The
outstanding options are exercisable at prices between C$3.75 and C$17.50 per
share and expire on various dates between August 31, 2000 and January 4, 2004.
As at September 30, 1999, 3,446,962 options remained available for future
grant under the Plan.
<PAGE>
Option Grants in 1999 Fiscal Year
The only named executive officers who were granted options during
fiscal 1999 were Michael Ball and Boudewijn Neijens, as follows:
% of Total Of Common
Securities Options Shares
Under Granted to Exercise Underlying
Options Employees in Price Options at the Expiry
Name Granted (#)(1) Fiscal Year (C$/Share) Date of Grant Date
Michael Ball 12,806 0.94% C$13.75 C$13.75 Jan04/03
Boudewijn
Neijens 14,116 1.04% C$13.75 C$13.75 Jan04/03
(1) All options vested and became exercisable on January 4, 1999.
Fiscal Year End Option Values
The following table sets out information relating to unexercised options
held as of September 30, 1999 by each of the named executive officers. No
options were exercised by these officers during fiscal 1999.
Value of Unexercised In-the-Money
Unexercised Options at Options at September 30, 1999
September 30, 1999 (#) ($)(1)
Name (exercisable/unexercisable) (exercisable/unexercisable)
Amos Michelson -- --
Dan Gelbart -- --
Kevin Joyce 30,904/52,000 552,106/922,882
Michael Ball 25,184/0 381,301/0
Boudewijn Neijens 36,302/0 561,254/0
(i) An option is in-the-money at September 30, 1999 if the market price of
the common shares on that date exceeds the exercise price of the option.
The value of unexercised options at September 30, 1999 is equal to the
difference between the market price of the common shares on that date
and the exercise price of the options. Market price for this purpose is
$24.563 (i.e., the closing price of the common shares on the Nasdaq
National Market, Creo's principal trading market, on September 30,
1999).
13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
The following are the only material transactions since September 30,
1998 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:
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 Creo's Initial
Public Offering in July 1999. In August 1999, we engaged Goldman
<PAGE>
to act as our financial advisor in connection with our interest in exploring a
potential transaction with Scitex Corporation Ltd.
All other material transactions prior to September 30, 1998 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 were outlined in on page 54 of our United States Initial
Public Offering prospectus filed with the SEC on form 424B4 on July 29, 1999.
PART II
14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
15. DEFAULTS UPON SENIOR SECURITIES
None
16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND
USE OF PROCEEDS
None
PART IV
17. FINANCIAL STATEMENTS
We have chosen to provide the financial statements specified in Item 18
in lieu of Item 17.
18. FINANCIAL STATEMENTS
See Item 19 Financial Statements.
19. FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
See page F-1.
Exhibits
None.
<PAGE>
CREO PRODUCTS INC.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998, and 1997
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Retained Earnings
(Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
Report Of Independent Auditors
To the Shareholders
Creo Products Inc.
We have audited the consolidated balance sheets of Creo Products Inc. as at
September 30, 1999 and 1998 and the consolidated statements of operations and
retained earnings (deficit) and cash flows for the years 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 audits.
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,
1999 and 1998 and the results of its operations and its cash flows for the
years then ended in accordance with generally accepted accounting principles in
Canada.
The consolidated financial statements as at September 30, 1997, 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 15 to the consolidated
financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
November 9, 1999
F-2
<PAGE>
Consolidated Balance Sheets
(In thousands of U.S. dollars)
September 30,
1999 1998
Assets
Current assets
Cash and cash equivalents $103,075 $ 16,224
Accounts receivable (note 3) 38,736 24,385
Inventories (note 4) 32,247 25,151
Prepaid expenses 3,312 2,212
-------- --------
Total current assets 177,370 67,972
Capital assets (note 5) 40,718 34,146
Future income taxes (note 10) 2,067 -
-------- --------
$220,155 $102,118
======== ========
Liabilities
Current liabilities
Accounts payable and accrued
liabilities (note 6) $ 30,144 $ 17,878
Income taxes payable 3,486 825
Future income taxes (note 10) 862 34
Deferred revenue and deposits 19,047 13,677
Current portion of long-term
debt (note 7) 296 943
-------- --------
Total current liabilities 53,835 33,357
Long-term debt (note 7) 6,364 6,660
Future income taxes (note 10) - 53
-------- --------
Total liabilities 60,199 40,070
Shareholders' Equity
Share capital (note 8) 138,202 58,854
Retained earnings 21,754 3,194
-------- --------
Total shareholders' equity 159,956 62,048
-------- --------
$220,155 $102,118
======== ========
Commitments and contingencies (note 13)
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Raffi Amit /s/ David A. Bennett
Raffi Amit, Director David A. Bennett, Director
F-3
<PAGE>
Consolidated Statements of Operations and Retained Earnings (Deficit)
(In thousands of U.S. dollars, expect per share amounts)
Years ended September 30,
1999 1998 1997
(note 1l)
Revenue
Product revenue $148,433 $114,652 $ 91,669
Service revenue 29,890 14,196 3,914
-------- -------- --------
Total revenue 178,323 128,848 95,583
Cost of sales 94,465 71,217 53,634
-------- -------- --------
Gross profit 83,858 57,631 41,949
-------- -------- --------
Research and development,
net (note 9) 13,805 6,931 12,772
Sales and marketing 30,373 22,417 14,619
General and administration 10,144 8,937 6,271
-------- -------- --------
Total operating expenses 54,322 38,285 33,662
-------- -------- --------
Earnings from operations 29,536 19,346 8,287
Other income (expense) 1,358 (1,580) 48
-------- -------- --------
Earnings before income taxes 30,894 17,766 8,335
Income tax expense (note 10) 12,334 6,676 2,498
-------- -------- --------
Net earnings $ 18,560 $ 11,090 $ 5,837
======== ======== ========
Earnings per common share
- - basic, Canadian GAAP (note 11) $ 0.65 $ 0.44 $ 0.26
======== ======== ========
- - fully diluted, Canadian GAAP
(note 11) $ 0.59 $ 0.41 $ 0.24
======== ======== ========
- - diluted, U.S. GAAP
(note 15) $ 0.62 $ 0.38 $ 0.25
======== ======== ========
Retained earnings (deficit),
beginning of year $ 3,194 $ (7,896) $(13,733)
Net earnings 18,560 11,090 5,837
-------- -------- --------
Retained earnings (deficit),
end of year $ 21,754 $ 3,194 $ (7,896)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Years ended September 30,
1999 1998 1997
(note 1l)
Cash provided by (used in) operations:
Net earnings $ 18,560 $ 11,090 $ 5,837
Items not affecting cash:
Amortization 5,983 4,996 3,673
Future income taxes 823 779 (380)
Incentive shares issued -- 78 102
Other 36 1 46
-------- -------- --------
25,402 16,944 9,278
Changes in non-cash working capital:
Accounts receivable (12,006) (4,090) (8,760)
Inventories (7,096) (838) (5,805)
Prepaid expenses (1,100) (448) (634)
Accounts payable and accrued
liabilities 12,266 1,217 6,179
Income taxes payable 2,661 (221) 1,912
Deferred revenue and deposits 5,370 (969) (2,864)
-------- -------- --------
95 (5,349) (9,972)
-------- -------- --------
25,497 11,595 (694)
Cash provided by (used in) investing:
Purchase of capital assets (12,971) (23,537) (4,220)
Proceeds from sale of capital assets 457 1,142 57
-------- -------- --------
(12,514) (22,395) (4,163)
Cash provided by (used in) financing:
Proceeds from share issues 77,156 405 24,254
Share-purchase loans (2,345) -- --
Increase in long-term debt -- -- 7,400
Repayment of long-term debt (943) (4,033) (7,082)
-------- -------- --------
73,868 (3,628) 24,572
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 86,851 (14,428) 19,715
Cash and cash equivalents,
beginning of year 16,224 30,652 10,937
-------- -------- --------
Cash and cash equivalents,
end of year $103,075 $ 16,224 $ 30,652
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Notes to Consolidated Financial Statements
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 15.
(a) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Creo Products N.V., Creo Inc.,
Creo SRL, Creo Products ULC and Creo Ltd. (to March 12, 1998, the date of
disposal). 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) 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.
(c) 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.
(d) 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.
(e) 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:
Building 4%
Equipment 20%
Computer software 100%
Furniture and fixtures 20%
Building improvements are amortized on a straight-line basis over five
years. Computer and demo equipment assets are amortized on a straight-line
basis over three years.
The Company monitors the recoverability of long-lived assets, based on
factors such as current market value, future asset utilization, business
climate and future undiscounted cash flows expected to result from the use
of the related assets. The Company's policy is to record an impairment
loss in the period when it is determined that the carrying amount of the
asset may not be recoverable. The impairment loss is calculated as the
amount by which the carrying amount of the asset exceeds the undiscounted
estimate of future cash flows from the asset. To September 30, 1999, no
impairment losses have been recorded.
F-6
<PAGE>
(f) 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.
(g) 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 year ended September 30, 1999 is $132 (1998 - $1,776;
1997 - $194).
(h) Revenue recognition
Revenue from sales of prepress 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.
(i) 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.
(j) 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. A valuation allowance is recognized
to the extent the recoverability of future income tax assets is not
considered more likely than not.
(k) Advertising costs
The Company expenses advertising costs as incurred.
(l) Comparative figures
In fiscal 1998, the Company's deficit was increased to reflect a change
in the amortization of computer and demo equipment and to reflect the
assignment of value to shares issued as incentives to employees. As at
October 1, 1997, the increase to the deficit was $5,233 of which $488
related to the amortization of capital assets and $4,745 related to shares
issued as incentives to employees. Net earnings for 1997 were reduced by
$244 from the amount previously reported.
Certain comparative figures have been reclassified to conform with the
basis of presentation adopted in the current year.
F-7
<PAGE>
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:
Years ended September 30,
1999 1998 1997
Consolidated Statements of Operations
Revenues $ 57,631 $ 35,542 $ --
Cost of sales 25,611 17,896 --
-------- -------- --------
Gross profit 32,020 17,646 --
Research and development 7,189 4,109 --
-------- -------- --------
Net income $ 24,831 $ 13,537 $ --
======== ======== ========
Years ended September 30,
1999 1998 1997
Consolidated Statements of Cash Flows
Cash provided by operating activities $ 24,831 $ 13,537 $ --
======== ======== ========
3. Accounts receivable
Included in accounts receivable as at September 30, 1999 is $2,345 in
interest-free share-purchase loans. The loans are due between March 31,
2000 and June 30, 2000 and are secured by 345,586 shares of the Company.
The market value of the shares held as security as at September 30, 1999 is
$8,488.
4. Inventories
September 30,
1999 1998
Materials $ 15,321 $ 11,722
Work-in-progress 8,256 7,240
Finished goods 8,670 6,189
-------- --------
$ 32,247 $ 25,151
======== ========
5. Capital assets
September 30,
1999 1998
Land $ 9,453 $ 9,453
Building 17,473 14,517
Building improvements 3,700 2,685
Equipment 5,926 4,357
Computer and demo equipment 15,501 10,994
Computer software 4,752 3,347
Furniture and fixtures 3,456 2,716
-------- --------
60,261 48,069
Less: accumulated amortization 19,543 13,923
-------- --------
$ 40,718 $ 34,146
======== ========
F-8
<PAGE>
Building includes $2,468 (1998 - nil) in construction in-progress on
which amortization will be charged upon completion of construction.
6. Accounts payable and accrued liabilities
September 30,
1999 1998
Trade payables $ 13,691 $ 7,561
Wages and benefits 11,633 6,118
Retrofit liabilities 3,910 3,278
Royalties 910 921
-------- --------
$ 30,144 $ 17,878
======== ========
7. Long-term debt
September 30,
1999 1998
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 $ 6,660 $ 6,956
Eastman Kodak Company
Unsecured, interest-free
loan repayable in
installments on or before
September 30, 2006 -- 647
-------- --------
6,660 7,603
Less: current portion 296 943
-------- --------
$ 6,364 $ 6,660
======== ========
On November 3, 1999, the Company repaid its first mortgage in full to
the Royal Bank of Canada.
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 September 30, 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 September 30, 1999, the swap has an estimated fair market value
of $57 (1998 - $341) in favor of Royal Bank of Canada.
In the year ended September 30, 1999, the Company incurred interest
expense on long-term debt of $450 (1998 - $525; 1997 - $408), which was
charged to operations. In the year ended September 30, 1999, the Company
paid interest on long-term debt of $533 (1998 - $605; 1997 - $338).
8. Share capital
A two-for-one share split of common shares took effect on May 4, 1999.
All information relating to common shares has been restated to
retroactively reflect 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.
F-9
<PAGE>
(b) Issued and outstanding
There have been no preferred shares issued. Common shares issued and
outstanding are as follows:
Number of
Common Stated
Shares Values
<PAGE>
Outstanding, September 30, 1996 21,611,492 $ 34,015
Issued as incentives to employees 15,500 102
Issued for cash, net of costs 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, net of costs 6,962,962 74,611
Issued for cash from share options 403,570 2,545
Tax benefit of share issue costs -- 2,192
---------- --------
Outstanding, September 30, 1999 32,418,694 $138,202
(c) Share option plan
The Company has reserved 8,000,000 shares under the 1996 Stock Option
Plan (amended). 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
is presented below:
Number of Weighted
Common Average
Shares Exercise Price
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 1,357,924 9.37
Exercised (403,570) 6.42
----------
Outstanding, September 30, 1999 4,206,526 8.16
The options outstanding at September 30, 1999 expire between August 31,
2000 and January 4, 2004.
The following table summarizes information about the Company's share
options outstanding at September 30, 1999:
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of At September Contractual Exercise at September Exercise
Exercise Price 30, 1999 Life Price 30, 1999 Price
$2.56 50,000 1.7 $ 2.56 50,000 $ 2.56
$2.57 - $ 5.00 729,018 1.3 $ 4.94 729,018 $ 4.94
$5.01 - $ 7.50 1,341,356 2.5 $ 6.82 1,169,356 $ 6.82
$7.51 - $10.00 1,345,838 4.3 $ 9.37 1,320,332 $ 9.37
$10.01 - $12.50 740,314 3.3 $11.93 732,864 $11.93
--------- ---------
4,206,526 3.0 $ 8.16 4,001,570 $ 8.20
F-10
<PAGE>
(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.
9. Research and development
Years ended September 30,
1999 1998 1997
Research and development expenses $ 31,269 $ 19,123 $14,877
Research and development funding:
Development contract revenue (12,607) (8,464) (1,405)
Investment tax credits (4,857) (3,728) (700)
-------- -------- --------
Research and development, net $ 13,805 $ 6,931 $ 12,772
======== ======== ========
10. Income taxes
Earnings before income taxes are as follows:
Years ended September 30,
1999 1998 1997
Canada $ 27,379 $ 12,891 $ 7,010
Foreign 3,515 4,875 1,325
-------- -------- --------
Total $ 30,894 $ 17,766 $ 8,335
======== ======== ========
The provision for (recovery of) income taxes consists of the following:
Years ended September 30,
1999 1998 1997
Current:
Canada $ 10,268 $ 5,369 $ 1,375
Foreign 1,243 528 1,503
-------- -------- --------
Total current $ 11,511 $ 5,897 $ 2,878
======== ======== ========
Future:
Canada $ 789 $ 1,071 $ (21)
Foreign 34 (292) (359)
-------- -------- --------
Total future $ 823 $ 779 $ (380)
-------- -------- --------
Total income tax provision $ 12,334 $ 6,676 $ 2,498
======== ======== ========
Income tax rate:
Years ended September 30,
1999 1998 1997
Combined Canadian federal/provincial tax
rate 45.6% 45.6% 45.6%
Increased (reduced) by:
Manufacturing and processing credits (5.5) (5.4) (1.3)
Foreign exchange translation not deducted
for tax (3.4) 6.5 --
Foreign losses (utilized) not recognized -- (6.5) 7.3
Future income tax assets not recognized -- -- (21.6)
Foreign tax rate increase (reduction) 0.2 (1.8) (2.7)
Amounts not deductible for tax and other 3.0 (0.8) 2.7
------ ------ ------
Effective rate 39.9% 37.6% 30.0%
====== ====== ======
F-11
<PAGE>
Temporary differences that give rise to future income taxes as
follows:
September 30,
1999 1998
Current future income tax assets (liability):
Investment tax credit revenue $(1,887) $ (998)
Revenue recognition 195 31
Retrofit liability and other 830 933
------- -------
Total current future income tax $ (862) $ (34)
======= =======
September 30,
1999 1998
Long-term future income tax asset (liability):
Capital assets $ 69 $ (412)
Financing costs 1,998 359
------- -------
$ 2,067 $ (53)
======= =======
In the year ended September 30, 1999, the Company paid income taxes of
$3,635 (1998 - $1,683; 1997 - $ 270).
As at September 30, 1999, the Company has unused investment tax credits
totaling approximately $5,200 available to reduce future Canadian
federal income taxes. These tax credits expire in varying amounts to 2009.
11. Earnings per common share
Basic earnings per common share is calculated by dividing the net
earnings for the year by the weighted average number of common shares
outstanding during the year: 1999 - 28,369,402 (1998 - 25,024,788; 1997 -
22,769,212).
Fully diluted earnings per share is based on the assumptions that all
outstanding options and warrants in note 8 were exercised at the beginning
of the year and that the funds derived therefrom had been invested to
produce an annual return of 3% after income taxes for the year ended
September 30, 1999 (1998 - 4%; 1997 -3%). The amounts of income imputed
after income taxes were $673 for the year ended September 30, 1999 (1998 -
$1,329; 1997 - $1,559).
12. 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 7.
Significant amounts of the Company's expenditures are denominated in
Canadian dollars. Fluctuations in the exchange rate between Canadian and
U.S. dollars could have a material effect on the Company's business,
financial condition, and results of operations. The Company has not
entered into foreign currency contracts or other instruments to mitigate
this risk.
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable. The
Company performs ongoing credit evaluations of its customers' financial
conditions and requires letters of credit or other guarantees whenever
deemed necessary.
F-12
<PAGE>
13. Commitments and contingencies
The Company is party to certain operating leases under which the future
minimum lease payments as at September 30, 1999 are approximately as
follows:
2000 $1,609
2001 1,119
2002 825
2003 489
2004 272
Thereafter 385
------
$4,699
======
Total rent expense for the year ended September 30, 1999 was $1,306
(1998 $1,072; 1997 $638).
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.
14. 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:
Years ended September 30,
1999 1998 1997
Canada $ 4,059 $ 3,193 $ 3,134
U.S. 105,953 71,927 62,441
Europe 56,252 41,655 15,718
Japan 2,647 5,316 9,936
Other 9,412 6,757 4,354
------- ------- -------
178,323 128,848 $95,583
======= ======= =======
There were no customers representing 10% or more of total revenue in
the year ended September 30, 1999, or the 1998 fiscal year. There was one
customer in 1997 representing approximately 10% of total revenue.
The Company has capital assets located in:
September 30,
1999 1998
Canada $37,678 $31,914
Other 3,040 2,232
------- -------
$40,718 $34,146
======= =======
F-13
<PAGE>
15. 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
In fiscal 1998, the Company changed its amortization policy for
computer and demo equipment from the declining balance method at 30% per
year to the straight-line method over 3 years. Under U.S. GAAP, the
change 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 effect of this difference would be:
Years ended September 30,
1999 1998 1997
Net earnings under Canadian GAAP $18,560 $11,090 $ 5,837
Reverse retroactive impact of change in
accounting policy -- -- 244
------- ------- -------
Earnings before cumulative effect of
change in accounting policy under
U.S. GAAP 18,560 11,090 6,081
Cumulative effect of change in accounting
policy -- (732) --
------- ------- -------
Net earnings under U.S. GAAP 18,560 10,358 6,081
Retained earnings (deficit), beginning
of year under U.S. GAAP 3,197 (7,164) (13,245)
------- ------- -------
Retained earnings (deficit), end of year
under U.S. GAAP $21,754 $ 3,194 $(7,164)
======= ======= =======
Earnings per share:
Basic earnings per share $ 0.65 $ 0.41 $ 0.27
======= ======= =======
Diluted earnings per share $ 0.62 $ 0.38 $ 0.25
======= ======= =======
The cumulative effect of the change in accounting policy reduced basic
earnings per share for the year ended September 30, 1998 by $0.03 and
diluted earnings per share for the year ended September 30, 1998 by $0.03.
Comprehensive earnings is the same as net earnings under U.S. GAAP for
all periods presented.
(b) Earnings per share
During 1997, the Company adopted Statement of Financial Accounting
Standard No. 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.
F-14
<PAGE>
Under Canadian GAAP, net income is adjusted in the calculation 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. Instead, 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
applied towards the repurchase of issued common shares at their market
value.
The following weighted average number of shares was used for the
computation of diluted earnings per share
Years Ended September 30,
1999 1998 1997
Weighted average shares used in
computation of basic earnings
per share 28,369,402 25,024,788 22,769,212
Weighted average shares from assumed
conversion of dilutive options 1,511,062 2,011,202 1,422,132
---------- ---------- ----------
Weighted average shares used in
computation of diluted earnings
per share 29,880,464 27,035,990 24,191,344
========== ========== ==========
(c) Statement of cash flows
Under U.S. GAAP, no subtotal would be provided in the operating section
of the statement of cash flows.
(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 September 30, 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, 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
its filings, notwithstanding the departure from U.S. GAAP. Accordingly,
the financial statements have not been adjusted to restate the accounting
under U.S. GAAP.
(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 and earnings 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 and earnings
per share under U.S. GAAP would have been adjusted.
F-15
<PAGE>
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:
Years Ended September 30,
1999 1998 1997
Value:
Expected dividend yield 0% 0% 0%
Expected stock price volatility 49% 50% 51%
Risk-free interest rate 6.0% 5.5% 5.0%
Expected life of options 5 years 5 years 5 years
Years Ended September 30,
1999 1998 1997
Adjusted net earnings and
earnings per share:
Net earnings under U.S. GAAP $18,560 $10,358 $ 6,081
Fair value of options granted
(note 8) (6,426) (5,452) (4,835)
------- ------- -------
Net earnings - pro forma $12,134 $ 4,906 $ 1,246
======= ======= =======
Basic earnings per share
- pro forma $ 0.43 $ 0.20 $ 0.05
======= ======= =======
Diluted earnings per share
- pro forma $ 0.41 $ 0.18 $ 0.05
======= ======= =======
Pro forma amounts reflect options granted after the 1995 fiscal year.
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) Share-purchase loans
Under U.S. GAAP, share-purchase loans would be deducted from share
capital rather than being included in accounts receivable. As a result,
shareholders' equity and accounts receivable would decrease by $2,345,
under U.S. GAAP.
(h) Supplementary information: allowance for doubtful accounts
Accounts receivable are disclosed net of allowance for doubtful
accounts as follows:
Years Ended September 30,
1999 1998 1997
Charged to expenses $358 $ 51 $426
Balance, end of year $114 $180 $391
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Creo Products Inc.
(Registrant)
/s/ Tom Kordyback
(Signature)
Tom Kordyback, Chief Financial Officer
(Name and title)
March 30, 2000
(Date)
