<PAGE>
CREO PRODUCTS INC. 1999 ANNUAL REPORT
<PAGE>
CREO PRODUCTS INC. 1999 ANNUAL REPORT
OUR MISSION
By 2001, the digital prepress solutions provided by CREO and its partners will
be the de facto standard in the Graphic Arts industry. CREO will also be
recognized as an excellent place to work and a great company with which to do
business.
CONTENTS
Letter to Creo Shareholders 4
Technology To Transform the World of Print 12
A Strategy for Success 20
Management's Discussion & Analysis 26
Auditors' Report & Management's Statement
of Responsibility 36
Consolidated Balance Sheets 37
Consolidated Statements of Operations
and Retained Earnings (Deficit) 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
Investor Information 48
This document was printed by a Creo customer. Hemlock Printers Ltd. of Burnaby,
BC, Canada produced this report using advanced techniques to achieve the
ultimate in presswork quality. Detailed production notes can be found on the
inside back cover.
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IMAGINE THE
POSSIBILITIES ...
[PICTURE]
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[PICTURE]
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4 | LETTER TO THE SHAREHOLDERS
[PICTURE]
AMOS MICHELSON, CEO
THE PROGRESS WE MADE IN 1999
IS A DIRECT REFLECTION OF THE SUCCESS
OUR CUSTOMERS HAVE ACHIEVED
WITH CREO PRODUCTS AND SERVICES.
LETTER TO CREO SHAREHOLDERS
DEAR CREO SHAREHOLDER The 1999 Creo fiscal year will be remembered as a very
exciting and rewarding one for us all. Not only did we strengthen our number-one
market position in computer-to-plate (CTP) and surpass our sales targets in
multiple areas, but we also penetrated new markets, made major product
announcements, and, to top it off, we became a publicly traded company. Our team
is stronger and the company is more profitable than ever before. We firmly
believe that we are well-positioned for continued growth in the coming year.
FINANCIAL HIGHLIGHTS Our progress in 1999 is a direct reflection of the success
our customers have achieved with Creo products and services. Total revenues rose
38.4% to $178.3 million (compared to $128.8 million in 1998). Net income was up
67.4% to $18.6 million (compared to $11.1 million in 1998) or $0.59 per share on
a fully diluted basis (compared to $0.41 per share in 1998). In fact, net income
for the three months ended September 30, 1999 was the highest of any quarter in
the company's history at $6.2 million. Gross margins for the year improved to
47.0% compared to 44.7% in 1998. At the end of fiscal 1999, total assets were
$220.2 million, while shareholder equity was $160.0 million.
Through our own operations and the Heidelberg/Creo Joint Venture (JV), the
number of shipments of CTP systems grew 61.4% in 1999. As of September 30, 1999,
the total number of systems installed worldwide was over 1200, which we believe
brings our installation base to more than three times that of our nearest
competitor. We continued to demonstrate our commitment to
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5 | LETTER TO THE SHAREHOLDERS
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<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS YEARS ENDED SEPTEMBER 30
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
<S> <C> <C> <C>
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
Earnings from operations 29,536 19,346 8,287
Net earnings 18,560 11,090 5,837
Assets 220,155 102,118 94,464
R&D expenses, gross 31,269 19,123 14,877
Shareholders' equity 159,956 62,048 50,475
Earnings per common share (fully
diluted, Cdn GAAP) $ 0.59 $ 0.41 $ 0.24
</TABLE>
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future profitability by expanding our R&D efforts to $31.3 million gross from
$19.1 million in 1998.
In July 1999, Creo went public on the NASDAQ and Toronto stock exchanges. We
believe this move will give the company the ability to consider new acquisitions
and pursue strategic goals. It will also provide liquidity to the shareholders
and employees who have invested in Creo for many years.
A FOCUS ON SUCCESS Sixteen years ago, Creo was a sparkle in the eye
of a small group of visionaries. Today, we are world's largest supplier of CTP
systems and the proud partner of hundreds of successful printers and tradeshops.
Our focus is on providing customers with the best value for their money, which
means we must be first to market with products that improve the quality and
economics of their operations. Only by being the most efficient provider of the
most valued products can we ensure leading market share and profitability.
CTP: NO LONGER IF BUT WHICH ONE Over the past few years, digital printing
technologies have been embraced as a way to enhance human skills and achieve new
efficiencies in a highly competitive industry. In 1999, it became evident that
customers were no longer debating if CTP was in their future but rather when and
which one. Printers and tradeshops around the world have now recognized that
making the transition to CTP and, to thermal CTP in particular, is a low-risk
investment that delivers superior quality, greater consistency, and better
efficiency in even the most demanding print environments.
Since the early 1990s, Creo has dedicated resources to eliminating the barriers
that could prevent the widespread acceptance of thermal CTP technology. These
roadblocks included the limited availability of thermal media, the high cost of
proofing hardware, and the lack of efficient and reliable workflow solutions
based on open formats. Today, we can confidently say that the last of these
barriers has been removed. Media vendors now offer more thermal media than ever
before, proofing technology has become more affordable, and PDF has emerged as
the open file interchange format of the future. Faced with the choice of which
technology to adopt and which vendor to consider, printers are looking for that
"something extra" to validate their purchasing decisions. Solutions must be
designed to fit the customer's specific print environment and business
challenges. Comprehensive customer support, a commitment to
WORLD WIDE SYSTEM INSTALLATIONS
[GRAPH]
CONSOLIDATED REVENUE (THOUSANDS OF US $)
[GRAPH]
NET INCOME (THOUSANDS OF US $)
[GRAPH]
EARNINGS PER SHARE (FULLY DILUTED, CDN GAAP)
[GRAPH]
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6 | LETTER TO THE SHAREHOLDERS
[PICTURE]
PARTNERING FOR SUCCESS
CREO IS COMMITTED TO BUILDING CLOSE PARTNERSHIPS WITH CUSTOMERS AND THEIR
CLIENTS IN ORDER TO BETTER UNDERSTAND INDUSTRY CHALLENGES AND TO CONTINUE TO
DEVELOP INNOVATIVE SOLUTIONS. THIS MEANS DELIVERING THE BEST, MOST PRACTICAL
TECHNOLOGY, AS WELL AS EXCELLENCE IN SALES, CUSTOMER SUPPORT, FIELD SERVICE AND
TRAINING.
THE FIRST POINT OF CONTACT FOR CREO'S CUSTOMER BASE, THE RESPONSE CENTER
OPERATES 24 HOURS A DAY, 7 DAYS A WEEK AND BRINGS TOGETHER TEAMS OF EXPERTS TO
HANDLE ANY CUSTOMER CONCERN. OVER 90% OF ALL SOFTWARE PROBLEMS AND OVER 65% OF
ALL HARDWARE ISSUES ARE RESOLVED THROUGH THE RESPONSE CENTER.
WHETHER IT IS RESPONDING IN RECORD TIME TO TECHNICAL PROBLEMS, TEAMING UP TO
ENSURE SUCCESSFUL SYSTEM INTEGRATION DURING INSTALLATION, OR TRAINING CUSTOMERS
ON NEW PURCHASES, THE CREO CUSTOMER SUPPORT TEAM PLAYS A VITAL ROLE.
AN INDEPENDENT SURVEY IN 1999 INDICATED THAT OVERALL CUSTOMER SATISFACTION WITH
CREO SUPPORT SERVICES RANKED 7.8 OUT OF 10 POINTS (WITH 10 MEANING "EXTREMELY
SATISFIED"). RESPONDENTS INDICATED THAT NO OTHER SUPPLIER DID A BETTER JOB
PROVIDING CUSTOMER SUPPORT SERVICES.
EVERYONE AT CERO IS DEDICATED
TO HELPING OUR CUSTOMERS
RUN PROFITABLE BUSINESSES.
[PICTURE] [PICTURE]
flexible product solutions, and time-tested, field-proven equipment are critical
to a well-rounded CTP offering. Creo is leading the way with complete,
end-to-end solutions.
TEAM CREO FLOURISHES The Creo team has been growing at an average rate of 36.5%
per year for the past three years. Our unique, decentralized corporate culture
and flexible team structure have allowed us to accommodate this growth
successfully. Overall, our work force grew by 453 people during the year to 1486
people. We feel strongly that our people are our greatest resource and that our
future success depends on us all working together effectively. In 1999, we
initiated an extensive leadership-training program within Creo, dedicating
internal resources to mentoring our people in leadership skills, business
strategy, and the principles of economic thinking.
To maintain focus on our corporate mission of making our systems the de facto
industry standard by 2001, we divided the company into four distinct product
groups in fiscal 1999: Output Systems, Workflow Products, Imaging & Media, and
Customer Support. Each group operates under a carefully defined set of
objectives.
INNOVATIVE SOLUTIONS Creo's success is based on our efforts to find innovative
solutions that help our customers run profitable businesses. In 1999, we were
issued four patents and filed for an additional 25.
OUTPUT SYSTEMS In 1999, we released a new, compact 4-page CTP system targeted at
smaller printers. With this system, which has been very successful to date, we
expect to take leadership in the 4-page CTP market in the same way that we have
with our 8-page CTP systems in that market. In
<PAGE>
7 | LETTER TO THE SHAREHOLDERS
1999, we enjoyed continued success with the Trendsetter Spectrum,-TM- which
adds cost-effective digital halftone color proofing functionality to our core
Trendsetter-Registered Trademark- platesetter line. We also continued
shipment of the Proofsetter Spectrum-TM- dedicated, stand-alone proofer.
Together, these products deliver a significantly more economical solution to
digital halftone proofing than others on the market today.
In 1999, we began an aggressive approach to penetrate other printing markets
with our innovative imaging technology. The flexographic printing market, a
sub-segment of the packaging market, is the fastest growing segment of the
printing industry and one to which we intend to become the leading provider
of CTP solutions. In 1999, the ThermoFlex-TM- flexographic platesetter
entered full production and was named Technological Innovation of the Year by
the Flexographic Prepress Platemakers Association (FPPA). We have recruited
specialists and developed technology that, together with strengthened
relationships with flexo media suppliers, will boost us into a leadership
position in this market.
IMAGING & MEDIA The patented Creo thermal imaging head is at the core of our
award-winning output devices. In 1999, we were able to significantly improve the
speed of our thermal imaging head, which was already the fastest on the market.
The imaging speed is now 40% faster than last year.
We also began to ship digital offset press (DOP) products to our joint venture
with Heidelberger Druckmaschinen AG, the world's leading supplier of press
equipment. Heidelberg began full production on the Speedmaster 74 Direct Image
(DI) press in the summer of 1999, and Creo supplies up to five thermal exposure
systems per press. We expect DOP to be a very fast-growing business for us in
the future.
The Imaging & Media teams at Creo and Heidelberg work with over 15 vendors of
thermal media worldwide to qualify products, including offset plates, flexo
plates, films, imposition proofing materials, and digital halftone proofing
materials. We are committed to the media qualification process to ensure that
customers achieve the best possible results from the combination of imaging
media and output device. All major manufacturers now offer thermal plates and
several are already offering thermal processless plates. This wide availability
of thermal media encourages competitive pricing and investment in thermal CTP.
WORKFLOW PRODUCTS The launch of the new Prinergy-TM- workflow management
system in August 1999 signaled a major shift in our approach to the market.
Together with our existing product lines, this new system--the first jointly
developed product with Heidelberg--highlights our focus on complete,
end-to-end solutions. We believe that Prinergy, which is based on
Adobe-Registered Trademark- Extreme-TM- and PDF (portable document format),
better prepares us to help customers make a seamless transition to a
one-hundred percent digital system. We view Prinergy not only as a workflow
product that drives Creo, Heidelberg, and all other output devices on the
market, but also as the potential center of every printing facility,
controlling all the workflow and offering web and e-commerce capabilities.
Ultimately, it will facilitate all
[PICTURE]
RAFFI AMIT, CHAIR OF THE BOARD OF DIRECTORS
TOTAL TEAM CREO GROWTH SINCE INCEPTION - 1983
[GRAPH]
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8 | LETTER TO THE SHAREHOLDERS
communication between the printer, print buyer, and suppliers, providing
real-time feedback and status reports.
As the industry moves toward a fully digital workflow, many Creo customers must
still work with legacy film and reflective copy. In 1999, Creo introduced the
Renaissance II copydot scanning system; a compact, high-performance system that
scans halftone film separations or reflective copy and generates digital files.
This scanner is based on the same technology as the GATF award-winning Creo
Renaissance copydot scanning system. Since its launch in the summer of 1999, the
Renaissance II has proven itself to be uniquely positioned to take advantage of
the remaining market for film digitization.
OUR SUCCESS TO DATE HAS BEEN DUE IN PART TO OUR STRATEGY OF
ESTABLISHING COLLABORATIVE RELATIONSHIPS; BOTH WITH OUR
CUSTOMERS AND WITH OTHER COMPANIES IN THE INDUSTRY.
CUSTOMER SUPPORT Of the four Creo product groups, Customer Support is by far the
fastest-growing group, expanding to match the pace of new installations. In
fiscal 1999, we began converting this team into a full-service unit and revenues
from Customer Support activities more than doubled. The Creo support network is
widely recognized as among the best in the industry, boasting one-hundred
percent customer retention.
STRATEGIC ALLIANCES Our success to date has been due in part to our strategy of
establishing collaborative relationships with numerous companies in the printing
industry. Nineteen ninety-nine marked the second anniversary of our joint
venture with Germany-based print-industry giant Heidelberger Druckmaschinen AG.
After an adjustment period for both companies, we believe that our alliance is
reaching maturity. Our cooperation unites the flexibility and development
capabilities of Creo with the international marketing strengths and distribution
network of Heidelberg. Distribution via Heidelberg in Europe and non-NAFTA
markets has improved significantly this year. In the last half of fiscal 1999
alone, sales and bookings of joint-venture products outside of North America
exceeded those in NAFTA for the first time.
[PICTURE]
[PICTURE]
In 1999, we also worked on strengthening other strategic alliances, particularly
in the area of imaging media. We extended our relationship with Kodak Polychrome
Graphics on a worldwide basis in the area of thermal plates and films. Kodak
Polychrome Graphics distributes both Creo and JV CTP products in Europe. We
worked closely with Imation Enterprises Corp. in the area of halftone color
proofing and, in the coming year, intend to expand our partnerships in this area
to include Kodak Polychrome Graphics and DuPont.
With the development and launch of Prinergy, our strategic alliance with Adobe
Systems has been in the spotlight in 1999. We began working with Adobe in 1996
and view them as a major partner in the future.
<PAGE>
9 | LETTER TO THE SHAREHOLDERS
CREO 2000 Fiscal 2000 will be a year of continued growth for Creo with the
benefit of having a full family of products, including a new state-of-the-art
workflow management system.
We estimate that the graphic arts prepress equipment, services, and
consumables businesses support annual revenues of U.S. $8-9 billion. Of this,
equipment, software, and services account for $3 billion and our current
addressable market of CTP and associated products/services totals
approximately $0.8 billion. With this in mind, we will continue to focus all
our resources on full digitization of the prepress industry, and will work to
push full digitization into the press and post-press area. This includes
expanding web and e-commerce capabilities to support our activities. Prinergy
lies at the core of this effort, with its Oracle-Registered Trademark-
database and flexible infrastructure providing a solid foundation for full
facility digitization. We believe that Prinergy will be extremely successful
this coming year and will be established as the most productive workflow
system available for the offset printing market. We will look for
opportunities to expand its application and establish it as the industry
standard in production workflows.
We will continue to focus on expanding our number-one market position in CTP
systems by working closely with our partners on improving sales in global
markets. Our topmost priority will be to protect our core business in
large-format (8-page and larger) CTP systems by reducing costs and ensuring that
they continue to provide the best price/performance ratio of any CTP system
available. We will also continue to leverage our technologies in the areas of
DOP imaging kits and 4-page CTP. Our penetration of the flexographic market will
continue as we introduce the most technically advanced systems available. In the
coming years, we will only pursue new opportunities where we believe we can
become the market leader.
NOTE OF THANKS We are thankful for the commitment, creativity, and dedication of
the entire Creo team and their families. Our customers also deserve our thanks
and appreciation for their loyalty, enthusiasm, and ongoing collaboration.
Finally, we would like to thank our partners and shareholders for their
continued support and understanding. We look forward to a productive and
successful year ahead.
/s/ Amos Michelson /s/ Raffi Amit
AMOS MICHELSON RAFFI AMIT
Chief Executive Officer Chair of the Board of Directors
December 1999
[PICTURE]
ADVANCING AN INDUSTRY
CREO IS COMMITTED TO THE ADVANCEMENT OF DIGITAL PREPRESS TECHNOLOGY, WITH OVER
400 CREO PERSONNEL DEDICATED TO APPLIED RESEARCH & DEVELOPMENT. WE ARE AT THE
FOREFRONT OF DIGITAL PREPRESS TECHNOLOGY R&D, INCLUDING NEXT-GENERATION
PRODUCTS THAT IMAGE DIGITAL DATA DIRECTLY ONTO PRINTING PRESSES. TESTAMENT TO
THE EFFORTS AND DEDICATION OF THE CREO TEAM IS THE FACT THAT, IN THE SPACE OF
FIVE YEARS, WE RECEIVED FOUR PRESTIGIOUS INTERTECH TECHNOLOGY AWARDS FROM THE
GRAPHIC ARTS TECHNOLOGY FOUNDATION (GATF):
1994 PLATESETTER 3244
1996 THERMAL IMAGING HEAD
1997 RENAISSANCE COPYDOT SCANNING SYSTEM
1998 PRINTLINK DIGITAL INK-KEY SETTING SOFTWARE
IN 1999, THE CREO THERMOFLEX FLEXOGRAPHIC CTP SYSTEM WAS NAMED INNOVATOR OF THE
YEAR BY THE FLEXOGRAPHIC PREPRESS PLATEMAKERS ASSOCIATION.
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10 | TECHNOLOGY SECTION
THE FREEDOM TO CREATE ...
[PICTURE]
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11 | TECHNOLOGY SECTION
[PICTURE]
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12 | TECHNOLOGY SECTION
[PICTURE]
DAN GELBART, PRESIDENT & CHIEF TECHNOLOGY OFFICER
WE BELIEVE THAT NO COMPETITOR OFFERS A PRODUCT RANGE COMPARABLE TO OURS IN
BREADTH, VERSATILITY, AND PERFORMANCE.
TECHNOLOGY TO TRANSFORM THE WORLD OF PRINT
THE EVOLUTION OF PRINTING If Johannes Gutenberg were alive today, he would
marvel at how his invention of the printing press has changed the very nature of
human civilization. By creating a more efficient method of producing and
circulating information, he literally redefined the way we communicate. At Creo,
we also focus on facilitating the production and movement of information. And,
like Gutenberg, we do it in the world of printing and the graphic arts.
Printing is currently undergoing a radical transformation, moving from its
origins as a manual craft to an automated manufacturing process. Although
quality color printing will always demand the skill and talent of creative
experts and artisans, today's competitive business environment demands that
these skills be complemented with processes that maximize productivity. Creo
prepress solutions help businesses become more efficient--and often more
profitable--by easing the transition to a digital workspace and by helping teams
work better together.
CONVENTIONAL PREPRESS
[PICTURE] Create digital pages [PICTURE] Assemble film flats
[PICTURE] Image film separations [PICTURE] Proof flats
[PICTURE] Develop films [PICTURE] Image printing plates
[PICTURE] Film [PICTURE] Develop plates
[PICTURE] Proof pages [PICTURE] Mount plates on press
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13 | TECHNOLOGY SECTION
MAKING CTP A PRACTICAL SOLUTION Even 20 years ago, the desire to make CTP a
practical reality was widespread. It was only recently, however, that
advancements in computing power, desktop publishing, and imaging technology
reached a point where reliable digital plate-production became feasible. In
1994, Creo was the first to develop and commercialize a fully integrated
high-speed CTP solution. To do this, we spent years researching and working with
industry players to identify and build the tools that would make their
businesses successful. The decisions made and risks taken along the way are what
helped Creo develop the most productive CTP solutions available today. Bold,
strategic decisions--such as the original move to focus on CTP as a
business--have defined the Creo character over the years and enable us to bring
successful products to market quickly. A company-wide commitment to these
decisions serves as the driving force behind our product development
initiatives.
BUILDING A BUSINESS OUT OF CTP Initially, Creo was a manufacturer of optical
tape recorder (OTR) devices and a vendor of laser imaging engines to the
printing industry. In 1991, the decision to service the industry directly as a
full-system CTP provider marked the start of Creo's unwavering commitment to
all-round customer success. Rather than offer a piece of a solution, we decided
to build a complete digital prepress system. The goal? Make it easy for
customers to adopt new technology by eliminating each potential roadblock; one
by one. To do this, we leveraged what we knew best--processless thermal imaging
technology. When we turned our sights to the printing industry, we used this
optical data storage technology as the platform upon which to build the world's
leading CTP systems.
HOT TECHNOLOGY: A FOCUS ON THERMAL IMAGING From 1991 to 1995, most research and
development initiatives at Creo focused on building a viable thermal imaging
engine for CTP applications. In 1994, we delivered our first commercial CTP
system, which used visible light to create the image on the plate. In 1995, we
introduced the first thermal CTP system at DRUPA--the world's largest trade fair
and exposition for printing technologies. Over 40 CTP systems were on display at
DRUPA, but only two were based on thermal technologies. Despite skepticism in
the industry at the time, Creo pursued thermal technology, driven by the fact
that it is the only process capable of imaging the entire range of materials
used by printers and tradeshops: offset plates, processless plates, dry
(waterless) plates, proofing media, film, and even flexographic media.
Since 1995, Creo has proven the value and reliability of thermal CTP technology
at over 1200 demanding production sites worldwide. Our innovations have
established thermal imaging as the industry standard for CTP technology.
[PICTURE]
PRINTING & PREPRESS: A BRIEF INTRODUCTION
THE PRINTING PROCESS PLACES DOTS OF DIFFERENT-COLORED INK ON PAPER SO THAT
TOGETHER, THEY FORM A FULL-COLOR IMAGE. MOST PRINTED IMAGES ARE FORMED BY MIXING
DOTS OF FOUR STANDARD COLORS: CYAN, MAGENTA, YELLOW, AND BLACK (CMYK). TO PRINT
A FULL-COLOR IMAGE ON A PRESS, THE ORIGINAL IMAGE MUST FIRST BE SEPARATED INTO
LAYERS REPRESENTING THE FOUR BASIC INK COLORS. EACH LAYER IS THEN PRINTED
SEPARATELY, ONE ON TOP OF THE OTHER, TO CREATE THE IMPRESSION OF MULTIPLE
COLORS.
THE FOUNDATION OF THIS PROCESS IS THE PRINTING PLATE. THESE ARE GENERALLY MADE
FROM ALUMINUM AND HOLD THE MASTER IMAGE USED BY THE PRESS TO TRANSFER INK ONTO
SHEETS OF PAPER. THE QUALITY OF THE IMAGE ON THE PLATE DIRECTLY AFFECTS THE
QUALITY OF THE PRINTED PIECE. THIS MEANS THAT PLATEMAKING IS ONE OF THE MOST
IMPORTANT ELEMENTS OF PRINT QUALITY. PLATEMAKING IS THE LAST STEP IN THE
PREPRESS PROCESS, WHICH INCLUDES ALL ACTIVITIES REQUIRED TO ENSURE A JOB IS
READY FOR PRINTING.
CREO TECHNOLOGY MAKES PREPRESS THE MOST EFFICIENT, CONSISTENT, ACCURATE PROCESS
POSSIBLE. TO PRINTERS, THIS MEANS A HEALTHIER PROFIT MARGIN AND REDUCED
OPERATING COSTS. TO PRINT BUYERS, IT MEANS GETTING THE BEST POSSIBLE JOB IN THE
SHORTEST POSSIBLE TIME.
CREO SOLUTION
[PICTURE] Create digital pages [PICTURE] Develop plates (optional)
[PICTURE] Workflow management [PICTURE] Mount plates on press
[PICTURE] Image thermal plates and
proofing media
<PAGE>
14 | TECHNOLOGY SECTION
CHANGING THE MINDSET OF AN INDUSTRY
"IN 1995 AT THE DRUPA PRINTING EXHIBITION IN GERMANY, THE PUNDITS OF THE
INDUSTRY COMMENTED THAT THERE WERE MORE COMPUTER-TO-PLATE SYSTEMS INSTALLED AT
THE SHOW THAN IN USER SITES AROUND THE WORLD. THIS WAS TRUE, BUT THE COMMENT
IMPLIED THAT CTP WAS NOT A VIABLE IDEA. THAT EVENT WAS ALSO NOTABLE FOR THE
INTRODUCTION OF CREO THERMAL CTP, WHICH HAD A LOT TO DO WITH CHANGING THE
MINDSET OF THE INDUSTRY.
AS WE RAPIDLY APPROACH DRUPA 2000, Y2K WILL BE REMEMBERED AS YCTP, AS PRINTERS
REALIZE THE BENEFITS OF WORKFLOW EFFICIENCY PROVIDED BY AUTOMATION OF THE
PLATEMAKING PROCESS. NOT ONLY IS THE IDEA VIABLE--IT IS ESSENTIAL FOR THE
SUCCESS OF PRINT AS A COMMUNICATION VEHICLE."
FRANK ROMANO
PROFESSOR
SCHOOL OF PRINTING MANAGEMENT & SCIENCES
ROCHESTER INSTITUTE OF TECHNOLOGY (RIT)
FROM LASER SPOT TO HALFTONE DOT
[PICTURE] - The energy in a Gaussian laser spot is brighter in the center
than at the edge. It is also round while the target pixels are
always square.
[PICTURE] - The laser spot is turned on and off (modulated) on the
recorder grid to build each halftone dot according to how it
was defined in the original bitmap.
[PICTURE] - Each halftone dot defines a tone in the final reproduction. If
the imaging method allows normal manufacturing tolerances and
variations to cause a change in dot size, the result will be a
shift in tone and color on press.
FROM LASER SPOT TO HALFTONE DOT WITH SQUARESPOT
[PICTURE] - Creo uses a unique, square-shaped laser energy spot to expose
the plate. This SQUAREspot imaging technology mimics the
square target pixels precisely.
[PICTURE] - The laser spot is turned on and off (modulated) on the
recorder grid to build each halftone dot according to how it
was defined in the original bitmap.
[PICTURE] - Each halftone dot defines a tone in the final reproduction.
Creo SQUAREspot imaging is virtually immune from the normal
manufacturing tolerances and variations that can cause dot
size changes and subsequent tone and color shift on press.
THE IMPACT OF GAUSSIAN THERMAL IMAGING ON HALFTONE DOTS
[PICTURE] - Gaussian laser spots are larger than the target pixel - their
gradation in energy from center to edge means that the final
dot shape on plate can vary with even minor process
variations.
[GRAPH] - Plate/emulsion thickness, laser exposure power, and processing
variations move the exposure threshold
- Zone of possible variation
- A-B Range of spot sizes that are imaged on plate
[PICTURE] - The edge of a single halftone dot exposed with a Gaussian
laser is an inaccurate representation of the original bitmap
pixels. (Unretouched photo micrograph colored only for
clarity)
[PICTURE] - A closer view, at an angle, reveals that the transition from
the ink-carrying image dot (-) to the water-carrying plate
surface (-) is gradual and poorly defined.
THE IMPACT ON HALFTONE DOTS WITH CREO THERMAL IMAGING
[PICTURE] - Creo SQUAREspot laser spots are square, like the original
halftone bitmap pixels. Laser energy is even from center to
edge. This means that typical, real-world variations in
exposure, plates, and processing can have only a negligible
effect on the final plate dot size.
[GRAPH] - Plate/emulsion thickness, laser exposure power, and processing
variations move the exposure threshold
- Zone of possible variation
- A-B Range of spot sizes that are imaged on plate
[PICTURE] - The edge of a single halftone dot exposed with Creo SQUAREspot
is a sharp, accurate representation of the original bitmap.
(Unretouched photo micrograph colored only for clarity)
[PICTURE] - A closer view, at an angle, reveals that the transition from
the ink-carrying image dot (-) to the water-carrying plate
surface (-) is sharp, steep, and well-defined.
<PAGE>
15 | TECHNOLOGY SECTION
CREO IS THE DRIVING FORCE BEHIND
AN INDUSTRY-WIDE TRANSITION TO
A FULLY DIGITAL PRINT-PRODUCTION ENVIRONMENT.
[PICTURE]
[PICTURE]
When given the choice, customers today overwhelmingly prefer thermal to other
imaging systems. Since January 1997, 99% of the systems we have installed have
been thermal, and all major manufacturers of CTP devices currently offer or plan
to offer thermal products. The majority of new plates and proofing media coming
to market are designed for thermal systems, with major media suppliers now
selling a greater volume of thermal plates than visible-light. The industry has
clearly embraced thermal CTP because it provides the foundation for total
process control and manufacturing efficiency. But not all thermal CTP systems
are created equal.
SQUARESPOT: UNIQUE, PATENTED IMAGING TECHNOLOGY SETS CREO APART The many
benefits of thermal CTP, such as higher-quality presswork, more consistent
reprints, less wastage, and digital image integrity ultimately depend on the
quality and consistency of the image on the printing plate. Creo developed a
unique, patented imaging technology--called SQUAREspot-TM- --which remains
unrivaled in the industry for output precision and predictability.
On a digital plate, the dots that make up each image are comprised of clusters
of laser-exposed spots, which are arranged according to a grid of squares. Most
imaging techniques use a round-shaped laser spot to fill the squares in the
grid. Because the laser forms round spots, each one must be larger than a single
grid-square to avoid creating gaps between adjacent spots. As a result,
neighboring spots overlap, which introduces distortions in the image. In
addition, the exposing energy of a round laser spot varies across its width,
producing inconsistent and unpredictable dots in the final image. Creo
SQUAREspot technology uses a square-shaped laser spot that exhibits virtually no
gradation in energy across its width, making the spot extremely predictable and
consistent. Its square shape allows exposed spots to be precisely knit together
to form any shape of final dot.
SQUAREspot imaging helps printers maintain end-to-end data integrity--from the
original file through to the press--despite the variations that occur in a
typical production environment. Such process control, which is the main
advantage of our systems, is a direct result of the superior edge-resolution
possible with SQUAREspot. Edge-resolution is a measurement of the transition
zone from imaged to non-imaged area at the edges of a laser spot. With
SQUAREspot, this transition is five to ten times more distinct than that of any
BUD LANGE, OWNER
LANGE GRAPHICS
DENVER, CO
"CREO HAS MADE US MORE COMPETITIVE FOR THREE REASONS. WE SAVE OUR CUSTOMERS
MONEY, OUR PROOFING AND PLATING CAPABILITIES ARE SUPERIOR TO THOSE OF OUR
COMPETITION, AND WE ARE ABLE TO PRODUCE BETTER QUALITY WORK MORE EASILY AND MORE
OFTEN. WE'RE GIVING OUR CUSTOMERS BETTER QUALITY WORK TODAY, AT A FASTER PACE,
FOR THE SAME PRICE. IT WAS DEFINITELY THE BEST BUSINESS INVESTMENT WE HAVE EVER
MADE."
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16 | TECHNOLOGY SECTION
CREO SOLUTIONS HELP BUSINESSES BECOME MORE EFFICIENT--
AND OFTEN MORE PROFITABLE--
BY EASING THE TRANSITION TO A DIGITAL WORKSPACE.
[PICTURE]
DAVE KAUFFMAN, WORKFLOW TECHNOLOGY LEADER
PRINERGY--THE NEW POWER IN WORKFLOW
IN 1999, CREO AND HEIDELBERG LAUNCHED THE PRINERGY WORKFLOW MANAGEMENT SYSTEM.
AN INTEGRATED, STATE-OF-THE-ART WORKFLOW MANAGEMENT SYSTEM, PRINERGY IS BASED ON
ADOBE EXTREME AND PDF TECHNOLOGY. BY ORGANIZING AND AUTOMATING THE INDIVIDUAL
TASKS IN PREPRESS AND PLATE PRODUCTION, PRINERGY MAKES IT EASIER THAN EVER FOR
PRINTERS TO MOVE TO A 100% DIGITAL WORKFLOW. PRINERGY IS DESIGNED TO TAKE FULL
ADVANTAGE OF E-COMMERCE TECHNOLOGY, USING GLOBAL STANDARDS FOR DATABASES AND
FORMATS.
THE PRODUCT ARCHITECTURE FOR PRINERGY IS DESIGNED TO MEET FOUR MAJOR OBJECTIVES;
THE FIRST BEING TO HELP PRINTERS AND PREPRESS PROFESSIONALS ACHIEVE RELIABLE
PROCESS CONTROL AND MAXIMUM PRODUCTIVITY. THE SECOND IS TO MAKE JOB PROGRESS
VISIBLE AT ALL STAGES OF PREPRESS, AND THE THIRD IS TO STRENGTHEN TEAMWORK BY
MAKING IT EASY TO SHARE INFORMATION IN REAL-TIME. FINALLY, PRINERGY IS AN OPEN,
ACCESSIBLE TOOL BASED ON INDUSTRY-STANDARD FILE FORMATS. THROUGHOUT THE
DEVELOPMENT PROCESS, CUSTOMERS TESTED AND PROVIDED DIRECT INPUT ON SYSTEM
FEATURES.
other CTP system on the market. The bottom line? Plates that are accurate and
consistent, giving customers the potential to increase their overall throughput,
product quality, and profitability.
ONE SYSTEM ARCHITECTURE; MULTIPLE APPLICATIONS Creo CTP solutions use a
combination of external drum architecture and a multi-beam thermal-imaging head:
[PICTURE]
EXTERNAL DRUM ARCHITECTURE Creo was the first to offer an automatic thermal CTP
system that transfers data onto plates wrapped around the outside of a rotating
drum. We believe that external drum technology produces a higher-quality image
on the plate, because it allows for the use of an auto-focus mechanism that is
essential for high-resolution imaging.
MULTI-CHANNEL THERMAL LASER Creo's patented thermal imaging head splits the
output of a single high-power laser into 240 separate beams. In contrast, most
competing CTP systems use separate lasers to produce each beam, which
significantly increases cost and complexity while reducing reliability.
Creo has used these core elements to build an entire family of imaging systems
for plates and proofing material of all sizes and types; systems that are
modular and scalable to fit any production environment. In addition to
streamlining our support and servicing mechanisms, this architectural simplicity
has allowed us to expand the application of our technology to the broadest
possible range of media, including on and off-press plating. Because all offset
presses are external drum devices, external drum architecture is uniquely suited
for on-press imaging applications using digital offset press (DOP)
technology--the next step in the digitization of the print-production process.
In fact, Creo began to ship DOP imaging solutions in 1999.
CRAFTING A COMPLETE SOLUTION...AND SIZING IT TO FIT With the advent of digital
technology came the need to transfer and manipulate huge volumes of digital
data. We have always believed that a database-driven workflow solution was the
key to making this process manageable. We pioneered this method with
PlateMaster; an open, PostScript-based workflow system currently in use in
hundreds of demanding
<PAGE>
17 | TECHNOLOGY SECTION
print-production facilities. The concept has evolved further with Prinergy,
which uses an Oracle database as its foundation.
At the heart of the decision to focus Creo on CTP was the understanding that
customers would want a complete solution before moving away from familiar,
conventional methods of platemaking. This meant building a system that could
digitize archived or client-supplied film; incorporate a reliable method of
previewing (i.e. proofing) jobs before they were imaged onto plates; and control
and track all job-related activities.
Today, Creo offers a comprehensive range of CTP solutions that comprise a
complete and fully integrated digital prepress system:
- - input devices, which digitize film separations;
- - workflow software, which manages the flow of data as it is processed
and prepared for output;
- - proofing systems, which are used to check color and layout by creating a
simulation of what the final printed job will look like; and
- - output devices, which transfer data onto printing plates.
Creo systems can accommodate a full range of plate sizes, throughput
requirements, and automation levels. Our solutions allow printers and tradeshops
with any size operation to respond more quickly and cost-effectively to demands
from their customers for tighter deadlines, better and more consistent color
quality, shorter print runs, and greater customization of print jobs. At the
same time they can benefit from reduced print cycle times and more flexible
scheduling of presses.
MODULAR, OPEN SYSTEMS MAKE INVESTING EASIER Creo solutions support
industry-standard file formats, accommodate a wide variety of input media, and
are adaptable to emerging file formats. Our equipment is designed to be
compatible with printers' existing prepress equipment, thus avoiding waste and
making our customers' investment decisions easier.
The components of our CTP solutions are modular and can be used separately or
assembled in a variety of configurations to meet the needs of customers with
varying print volumes and press sizes. Components can be added to increase
functionality and/or capacity.
GIVING SUPPORT SERVICES A NEW TWIST Creo offers comprehensive pre-sale
evaluation, installation, system integration, training, and post-sale support
through what we believe is the most knowledgeable and experienced field service
organization in our industry. We believe that our service and support
organization, which maintains the reliability and performance of our systems and
works proactively to improve the productivity of our customers, gives us a
competitive edge.
Today, customers count on Creo to help them be more efficient, more consistent,
and more profitable in their work. Tomorrow, they can continue to count on us as
we redefine industry standards with advanced tools designed for practical
applications.
TONY PARKER, CORPORATE DIRECTOR OF DIGITAL TECHNOLOGY
SMYTH COMPANIES (ST. PAUL, MN)
PIEDMONT LABEL DIVISION (BEDFORD, VA)
"CTP IS NOT ONLY A SYSTEM TO GET IMAGES ONTO PLATE, IT'S LITERALLY TRANSFORMING
THE WAY WE DO BUSINESS. OUR OBJECTIVES ARE TO USE CREO SOLUTIONS TO CREATE
CONSISTENCY AND BUILD COMMON PROCESSES ACROSS THE BOARD. THAT'S WHAT WILL KEEP
US COMPETITIVE IN THE GLOBAL ECONOMY."
PRODUCT OVERVIEW (SIMPLIFIED)
INPUT SYSTEMS
[PICTURE]
RENAISSANCE II
copydot scanning system
[PICTURE]
RENAISSANCE
copydot scanning system
[PICTURE]
COPYDOT TOOLKIT
software
WORKFLOW MANAGEMENT SYSTEMS
[PICTURE]
iMPAct WORKFLOW
PostScript-based
[PICTURE]
PRINERGY WORKFLOW
PDF-based
Creo workflow management solutions are based on open, industry standard
formats in order to enable maximum connectivity among systems produced by
different vendors. These two product families incorporate a variety of tools
that address every facet of print production.
OUTPUT SYSTEMS
Digital Halftone Proofs, Films and/or Plates
OFFSET SYSTEMS
- -------------------------------------------------------------------------------
[PICTURE]
THERMAL HEAD
[PICTURE]
PROOFSETTER SPECTRUM
[PICTURE]
TRENDSETTER FAMILY
[PICTURE]
PLATESETTER 3244
[PICTURE]
VLF TRENDSETTER FAMILY
[PICTURE]
VLF PLATESETTER FAMILY
FLEXO SYSTEMS
- -------------------------------------------------------------------------------
[PICTURE]
THERMOFLEX FAMILY
<PAGE>
18 | A STRATEGY FOR SUCCESS
BELIEVE IN A TRANSFORMATION
OF THE WORLD OF PRINT...
[PICTURE]
<PAGE>
19 | A STRATEGY FOR SUCCESS
[PICTURE]
<PAGE>
20 | A STRATEGY FOR SUCCESS
[PICTURE]
93% OF CTP USERS SURVEYED SAID THAT THEY WOULD STILL BUY CTP
IF THEY HAD TO DO IT ALL OVER AGAIN. 79% OF SURVEY RESPONDENTS INDICATED
THAT THEY PLAN TO MAKE ADDITIONAL CTP INVESTMENTS IN THE FUTURE.
1999 SURVEY OF CTP USER SATISFACTION,
GRAPHIC ARTS TECHNICAL FOUNDATION (GATF), AUTHORED BY HAL HINDERLITER.
A STRATEGY FOR SUCCESS
Over the past decade, companies in the graphic arts and printing industry have
been challenged to keep pace with a steady increase in customer demand for
tighter deadlines, better and more consistent color quality, shorter print runs
and greater customization of print jobs. In a market where competition is fierce
and margins slim, this means finding smart new ways to give print buyers greater
value for the same money. Applying sophisticated technology and automation to
enhance the capabilities of traditional prepress and press operations is the
key. The Creo strategy focuses on generating practical solutions that help
printers and tradeshops around the world stay competitive. It's important to
everyone at Creo that we be recognized as a company that cares about customer
success. Whatever it takes.
CHALLENGES AND OPPORTUNITIES The printing industry is changing, and the change
is not driven by customer demand alone. The trend towards consolidation is
uniting production facilities located a continent apart...or just across town.
New business models are required to manage the fact that jobs might be processed
in one location, proofed at another, and printed at a third. Prepress might
happen in-house or different stages contracted out to a tradeshop.
The way that people communicate and advertise is also changing. The increasing
availability of alternate media, such as the Internet and "on-demand" digital
printing, is giving buyers new ways to deliver information; ways that are cheap,
easy, and immediate. To remain competitive, printers and tradeshops must produce
more, better, faster. Some are adding e-commerce, web design, and on-demand
digital printing to round out their offerings. Equipment investments must pay
back quickly and staff must work at optimum productivity levels. In the end,
producing high-quality output quickly
<PAGE>
21 | A STRATEGY FOR SUCCESS
and reliably will remain critical. We believe that we provide the broadest range
of solutions to make this a reality for businesses of all types and sizes. We're
also plugged into the issues that will affect how these companies remain
competitive as the industry evolves. Through a combination of partnership,
understanding, support, and innovative technology, we will lead them to success
in the coming years.
MARKET DEMOGRAPHICS Commercial printing is the largest segment of the printing
industry and commercial printers are the largest purchasers of prepress capital
equipment. 1997 revenues of commercial printers in the United States alone
exceeded $70 billion,(1) and it has been estimated that the worldwide market for
prepress imaging equipment will exceed $3 billion.(2) We believe that less than
20% of commercial printers in the world currently use CTP solutions and we are
focused on the fact that CTP unit shipments worldwide are expected to grow at a
compound annual growth rate of over 25% from 1999 to 2003.(3)
At the end of fiscal 1999, more than 1200 of our CTP systems had been installed
in 29 countries worldwide, with many of the largest commercial printers in North
America and Europe having installed our systems at multiple sites. About half of
current Creo customers are small and mid-size commercial printers. Our goal is
to continue to expand penetration of the worldwide small and mid-size printing
market.
STRATEGIC DIRECTIONS
Our primary objective is to maintain our position as a leading developer and
supplier of innovative digital prepress products and technologies, expanding
over time to include on-press and post-press solutions. To cite our mission
statement, by 2001 the digital prepress solutions provided by Creo and its
partners will be the DE FACTO standard in the graphic arts industry. Our
business strategy consists of the following four key elements:
FOCUS ON CUSTOMER SUCCESS We strive to work closely with our customers to ensure
that Creo solutions generate clear economic benefits for them. Their
contributions are important to our design process, helping us to evaluate the
productivity, output quality, reliability, and ease-of-use of our systems. In
the coming years, we will continue our efforts to make our systems a
cost-effective investment for every size and type of print operation. We will
also carry through with plans to expand our customer service capabilities and
become even more proactive about support and training issues.
EXPAND AND LEVERAGE STRATEGIC BUSINESS ALLIANCES Creo's success to date has
been due in part to a 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.
[PICTURE]
EXCELLENCE IN OPERATIONS
AT CREO, WE MAINTAIN SUPERIOR QUALITY STANDARDS BY IMPLEMENTING A QUALITY
SYSTEM BASED ON THE REQUIREMENTS OF THE ISO 9002 STANDARD. THIS QUALITY
SYSTEM WORKS IN TANDEM WITH A STRONG EFFORT TO INSTILL PERSONAL QUALITY
RESPONSIBILITIES IN EACH CREO EMPLOYEE. EVERYONE AT CREO IS RESPONSIBLE FOR
ENSURING THAT OUR CUSTOMERS ARE SUCCESSFUL AND SATISFIED USING CREO PRODUCTS
AND SERVICES.
AS PART OF AN ONGOING EFFORT TO IMPROVE OPERATIONAL CAPABILITIES, CREO
DEPLOYS BEST-OF-BREED SYSTEMS FOR EACH AREA OF THE COMPANY. FOR ORDER
FULFILLMENT, MANUFACTURING, FINANCE, AND HUMAN RESOURCES, WE USE SAP,-TM-
WHICH WE HAVE SUCCESSFULLY INTEGRATED WITH CLARIFY-TM---OUR CUSTOMER SUPPORT
SYSTEM--AND PLAN TO INTEGRATE WITH PIVOTAL-Registered Trademark--- OUR SALES
SYSTEM.
CREO USES MICROSOFT-Registered Trademark- NT,-Registered Trademark-
SQL SERVER,-TM- EXCHANGE, AND IIS; WORKING CLOSELY WITH MICROSOFT AS A BETA
SITE FOR SQL 7.0. WE HAVE A RICH, DEEP INTRANET FOR COMMUNICATING INFORMATION
TO CREO EMPLOYEES WORLDWIDE, AND WE ARE MAKING A SIGNIFICANT INVESTMENT IN
THE CREONET WEB INFRASTRUCTURE TO SUPPORT A RANGE OF E-BUSINESS INITIATIVES.
(1) Industry study prepared in July 1998 for NPES (The Association for
Suppliers of Printing, Publishing and Converting Technologies) based in
Reston, Virginia.
(2) Report prepared in November 1997 by State Street Consultants, Inc., an
independent consulting firm based in Boston, Massachusetts.
(3) June 1999 report prepared by Cloud Information Services, industry
researchers based in Nashua, New Hampshire.
<PAGE>
22 | A STRATEGY FOR SUCCESS
NOT ONLY DOES OUR PHILOSOPHY OF SELF-MANAGEMENT
ALLOW US TO PUSH THE TECHNOLOGICAL ENVELOPE,
BUT IT ALSO KEEPS OUR STAFF TURNOVER RATE
ONE OF THE LOWEST IN THE INDUSTRY.
TED ETHERIDGE, PRESIDENT & CEO
STEKETEE VAN-HUIS
HOLLAND, MI
"OUR PAYBACK WILL BE MEASURED BY IMPROVEMENTS IN PRESSWORK QUALITY, SHORTENED
TURNAROUND TIME FOR OUR CUSTOMERS, REDUCTION OF LEAD TIME ON JOBS, AND THE
FLEXIBILITY OF MAKING LAST-MINUTE CHANGES BEFORE THE PLATES ARE IMAGED. WE'RE
SELLING PREDICTABLE RESULTS TO OUR CUSTOMERS, AND WE BELIEVE THAT CREO AND
HEIDELBERG DELIVER THE MOST PREDICTABLE RESULTS FROM PROOF TO PLATE TO PRESS,
DAY IN AND DAY OUT."
CREO OPERATING PRINCIPLES
WE STRIVE TO BE THE BEST IN THE WORLD IN ALL THAT WE DO
WE CARE ABOUT EACH OTHER, OUR CUSTOMERS, OUR SUPPLIERS, AND OUR SHAREHOLDERS
WE WILL DO OUR ABSOLUTE BEST TO HONOR OUR COMMITMENTS
WE BELIEVE PEOPLE ARE MOST EFFECTIVE WHEN SELF-MANAGED
WE WILL STRIVE TO ACT ALWAYS WITH INTEGRITY AND FAIRNESS
CONTINUE TO EXPAND OUR GLOBAL MARKET PRESENCE We plan to increase expansion of
our market penetration geographically, with a focus on small to mid-size
commercial printers, which generally use 4-page and 8-page presses. We will
continue to expand our presence in the international market for large-format CTP
systems by augmenting our direct sales force and cultivating distribution
arrangements with leading vendors of thermal plates.
EXPAND OUR TECHNOLOGY LEADERSHIP We intend to continue to make significant
investments in the research and development of innovative, next-generation,
market-leading technologies. We will continue to broaden the range of our
product offerings as well as enhance the features, reliability, and
price/performance ratio of our existing products.
COMPETITIVE ADVANTAGES
TEAM-FOCUSED MANAGEMENT Creo is built on a foundation of solid technology,
strong business sense, calculated risk, good timing, and a healthy measure of
fun. We emphasize teamwork, flexibility, decentralized decision-making and the
free flow of information. Over the years, we have developed a unique corporate
culture that attracts highly qualified and motivated employees. Not only does
our philosophy of self-management and the encouragement of creativity allow us
to push the technological envelope, but it also keeps our staff turnover rate
one of the lowest in the industry. In 1999, only 3.8% of our staff chose to move
on.
We believe that our management approach enables each individual to perform at
their best, in the method that best suits their own unique style. Our
decentralized organization is a key factor in the Company's ability to
accommodate rapid growth in multiple geographic locations with relative ease.
Creo was founded on a vision that stresses consensus, unit presidency, and
economic thinking, while discouraging the politics and unilateral directives
that can often result from a structured hierarchy.
We feel it is important that every Creo employee be a shareholder in the company
and share in the rewards earned by the team as a whole. This level of employee
ownership is quite rare, especially in a high-technology industry. Many people
find it interesting to learn that performance evaluation at Creo is based on an
annual 360-degree peer review. Conducted every October, this process is managed
using sophisticated, confidential database tools and covers every employee,
including Senior Management.
<PAGE>
23 | A STRATEGY FOR SUCCESS
As at September 30, 1999, we employed 1486 people full-time. Of these, 447 are
engaged in research and product development, 390 in manufacturing, 377 in
customer support activities, 149 in marketing and sales and 123 in
administration.
IN-HOUSE RESEARCH AND PRODUCT DEVELOPMENT Research and product development
activities at Creo are performed in-house by engineers and scientists with
expertise in a variety of fields, including software, electronics, mechanics,
optics, physics, and printing. Product development is organized around core
teams that involve representatives from all areas of the company. Each core team
has the authority to manage all aspects of its products and projects, including
product architecture, core technology, functionality, and testing.
Current research and product development efforts are focused on improving our
current product line; developing next-generation workflow and output devices,
including digital offset press products; and applying our core technologies to
new printing markets and methods such as packaging printing and flexography.
Our success and ability to compete are dependent in part on our ability to
develop and protect proprietary technology. We file United States and, where
appropriate, foreign patent applications to protect technology, inventions and
improvements important to the development of our business. We also rely on a
combination of copyright, trademark and trade secret rights, confidentiality
agreements, and licensing arrangements.
CONCENTRATED PRODUCTION We produce and assemble most of our hardware and
software products, including all thermal imaging heads, at the three Creo
production facilities in British Columbia, Canada. Electro-optical assembly,
precision mechanics and electro-mechanical assembly, as well as testing and
systems integration are also performed at these facilities. In order to maintain
flexibility and reduce costs, Creo sub-contracts the manufacture and assembly of
some of the components of our output devices. All of our output devices are
designed to use the same imaging heads, resulting in reduced inventory
requirements and increased manufacturing and servicing efficiencies. 4- and
8-page Trendsetters are also produced at Heidelberg's manufacturing facility in
Kiel, Germany. These systems are destined for delivery to customers in Europe,
Asia, Africa, and South America.
CLOSE CUSTOMER RELATIONSHIPS & COMPREHENSIVE CUSTOMER SUPPORT Creo backs up the
most dependable, highest-quality products in the industry with what we believe
to be the most dependable, highest-quality customer support in the industry. We
provide comprehensive services to our customers, including on-site and 24 x 7
on-line service and support. Our site-ownership approach promotes a long-term
relationship between the customer and Creo support staff; a relationship built
on a complete understanding of each customer's unique challenges.
[PICTURE]
[PICTURE]
BEYOND PROFITS--DIGITAL SOLUTIONS THAT BENEFIT THE ENVIRONMENT
NOT ONLY DOES DIGITAL TECHNOLOGY SAVE PRINTERS AND PREPRESS EXPERTS MONEY, BUT
IT ALSO BENEFITS THE ENVIRONMENT BY REDUCING WASTE AND CHEMICAL BY-PRODUCTS. BY
ELIMINATING FILM AND THE CHEMICALS ASSOCIATED WITH PROCESSING IT, CTP HAS MADE
GREAT STRIDES IN REDUCING THE NON-RECYCLABLE AND POTENTIALLY TOXIC WASTE
PRODUCED IN THE PRINTING PROCESS. IN FACT, THE EFFICIENCIES THAT CTP BRINGS TO
THE PRESSROOM GENERATE OVERALL SAVINGS OF INK, PAPER, POWER, AND IMAGING MEDIA.
BECAUSE THERE IS LESS PAPER WASTED IN PRESS MAKE-READY, DISPOSAL REQUIREMENTS
CAN ALSO BE SIGNIFICANTLY REDUCED.
CREO HAS BEEN DRIVING THE DEVELOPMENT OF PROCESSLESS PLATE-IMAGING TECHNOLOGY,
TO REDUCE COSTS AND TIME IN PREPRESS, BUT ALSO TO DELIVER LONG-TERM
ENVIRONMENTAL BENEFITS. WE ARE ACTIVELY WORKING WITH ALL MAJOR MEDIA VENDORS
WORLDWIDE TO HELP THEM DEVELOP AND TEST PROCESSLESS MEDIA.
<PAGE>
24 | A STRATEGY FOR SUCCESS
[PICTURE]
DESTINATION: THE WORLD
FROM CREO HEADQUARTERS IN GREATER VANCOUVER, CANADA AND HEIDELBERG'S
MANUFACTURING FACILITY IN KIEL, GERMANY, ABOUT 90 IMAGING SYSTEMS PASS THROUGH
THE SHIPPING BAYS EACH MONTH. DESTINED FOR COUNTRIES AROUND THE WORLD, EACH
SYSTEM IS SPECIALLY PACKAGED TO ENSURE ITS PROTECTION. TO DATE, THERE HAS NEVER
BEEN AN INSTANCE OF SYSTEM DAMAGE EN ROUTE TO A CUSTOMER SITE.
LIKE OUR PRODUCTS, THE CREO TEAM TRAVERSES THE GLOBE. FROM FIELD OFFICES IN 15
COUNTRIES, CREO SALESPEOPLE AND SERVICE ENGINEERS SUPPORT A DIVERSE GROUP OF
CUSTOMERS IN ALL LOCATIONS WHERE OUR SYSTEMS OPERATE. BY EMPLOYING PEOPLE
LOCALLY, WE GAIN VALUABLE MARKET EXPERTISE AND A BETTER UNDERSTANDING OF THE
UNIQUE PRODUCTION CHALLENGES FACED BY CUSTOMERS IN DIFFERENT GEOGRAPHIC AREAS.
OUR JOINT EFFORTS WITH HEIDELBERG ENSURE OUR REPRESENTATION IN AN EVEN LARGER
MARKET OF UP TO 160 COUNTRIES. THIS FAR-REACHING INFRASTRUCTURE ALSO ALLOWS US
TO SERVICE GLOBAL PRINT GROUPS AT ANY OF THEIR LOCATIONS AROUND THE WORLD.
[LOGO]
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We maintain modem connections with most of our systems, which allows engineers
to perform remote diagnostics and provide immediate trouble-shooting support. In
addition to regular service calls, Customer Support Engineers visit each
customer site at least twice a year to perform preventative maintenance. We also
provide instruction to customers in the use of all of our products, both at
their sites and at training centers located at our headquarters in Canada and
Europe, and at our software-training center near Chicago.
STRATEGIC ALLIANCES
PARTNERS IN PROGRESS An important part of the Creo growth strategy has been
establishing strategic alliances with major industry players. In October 1997,
we entered a joint venture with Heidelberg--the largest press manufacturer in
the world--to develop, manufacture, market, and distribute our CTP solutions
worldwide. 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 realize significant benefits from this joint venture.
These include:
- - access to Heidelberg's worldwide customer base of small and mid-size
commercial printers, through its established marketing and distribution
network;
- - access to Heidelberg's extensive service and customer support organization
outside North America;
- - shared funding of some of our research and development projects relating
to joint-venture CTP products; and
- - cost-effective manufacture of some CTP products by Heidelberg in
Kiel, Germany.
We are grateful for the support and cooperation that other industry leaders have
shown us over the years. Some of the companies we have partnered with to date
are represented on this page by logo.
MOVING FORWARD
Over the past six years, Creo has led the industry in the transition to digital
print-production processes. We believe we are in a unique position to leverage
our experience to take the industry to the next stage--connecting the physical
world of print with the virtual world of the Internet. It is clear that the
Internet and electronic commerce will have a significant impact on the printing
industry. Electronic commerce is being used across all industries to improve
communications and productivity between vendors and customers. Effective
communication makes existing processes more efficient and provides an economical
way of producing print in ways that could once only be imagined. At Creo, we
have a history of building and supporting systems that work well and deliver
real value to our customers. We will continue this in the years to come.
<PAGE>
25 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
INDEX TO FINANCIAL STATEMENTS
Management's Discussion and Analysis
of Financial Condition and Results of Operations 26
Consolidated Balance Sheets 37
Consolidated Statements of Operations
and Retained Earnings (Deficit) 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
ALL AMOUNTS IN U.S. DOLLARS
<PAGE>
26 | MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
We are a leading developer, manufacturer and distributor of comprehensive
digital solutions that automate the prepress phase of commercial printing. Our
solutions enable commercial printers to use their installed base of printing
presses more profitably while improving their ability to meet customer demands
for tighter deadlines, better and more consistent color quality, shorter print
runs, and greater customization of print jobs.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 Heidelberger Druckmaschinen AG 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 that 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 CTP and
related workflow products and consumables. The joint venture is co-managed and
does not own any material assets, maintain any employees, or operate any
manufacturing or other operating facilities. We share 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.
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27 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 its digital prepress products and corresponding improvements in
Creo's product revenue growth.
Creo's business and results of operation are dependent upon the success of the
joint venture with Heidelberg. Our share of joint-venture revenue accounted for
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
adversely 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.
SALES AND MARKETING Sales and marketing expenses are primarily attributable to
the salaries, commissions, travel costs, office expenses, and support staff
associated with our sales staff. In addition, the costs of trade shows,
advertising, and marketing are also included in sales and marketing expenses.
Due to the growth of our business primarily in North America and Europe, we
intend to continue to invest in the expansion of our sales force. Because of the
competitive nature of our business, we do not expect our sales and marketing
expenses to decrease as a percentage of our revenue.
FOREIGN EXCHANGE Substantially all of our revenue is received in U.S. dollars. A
significant portion of our expenses are incurred in Canadian dollars and Belgian
francs. As a result, appreciation in the value of these currencies relative to
the U.S. dollar could adversely affect our operating results. Foreign currency
translation gains and losses arising from normal business operations are
credited to or charged against other income for the period incurred. To date, we
have not done any currency hedging to minimize the effect of these gains or
losses. As a result, fluctuations in the value of Canadian dollars and Belgian
francs relative to U.S. dollars have caused and will continue to cause currency
translation gains and losses.
Our consolidated financial statements are prepared in accordance with Canadian
GAAP. These principles conform in all material respects with U.S. GAAP, except
as disclosed in note 15 to the consolidated financial statements.
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28 | MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997 The joint venture with Heidelberg commenced operations on
October 1, 1997. During the joint venture's first two years of operations our
revenue growth rate decreased compared to prior periods, even though unit sales
of our computer-to-plate products increased. This decrease was expected because
prior to the start-up of the joint venture, all of the revenue from sales by us
of the computer-to-plate products now sold by the joint venture was recorded in
our income statement, whereas now only one-half of the revenue arising from
sales through the joint venture is for our account. The following comparison of
results of operations for 1999, 1998, and 1997 should accordingly be read with
this development in mind.
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 was due to the
substantial increase in the installed base of our equipment. Revenue from our
North American customers accounted for $110.0 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, 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
CONSOLIDATED REVENUE (THOUSANDS OF US $)
[GRAPH]
NET INCOME (THOUSANDS OF US $)
[GRAPH]
EARNINGS PER SHARE (FULLY DILUTED CDN GAAP)
[GRAPH]
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29 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 and development expenses 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. 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. See note 10 to our
consolidated financial statements.
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, cash generated by
operations, and proceeds from our Initial Public Offering. 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 have 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.
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30 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 existing cash balances, cash generated by our operations, and
funds available under our credit facility will be sufficient to meet our
anticipated working capital and capital expenditure requirements for the next
two years.
YEAR 2000 READINESS DISCLOSURE: STATE OF READINESS We initiated a Year 2000
compliance program for our products in the summer of 1998. The program focused
on two areas:
THE COMPONENTS OF CREO PRODUCTS THAT ARE PROVIDED BY SUB-CONTRACTORS;
AND THE COMPONENTS OF CREO PRODUCTS THAT WE PRODUCE OURSELVES.
We have completed our tests on the product components that could be affected by
Year 2000 issues and, based on our tests, we believe that all of these
components are Year 2000-compliant. Although we have received written warranties
or other representations from substantially all of our sub-contractors that
their products are Year 2000-compliant, we have no other Year 2000-related
contractual commitments. Moreover, if we were to make a warranty claim against
one of our sub-contractors because of a malfunction related to the Year 2000,
there can be no assurance that the sub-contractor would actually pay our
warranty claim. 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/are not Year
2000-compliant. In the event of a failure of one of our products at a customer
site, our normal protocols for customer support would be followed. Heidelberg
believes that the products it produces for our joint venture are Year
2000-compliant apart from a few exceptions that are currently being addressed.
COSTS OF ADDRESSING YEAR 2000 ISSUES Given the extent of our systems'
compliance, we do not expect Year 2000 compliance costs to have any material
adverse impact on our business. The total costs for the Year 2000 compliance
assessment and remediation undertaken by us have not been significant and are
included in general and administrative expenses.
RISKS OF YEAR 2000 ISSUES In light of our assessment and remediation efforts to
date, we believe that any residual Year 2000 risk is limited to non-critical
business applications and support hardware. We have no assurance that the
outside manufacturers who supply components to us will be Year 2000-
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31 | MANAGEMENT'S DISCUSSION & ANALYSIS
compliant with their internal systems. A reduction in the supply of product from
these suppliers could have a material adverse effect on our business.
CONTINGENCY PLANS The most likely worst-case scenario that we may encounter as a
result of a Year 2000 issue is a product failure at one or more of our customer
sites coupled with a parts shortage resulting from one or more of our suppliers
failing to be Year 2000-compliant. To address the possibility of a product
failure at one or more of our customer sites as a result of a Year 2000 issue,
we will have additional customer service and support personnel on hand in our
Response Center during the beginning of the Year 2000 to handle any unusual
increase in customer requirements. To address the possibility of a parts
shortage resulting from one or more of our suppliers failing to be Year
2000-compliant, we have identified other suppliers that could rapidly provide an
alternative source of component parts.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In addition to the U.S. GAAP
differences referred to in note 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, but does not believe its adoption will materially
affect our historical results of operations or shareholders' equity when
reconciled to U.S. GAAP as set out in our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have used an
interest rate swap to manage our risk with regards to interest rate changes. As
a result, floating rate debt has been converted to fixed rate debt. The swap
results in our paying an interest rate of 8.05% and receiving an interest rate
of LIBOR + 1.5% for the duration of the long-term debt. The fair value of the
interest rate swap as at September 30, 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.
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.
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's 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.
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32 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 begun to demonstrate 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 our products if they have reliability, quality, or
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33 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 customers. We carry
product liability insurance that we consider adequate, but a successful claim
against us for an amount exceeding our policy limits would force us to use our
own resources to pay the claim, which would result in a reduction in our working
capital available for other uses, as well as an increase in our expenses and a
negative effect on our results of operations.
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 could 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 Executive 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 our
executive officers, or if one or more of them decide to join a competitor or
otherwise compete directly or indirectly with us, our business would be
seriously harmed. 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
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34 | MANAGEMENT'S DISCUSSION & ANALYSIS
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.
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 plan 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 need to further improve our
operational, financial, and management systems and successfully 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 among
other things 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
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35 | MANAGEMENT'S DISCUSSION & ANALYSIS
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 are 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 sub-contractor 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>
36 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The management of Creo Products Inc. is responsible for the preparation of the
accompanying consolidated financial statements and the preparation and
presentation of all information in the Annual Report. The consolidated financial
statements have been prepared in accordance with the accounting principles
generally accepted in Canada and are considered by management to present fairly
the financial position and operating results of the Company. Material
differences to United States accounting principles are set out in Note 15.
The Company maintains various systems of internal control to provide
reasonable assurance that transactions are appropriately authorized and
recorded, that assets are safeguarded, and that financial records are
properly maintained to provide accurate and reliable financial statements.
The Company's audit committee is composed entirely of non-management directors
and is appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
financial reporting matters and internal controls and to review the consolidated
financial statements and the auditors' report. The audit committee reported its
findings to the Board of Directors, who have approved the consolidated financial
statements. The Company's independent auditors, KPMG LLP, have examined the
consolidated financial statements and their report follows.
/s/ Amos Michelson /s/ Thomas Kordyback,
AMOS MICHELSON, Chief Executive Officer THOMAS KORDYBACK, Chief Financial
Officer
November 9, 1999
AUDITORS' REPORT TO THE SHAREHOLDERS
TO THE SHAREHOLDERS OF 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 audits 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 for the year ended September 30, 1997,
prior to restatement for the change in amortization policy and recording of
incentive shares as described in note 1l, 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
KPMG LLP, Chartered Accountants
November 9, 1999
<PAGE>
37 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
CREO PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS OF U.S. DOLLARS)
SEPTEMBER 30 1999 1998
<S> <C> <C>
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 AND SHAREHOLDERS' EQUITY
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
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
38 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
CREO PRODUCTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30 1999 1998 1997
(NOTE 1l)
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES:
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)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
39 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
CREO PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS OF U.S. DOLLARS)
YEARS ENDED SEPTEMBER 30 1999 1998 1997
(note 1l)
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
40 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
CREO PRODUCTS INC.
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:
<TABLE>
<S> <C>
Building 4%
Equipment 20%
Computer software 100%
Furniture and fixtures 20%
</TABLE>
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 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 received 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.
<PAGE>
41 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
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.
2 JOINT VENTURE
Effective October 1, 1997, the Company entered into a 50%-owned unincorporated
joint venture with Heidelberger Druckmaschinen AG (Heidelberg) with respect to
the design, manufacture, and marketing of certain digital prepress equipment.
The joint venture has no assets or liabilities. The consolidated financial
statements include the following amounts representing the Company's
proportionate share of the operations of the joint venture:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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 $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
Cash provided by operating activities $24,831 $13,537 $ -
- --------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
SEPTEMBER 30
1999 1998
<S> <C> <C>
Materials $15,321 $11,722
Work-in-progress 8,256 7,240
Finished goods 8,670 6,189
- ---------------------------------------------------------------------
$32,247 $25,151
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
42 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
5 CAPITAL ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
SEPTEMBER 30
1999 1998
<S> <C> <C>
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
- ---------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
SEPTEMBER 30
1999 1998
<S> <C> <C>
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
- ---------------------------------------------------------------------
</TABLE>
7 LONG-TERM DEBT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SEPTEMBER 30
1999 1998
<S> <C> <C>
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
- ---------------------------------------------------------------------------------
</TABLE>
On November 3, 1999, the Company repaid in full its first mortgage to 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 an unlimited number of voting
common shares without par value and an unlimited number of preferred shares
issuable in series.
<PAGE>
43 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
b ISSUED AND OUTSTANDING
There have been no preferred shares issued. Common shares issued and outstanding
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
COMMON SHARES ISSUED AND OUTSTANDING
NUMBER OF
COMMON STATED
SHARES VALUES
- -----------------------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
SHARE OPTION ACTIVITY
WEIGHTED
NUMBER OF AVERAGE
COMMON EXERCISE
SHARES PRICE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SHARE OPTIONS OUTSTANDING
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT SEPT.30, CONTRACTUAL EXERCISE AT SEPT. 30, EXERCISE
Range of Exercise Price 1999 LIFE PRICE 1999 PRICE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
- ---------------------------------------------------------------------------------------------------
</TABLE>
d WARRANTS
The Company issued warrants to purchase 24,598 shares on or before June 2, 2002
as consideration for raising capital in 1997. The exercise price of each warrant
is $9.38.
<PAGE>
44 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
9 RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
</TABLE>
10 INCOME TAXES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES ARE AS FOLLOWS: YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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:
<CAPTION>
YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
<CAPTION>
INCOME TAX RATE: YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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%
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
TEMPORARY DIFFERENCES THAT GIVE RISE TO FUTURE INCOME TAXES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
<S> <C> <C>
Current future income tax asset (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)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<CAPTION>
SEPTEMBER 30
1999 1998
<S> <C> <C>
Long-term future income tax asset (liability):
Capital assets $ 69 $(412)
Financing costs 1,998 359
- ---------------------------------------------------------------------------
Total long-term future income tax $2,067 $ (53)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
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.
- ---------------------------------------------------------------------------
<PAGE>
45 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
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 amount of income imputed after income taxes was $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 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.
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:
<TABLE>
<S> <C>
2000 $1,609
2001 1,119
2002 825
2003 489
2004 272
Thereafter 385
- ----------------------------
$4,699
</TABLE>
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 that
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
REVENUE GENERATED BY GEOGRAPHIC REGION YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
LOCATION OF CAPITAL ASSETS SEPTEMBER 30
1999 1998
<S> <C> <C>
Canada $37,678 $31,914
Other 3,040 2,232
- ---------------------------------------------------------------------
$40,718 $34,146
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
46 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
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 statements 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
EFFECT OF CHANGE OF AMORTIZATION POLICY YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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 3,194 (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
- ---------------------------------------------------------------------------------------------
</TABLE>
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.
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
c STATEMENT OF CASH FLOWS
Under U.S. GAAP, no subtotal would be provided in the operating section of the
statements of cash flows.
<PAGE>
47 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
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 or 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 are 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.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option valuation model with the following assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ASSUMPTIONS FOR FAIR VALUE YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED NET EARNINGS AND EARNINGS PER SHARE YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30
1999 1998 1997
<S> <C> <C> <C>
Charged to expenses $358 $ 51 $426
Balance, end of year $114 $180 $391
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
48 | CREO PRODUCTS INC. 1999 ANNUAL REPORT
BOARD OF DIRECTORS AND CREO
MANAGEMENT TEAM
The following table presents information about our Board of Directors and the
Creo Management Team, as of September 30, 1999:
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ---------------------------------------------------------------------------------------------------
<S> <C>
AMOS MICHELSON Chief Executive Officer, Creo
- ---------------------------------------------------------------------------------------------------
DAN GELBART President and Chief Technology Officer, Creo
- ---------------------------------------------------------------------------------------------------
RAFFI AMIT, PH.D. Chair of the Board
Professor, The Wharton School, University of Pennsylvania
- ---------------------------------------------------------------------------------------------------
DAVID A. BENNETT Managing Director, Business Development Bank of Canada
- ---------------------------------------------------------------------------------------------------
THOMAS D. BERMAN Executive Director, Brinson Partners, Inc.
- ---------------------------------------------------------------------------------------------------
JOHN J. BU Managing Director, Goldman, Sachs & Co.
- ---------------------------------------------------------------------------------------------------
DOUGLAS H. RICHARDSON Director of Technology, Imaging and Media, Creo
- ---------------------------------------------------------------------------------------------------
KENNETH A. SPENCER, PH.D Corporate Director
- ---------------------------------------------------------------------------------------------------
CHARLES YOUNG President, Marin Investments
- ---------------------------------------------------------------------------------------------------
<CAPTION>
CREO MANAGEMENT TEAM
- ---------------------------------------------------------------------------------------------------
<S> <C>
AMOS MICHELSON Chief Executive Officer
- ---------------------------------------------------------------------------------------------------
DAN GELBART President
- ---------------------------------------------------------------------------------------------------
MICHAEL D. BALL Vice President, Business Development
- ---------------------------------------------------------------------------------------------------
DAVID BROWN Vice President, Business Strategy
- ---------------------------------------------------------------------------------------------------
MARK N. DANCE Vice President and Chief Operating Officer
- ---------------------------------------------------------------------------------------------------
PHILIPPE H. FAVREAU Vice President, Manufacturing
- ---------------------------------------------------------------------------------------------------
KEVIN M. JOYCE Vice President, Sales of Creo Inc.
- ---------------------------------------------------------------------------------------------------
THOMAS A. KORDYBACK Vice President, Finance, Chief Financial Officer and Secretary
- ---------------------------------------------------------------------------------------------------
ROBERT J. MIELCARSKI Vice President, Business Systems and Technology
- ---------------------------------------------------------------------------------------------------
BOUDEWIJN P. NEIJENS General Manager of Creo Products N.V.
- ---------------------------------------------------------------------------------------------------
B. DARCY O'GRADY Vice President, Human Resources
- ---------------------------------------------------------------------------------------------------
MICHAEL ROLANT Vice President, Customer Support
- ---------------------------------------------------------------------------------------------------
</TABLE>
INVESTOR INFORMATION
INVESTOR RELATIONS
Creo Products Inc.
3700 Gilmore Way
Burnaby, BC
Canada V5G 4M1
TEL 604.451.2700
FAX 604.437.9891
EMAIL [email protected]
INTERNET www.creo.com
TRANSFER AGENT AND REGISTRAR
Montreal Trust Company of Canada
Stock and Bond Transfer Department
510 Burrard St.
Vancouver, BC
Canada V6C 3B9
TEL 604.661.0222
FAX 604.661.9498
LISTING
Creo Products Inc. is listed on the Toronto Stock Exchange under the trading
symbol CRE, and on the NASDAQ National Market under the trading symbol CREO.
TRADEMARKS
Creo, the Creo logo, and Trendsetter are registered trademarks of Creo Products
Inc. Prinergy, Staccato, Harmony, Trendsetter Spectrum, Proofsetter Spectrum,
ThermoFlex, and SQUAREspot are trademarks of Creo Products Inc. All other terms
and product names may be trademarks or registered trademarks of their respective
owners and are hereby acknowledged.
CREO OFFICES
HEAD OFFICE
3700 Gilmore Way [PICTURES]
Burnaby, BC
Canada V5G 4M1 [PICTURES]
TEL 604.451.2700
FAX 604.437.9891 www.creo.com
USA REGIONAL OFFICES EUROPEAN
HEADQUARTERS
NORTHEAST
TEL 978.937.8200 BRUSSELS, BELGIUM
TEL +32.2.711.1400
CENTRAL FAX +32.2.720.9671
TEL 630.250.3170
AUSTRALIAN FIELD OFFICE
WESTERN
TEL 714.736.5820 SYDNEY, AUSTRALIA
TEL +61.2.93.18.5262
SOUTHERN FAX +61.2.93.18.5204
TEL 770.951.9050
