Our legal and commercial
name is Scitex Corporation Ltd. and our legal form is a company limited by
shares. We were incorporated under the laws of the State of Israel on November
2, 1971, succeeding a predecessor corporation, Scientific Technology Ltd. that
was founded on September 5, 1968. Our corporate headquarters and principal
executive offices are located at 3 Azrieli Center, Triangular Tower, 43
rd
Floor, Tel Aviv, 67023, Israel. Our telephone number in Israel is (972) 3 – 6075855. Our website address
is
www.scitex.com
. Information
contained on our website does not constitute a part of this Annual Report.
We initially focused on
imaging competencies in systems for the textile design market. In 1979, we
launched the world’s first computerized color prepress system. In the 1990s we
identified the evolving digital printing market and focused on commercializing
innovative solutions for the graphic publishing industry in its transition from
analog to digital printing, and made several key acquisitions of digital
printing operations. In April 2000, we sold our digital preprint operations and
our print-on-demand systems business to Creo. We, through our subsidiaries, now
design, develop, manufacture, market and support primarily industrial inkjet
digital printing solutions.
M
AJOR
B
USINESS
D
EVELOPMENTS
We are currently focusing,
through Scitex Vision, on the wide format segment of the industrial inkjet
digital printing market. In January 2004, we ended our involvement in the
high-speed digital printing business through the sale of the business of SDP to
Kodak (
see Item 10C below
). In connection with that transaction, we approved a
plan to distribute approximately $118 million to our shareholders through a
repurchase of shares from our shareholders and a cash distribution:
—
In May 2004, we commenced
a self tender offer to purchase up to 5,643,739 of our shares for $5.67 per
share (up to $32 million in the aggregate) in cash. In June 2004, we
completed the tender offer and purchased 4,952,050 shares for an aggregate
amount of approximately $28 million.
—
In July 2004, we
distributed $2.36 per ordinary share, or approximately $90 million in the
aggregate, to our shareholders of record as of June 30, 2004.
As we previously announced,
we have been pursuing various strategic alternatives, including a sale and an
IPO, of our holdings in Scitex Vision. In March 2005, we announced that we are
engaged in preliminary negotiations for the possible sale of our holdings in
Scitex Vision, of which we hold approximately 77.1% of the outstanding share
capital (70.6% on a fully diluted basis), for an enterprise value of Scitex
Vision in the range of $230–250 million. The proposed transaction is subject to
a due diligence process and the negotiation and execution of definitive
agreements. There is no assurance whatsoever that any transaction will result
with respect to Scitex Vision or as to the terms, deal structure and the
purchase price for Scitex Vision if a sale occurs.
19
Since January 1, 2002,
except for the self tender offer and the cash distribution described above,
most of our principal capital expenditures and divestitures have been for the
acquisition or sale of interests in other companies, as follows:
—
We invested an aggregate
of approximately $ 2.8 million in Objet Geometries Ltd. since January 1,
2002, including $0.5 million and $ 0.3 million that were invested in December 2003 and November 2004,
respectively, in connection with Objet’s rights offerings, and thereafter
held an approximate 22.9% interest of Objet. In May 2005, we agreed to sell
all of our holdings in Objet to several shareholders of Objet for $3.0
million in cash, payable in two installments. Additional contingent
consideration will be paid to Scitex if Objet undergoes specified “exit
events” prior to the end of 2007. The closing of the sale occurred in late
June 2005. The book value of our investment in Objet was recorded at close to
nil on our balance sheet as of March 31, 2005, and such investment is
accounted for under the equity method;
—
Since January 1, 2002, we
invested an aggregate of approximately $8.0 million in Jemtex InkJet Printing
Ltd., partly in Jemtex’s share capital and partly in consideration for
convertible debentures of Jemtex. We now hold an approximate 74.3% interest
(83.5% assuming conversions of the debentures) in Jemtex;
—
In the fourth quarter of
2002, we signed an agreement to combine the operations of Scitex Vision and
Scitex Vision International, our then wholly owned subsidiary, and in January
2003 we completed this transaction, as a result of which Scitex Vision became
a majority owned subsidiary of ours and the parent of Scitex Vision
International. In July 2003 and May 2004, Scitex Vision concluded rights
offerings in which we invested approximately $5.0 million and $4.2 million,
respectively, in accordance with our pro rata share of such offering.
See in
Item 7B below under the captions “Combination of Scitex Vision and Scitex
Vision International” and “Rights Offerings by Scitex Vision,” respectively
.
As previously reported, we were involved in several disputes with C.D.I.
Technologies (1999) Ltd. (CDI) a minority shareholder of Scitex Vision,
including claims against us, Scitex Vision and several other parties. In May
2005, we and our two largest shareholders, Clal and Discount, purchased all
of CDI’s interest in Scitex Vision, constituting 1.89% of Scitex Vision’s
issued share capital (1.35% on a fully diluted basis), for $1.6 million, plus
additional contingent consideration to be paid if Scitex Vision undergoes an
“exit event” within the next two years at a higher valuation than implied in
the agreement. In the framework of the purchase agreement, CDI agreed to
dismiss all of the claims asserted by it against us and the other parties.
—
In April 2002, Scitex
Vision International acquired advanced digital printing technologies from
Siantec SARL, or Siantec, by way of an asset purchase agreement for $2
million and additional contingent payments of up to a maximum of $10 million.
Furthermore, we issued guarantees in favor of Siantec to secure Scitex Vision
International’s obligations and payments under the agreement, and in favor of
Bank Hapoalim, in the amount of $2 million, to secure a loan provided by the
bank for the initial payment by Scitex Vision International. The $2 million
loan was fully repaid to the bank by Scitex Vision. In February 2004, Siantec
agreed to pay Scitex Vision International $1 million out of the escrow
account established in the framework of the transaction and to waive its
rights to the said contingent payments of up to $10 million in settlement of
alleged breaches of representations and warranties made by Siantec in the
asset purchase agreement;
—
In April 2000, we sold our
digital preprint operations and our print-on-demand systems business to Creo,
in return for 13.25 million Creo shares, and became the largest shareholder
in Creo, initially with approximately 28.7% of the outstanding Creo shares. As part of the transaction, we issued to Creo
an unsecured, non-interest bearing note in the principal amount of $18.8 million,
which was fully repaid in April 2003. In November 2001, we sold 7.0
million shares of Creo for gross proceeds of approximately $78 million as
part of a private placement to Canadian institutional investors. In June and
August 2003, we sold 3.0 million shares of Creo for gross proceeds of
approximately $24 million and 3.25 million shares of Creo for gross proceeds
of approximately $31 million, respectively, as part of arranged sales to
various financial institutions in Canada. We no longer hold any Creo shares;
20
—
In April 2002, we
completed the sale of our shares in the Karat Digital Press joint venture, a
developer of color digital offset press, to Koenig & Bauer A.G., or KBA,
our joint venture partner, for approximately $14.4 million and for additional
contingent future performance related payments. Other
terms of this transaction, announced in early 2001, include, among other
things, the assumption by KBA of full responsibility for manufacturing, sales
and customer support operations of Karat Digital Press machines worldwide;
—
In January 2004, we
completed a transaction to sell the business of SDP, our indirect wholly
owned subsidiary, to Kodak. This transaction is described under “
Item 10C.
Material Contracts – Sale of SDP
” below; and
—
In late April 2005, IDX
Systems Corporation, or IDX, entered into a purchase agreement with
RealTimeImage Ltd. (formerly RTimage Ltd.) (RTI), our 14.9% minority-owned
affiliate, whereby it will acquire the assets of RTI for an estimated
purchase price of $15.5 million. The closing of the acquisition, currently
expected in summer of 2005, is subject to certain customary terms and
conditions. Also, the distribution of funds to the shareholders of RTI is
subject to certain time and other limitations and processes, including
pursuant to the purchase agreement. The book value of our investment in RTI
was recorded at $1.2 million on our balance sheet as of March 31, 2005, and
such investment is accounted for under the cost method.
B.
BUSINESS OVERVIEW
O
VERVIEW
We are leaders, through
Scitex Vision, in the wide and super-wide format segment of the industrial
inkjet digital printing market. Our current operations, carried out by our
operating subsidiaries, Scitex Vision and Jemtex, consist of the design,
development, manufacture, marketing and support of products for the industrial
inkjet digital printing market.
Until the second half of
2003, we also operated in the digital preprint business through our equity
interest in Creo, and, through the end of 2003, we operated in the high-speed
segment of the industrial inkjet digital printing market through SDP.
During 2004, we also
operated in the rapid prototyping market (through our equity interest in Objet)
and in the Internet-based imaging market (through our equity interest in RTI).
However, as described above, (1) in April 2005, RTI agreed to sell its business
to IDX, and (2) in May 2005, we agreed to sell all of our holdings in Objet.
The closing of these transactions is subject to certain conditions.
21
S
CITEX
V
ISION
– W
IDE
F
ORMAT
&
S
UPER
-
WIDE
F
ORMAT
P
RINTERS
General
Scitex Vision Ltd.
(formerly, Aprion Digital Ltd.), or Scitex Vision, is our majority owned
subsidiary (approximately 77.1% interest), based in Netanya, Israel. It is a
leading developer, manufacturer and distributor of wide-format and super-wide
format, color inkjet digital printing systems used for point-of-purchase
displays, banners and indoor and outdoor advertising posters. It is also
engaged in the design, development, manufacturing and marketing of advanced
digital printing presses and specialized water-based inks for the packaging and
textile markets based on its patented drop-on-demand inkjet technology. As of
December 31, 2004, Scitex Vision employed approximately 500 employees
(including employees of its sales, marketing and support subsidiaries and
part-time and temporary employees).
Scitex Vision was formed out
of several acquisitions and transactions. The following is a brief outline of
some of the key dates in Scitex Vision’s corporate history:
1994:
Idanit Technologies Ltd.
was founded as an Israeli company.
1998:
Scitex acquired the
operations of Idanit in February 1998 and, in October 1998, expanded its
operations with the purchase of the super-wide format product line from the
Israeli Matan group of companies.
1999:
Idanit’s name was changed
to Scitex Wide Format Printing Ltd. on February 24, 1999. In September 1999,
Scitex formed Scitex Vision (under the name of Aprion Digital) out of its
Advanced Printing Products division, together with several other investors,
including Clal and Discount.
2000:
The name of Scitex Wide
Format Printing Ltd. was changed to Scitex Vision Ltd. (currently, Scitex
Vision International Ltd.) on August 21, 2000.
2001:
Scitex Vision Ltd.
(currently, Scitex Vision International Ltd.) acquired the ink manufacturing
business of Techno Ink Manufacturing (PTY) Ltd., a company based in Capetown,
South Africa.
2003:
In January 2003, the
operations of Scitex Vision International (formerly, Scitex Vision Ltd.) were
combined with those of Scitex Vision (formerly, Aprion Digital Ltd.), as a
result of which Scitex Vision International became a wholly owned subsidiary
of Scitex Vision.
2004:
The name of Aprion Digital
Ltd. was changed to its present name, Scitex Vision Ltd., on February 16,
2004.
Product Overview
Scitex Vision
printers are dedicated to a wide array of applications including billboards,
fleet marking, banners, street advertising, point-of-purchase displays and floor
and window graphics, and applications for the packaging display market and,
through strategic partners, for the textile market. Its printing systems are
aimed at providing high-quality and cost-effective solutions to digital
printing houses worldwide. Scitex Vision operates principally in the following
fields: wide format systems, super-wide format systems, and flatbed printing
systems for graphic arts, graphic display and textile printing applications.
Wide Format Printing Systems.
Scitex
Vision’s wide format systems utilize piezoelectric drop-on-demand inkjet
technology and the company’s proprietary multi-array technology. These wide
format systems are especially designed for short and medium print run
applications and a broad range of applications, such as point-of-purchase
displays, outdoor billboards, fleet marking, street advertising and bus
shelters. Scitex Vision wide format systems have become an industry standard
among paper billboard printers and fleet graphics printers in Europe and the
United States. Representative products in this category are:
—
TURBOjet
.
With printing speed of up to 400 square meters per hour and a high printing
resolution (of up to 440 dpi (dots-per-inch)), the TURBOjet is designed to
provide a high-quality, high-speed and low-cost industrial digital printing
solution for the screen printing and offset industry.
22
—
Superjet
.
The Superjet is an industrial roll-to-roll printing system that prints with
environmentally friendly water-based inks, at a high printing resolution (600
dpi). It is designed to provide high image and text quality at high printing
speeds for unique applications, such as point-of-purchase displays and
banners.
Super-Wide Format Printing Systems.
Scitex
Vision’s super-wide format systems are especially designed for short print run
applications on formats of between two to five meters wide for a broad range of
applications, including billboards, point-of-purchase, truck-side curtains,
vehicle wraps, textile and carpet printing, floor and window graphics, wall
coverings, exhibition graphics and banners, and theater and television
backdrops. Representative products in this category include the Scitex Vision
Grandjet, and the Scitex Vision XLjet line of systems that print mainly on
formats of up to three and five meters wide, the only limitation on length of
the print being the size of the roll. If wider print widths are required,
systems create a print layout in sections that, when seamed and placed
together, create a continuous and seamless-looking image in super-wide formats
such as mega posters. These systems differ mainly in their image quality,
number of colors, throughput capability and price. Like Scitex Vision’s wide
format digital printing systems, the Scitex Vision Grandjet and Scitex Vision
XLjet systems utilize piezoelectric drop-on-demand inkjet technology. However,
unlike the TURBOjet and other previous wide format systems, which are
drum-based (except for the Superjet), they are based on a roll-to-roll
technology, using a print process in which the substrate is placed on two long
cylindrical shafts at the base of the printer. During 2003 and 2004, Scitex
Vision introduced several new additions and improvements to its product
offering in the super wide format range covering all ranges of systems from the
entry level Grandjet Classic to the high-end Xljet 5+.
Flatbed Printing Systems.
Following the
acquisition of flatbed and UV curable ink technologies in April 2002 from
Siantec SARL, Scitex Vision has developed, and in 2003 launched, the Scitex
Vision VEEjet, an advanced versatile flatbed wide format digital system
designed to print on a wide range of rigid and flexible substrates for the
graphic arts market using environmentally friendly UV curable inks. The UV
Flatbed system market has developed rapidly over the last two years and,
following a slow start in 2003, the sales of the Scitex Vision VEEjet have been
developing more rapidly since mid 2004. The main applications driven by the
Flatbed systems are point of purchase displays and interior design elements.
The UV systems are characterized by their ability to print on various
substrates including glass, ceramics and metals. Some applications in the
high-end productivity market of this field are handled by the Scitex Vision
CORJet described below.
Industrial Inkjet Presses.
Scitex Vision
designs, develops, manufactures and markets advanced digital printing presses
and specialized water-based inks for industrial applications based on its
patented drop-on-demand inkjet technology. This technology, initially developed
under Scitex’s former Advanced Printing Products division, is based on piezo
inkjet heads with a patented multi-layer construction designed to provide high
printing speed, flexibility of media choice and high reliability. Applications
include packaging and displays, graphic arts and textile. The industrial inkjet
press system exists in roll-to-roll and sheet-fed versions. It is a
cost-effective, piezo-driven, drop-on-demand inkjet system with a traversing
print array. The press can handle short runs printed on materials up to 63
inches in width and is designed for industrial applications. Representative
products include:
—
CORJet
. The CORJet is
designed to provide a flexible, high-quality and high-printing speed product
for short and medium run prints on corrugated displays and packaging
applications. It is a fully automated system that prints with
environment-friendly industrial digital inkjet press for cost-effective short
runs.
23
—
DreAM
. The DreAM is an
industrial digital printer for textile applications for short and medium
fabric print runs for specialized clothing, home furnishings, automotive and
other technical textiles, flags and banners, and emerging applications. It
prints with printing speed of up to 150 square meters per hour and at a high
printing resolution (600 dpi) directly on woven, knitted and non-woven
fabrics. The DreAM was introduced in December 2002 by Reggiani Macchine
S.p.A. of Italy, and combines Reggiani’s proprietary substrate-conveying system
with Scitex Vision’s inkjet heads and uses novel printing inks, developed
especially by Ciba Specialty Chemicals of Switzerland. Pursuant to Scitex
Vision’s agreement with Reggiani and Ciba, Reggiani is responsible for the
integration, marketing and service of the DreAM while the inks are developed
and marketed by Ciba.
Consumables.
The inks used
with Scitex Vision’s printing systems are an important element of the printing
process. The quality of the prints depends in part on a number of factors relating
to the inks, including the compatibility of the inks with the printheads, the
color gamut achievable with the inks, the ink gloss and the color density. In
addition, outdoor applications require additional characteristics in the ink
such as durability and abrasion resistance to protect against the elements.
Scitex Vision sells inks that are specially formulated to work with its
systems. Most of the inks sold are solvent-based pigmented inks. In March 2001,
following the acquisition by Scitex Vision of Tech-Ink, one of the leading
state-of the-art ink manufacturers, located in Cape-Town, South Africa, the
inks are manufactured by Tech-Ink. In April 2001, Scitex Vision introduced the
innovative VisionInk program to the market, whereby customers are able to
select inks that have been specially developed for both their printing systems
and their applications.
Manufacturing
Scitex Vision
outsources the manufacturing of many of the components for its systems to its
own specifications and purchases off-the shelf components for its systems from
third party vendors. The most important third party vendors for its printing
systems are the suppliers of the printheads used in such systems, and the
subcontractors for assembly of its wide format systems.
Final integration
and quality control testing of Scitex Vision’s wide and super wide format
systems is conducted at its facilities in Netanya, Israel, where it also
assembles its wide and super-wide format systems and conducts full system
integration and quality assurance testing.
In February
2005, Scitex Vision entered into a strategic partnership agreement with Beiren
Group Corporation (Beiren), a leading printing machinery manufacturer in China.
The agreement initially covers the manufacturing and assembly at Beiren of
Scitex Vision’s entry-level super-wide format digital printing system, the
Scitex Vision Grandjet Classic. The partnership also paves the way for
potential joint product development and other manufacturing activities.
Most of the
parts, components and commodities used by Scitex Vision in the manufacture and
assembly of its products are available from several sources, although it
currently purchases a substantial number of items from single suppliers. In
some cases, there is only one source of supply for a component or commodity
used by it. In particular, Scitex Vision currently has only single sources for
the supply of the printheads for its wide format printers and for its
super-wide format printers. While Scitex Vision conducts a continuous process of
evaluation of the main printheads available in the market, if either of these
printhead suppliers were to discontinue the manufacture or supply of
printheads, Scitex Vision believes it would have difficulties in locating
alternative suppliers or manufacturing these products itself within a
reasonable time frame.
24
Scitex Vision
generally purchases certain major components and commodities used in its
products under annually renewable supply agreements with principal suppliers.
To date, it has managed to overcome any difficulties experienced in obtaining
timely deliveries. However, increased demand for these components and
commodities or future unavailability could result in production delays that
might adversely affect our business.
Scitex Vision
also operates through original equipment manufacturers (OEMs) and cooperation
agreements in respect of its industrial inkjet press systems for the textile
market, whereby a family of print modules incorporating its unique printhead
technology for these systems is used by its business partners in a variety of
configurations and applications.
Sales & Marketing
Scitex Vision has a large
customer base with over 1,600 systems installed globally to date. It sells its
products through its direct sales force, indirect distribution channels and
third party joint sales arrangements:
—
Direct
sales
. Scitex Vision formed regional subsidiaries that operate as
distribution units principally in North America and Europe, the Asia Pacific
region and Central America, the Middle-East and Africa. These subsidiaries
carry out direct sales and marketing as well as service and logistics for its
products in their respective regions.
—
Distribution
channels
. Scitex Vision relies on third party distributors and dealers to
conduct sales and marketing in Latin America and in certain countries in
Europe, Asia Pacific, Africa and the Middle East.
—
Joint sales
arrangements
. Scitex Vision sells and distributes products also in
conjunction with Regianni Macchine of Italy, through an OEM arrangement.
Equipment
sales are typically made on terms requiring an advance payment, with the
balance of the purchase price payable in stages, generally on delivery and on
or shortly after installation.
Customer Support
Scitex Vision
believes that a high level of customer service, technical support and training
is important in achieving customer satisfaction and market acceptance of its
products. It has a dedicated customer service and support team, consisting of
over 100 engineers, technical and application specialists, and logistics and
management personnel. These personnel are located in the United States, Europe
and Asia as well as at the company’s headquarters in Israel. The customer
support team is responsible for providing installation services, post-sales
support, and warranty services. Scitex Vision maintains a training facility at
its headquarters in Israel for its customer support team and customers. In
addition, its sales demonstration facilities in Brussels, Belgium and Atlanta,
U.S.A., are also used for training purposes.
Scitex Vision
offers an equipment warranty to its customers and distributors that, in most
cases, cover defects in the systems for a period of six to 12 months following
installation. At the end of the warranty period, the customer may enter into a
service agreement with Scitex Vision, which includes equipment and software
maintenance. If a customer does not enter into a service agreement, service is
provided and charged on a per-call basis.
In 2004,
Scitex Vision generated approximately $49.8 million of revenue from the supply of consumables (mainly
ink) and service operations, representing approximately 39% of its total revenues compared to approximately $42
million,
or 41% of its total revenues, in 2003.
Competition
The primary
competitive factors affecting sales of Scitex Vision’s products are price,
productivity, product features, application versatility, reliability, support,
print quality, durability and cost of inks and substrates. Other competitive
factors include the reputation of the manufacturer and access to product
financing.
25
We believe
that the Scitex TURBOjet wide format system, the Scitex Grandjet and Scitex
XLjet super-wide format systems, as well as the VEEjet flatbed system and
CORjet packaging and graphic display system, are generally competitive on price
and features and have certain advantages and disadvantages as compared to
competitors’ products. While certain of the Scitex Vision’s systems may be
slightly more expensive than the printing systems offered by Scitex Vision’s
competitors, we believe they are competitive based on other factors, such as
superior performance regarding quality of prints and speed of output and
certain other competitive criteria and unique solutions.
Scitex
Vision’s principal competition is as follows:
—
Super-wide
format
. Scitex Vision has three main competitors in the super-wide format
market: Vutek, Inc. of the United States (recently acquired by
Electronics For Imaging, Inc. (EFI)), Gandi Innovation of Canada and NUR
Macroprinters Ltd. of Israel. In the last couple of years, several additional
producers, mostly from China, have entered the super-wide format printing
market with low cost products emulating Scitex Vision’s entry-level printing
systems. Scitex Vision faces strong competition in this market, mainly in the
Asia Pacific region.
—
Wide format
.
Scitex Vision also competes in the wide format market with traditional,
analog printing methods, particularly screen and offset printing, which
continue to be the main methods used in wide format printing. The main
competitors in this market are screen printing manufacturers, such as Thieme
GMBH & Co. KG of Germany and M&R Sales and Service, Inc. of the U.S.
—
Flatbed
. Scitex Vision has several competitors in the digital flatbed
market, including Vutek with its PressVu flatbed versions; Nur Macroprinters
with its Tempo line of products; Inca Digital Printers of the U.K. (recently
acquired by Dainippon Screen Mfg. Co.
Ltd.) with its Spyder, Eagle and Columbia printers; and Durst Phototechnik AG
of Italy with its Rho 160 and Rho 205 printers.
—
Industrial
Inkjet Presses
. Our main competitor in
this market, mainly in the packaging and display segments, is Inca with its
Columbia line of printers.
—
The textile digital printing market
. This market is in the early
stages of development and we are currently not aware of any significant
competitors or competitive patterns.
—
Consumables
.
Certain ink manufacturers, including Sericol Limited of the U.K. (which was
recently acquired by Fuji Photo Film Co. Ltd.), and Triangle Digital LLC of
the U.S., are developing or have developed inks that are compatible with
Scitex Vision’s systems. Scitex Vision is facing increased competition for
the sale of inks for use with these systems, which could materially adversely
affect future revenues from the sale of inks. Scitex Vision’s approach to
this market is to compete based on its VisionInk concept, which allow
customization of the inks which it supplies for use on its printing systems
and the provision of a single source for most of a printer’s digital printing
requirements, including after-sales service and consulting, inks and media.
The Chinese market, to which Scitex Vision sells ink in insignificant
amounts, is now dominated by local ink manufacturers.
J
EMTEX
I
NK
J
ET
P
RINTING
L
TD
. – C
ONTINUOUS
I
NKJET
I
NDUSTRIAL
D
IGITAL
P
RINTING
General
Jemtex, located in Lod,
Israel, was established in 1995. It employed, as of December 31, 2004,
approximately 30 people. We currently hold an approximate 74.3% interest in
Jemtex. Jemtex is a
developer and manufacturer of inkjet based digital systems, printheads and
engines for the industrial printing markets, primarily for the ceramic tiles
market. The printing application for ceramic tiles market is a newly developed
market and its development is slower than we expected.
26
Product Overview
Jemtex’s
Continuous Ink Jet technology is designed to allow for customization, higher
flexibility in design, file changes during print runs, smaller production runs,
and faster turnaround time from print order to delivery of printed material.
Jemtex has developed solutions for nozzle design, drop assignment and image
processing algorithms for multi-nozzle alignment, calibration and on-line video
process control. The design of its printheads and modular implementation are
aimed to assure fast assembly and up time, as well as smooth operation with
higher viscosity inks and colorant concentrations. Jemtex’s current strategy is
operating through strategic alliances.
Jemtex has
introduced a new digital printing decoration system for ceramics named Gema II
in 2004. The Gema II is designed to operate at productivity levels comparable
to conventional printing while providing the advantages of digital printing.
Due to the expected savings in color stocks, printing drums and set-up times
associated with analog printing, this system is expected to be cost effective
compared to current competing solutions. However, this system is still in its
initial stages and may require additional enhancements or improvements.
Manufacturing &
Sales
Jemtex
outsources the manufacturing of part of the components for its systems to its
own specifications and also purchases off-the shelf components for its systems
from third party vendors. Other components are built in Jemtex’s premises and
final manufacturing, full system integration and quality assurance testing of
Jemtex’s systems are conducted at its facilities in Lod, Israel.
Jemtex started the delivery
of first two Gema II systems and their installment at a customer site in
Spain in late 2004 in the framework of a distribution agreement with a third
party.
Competition
We believe that
the Gema II system is competitively positioned vis-à-vis the KERAjet
digital system (produced by Ferro Corporation), in terms of robustness,
productivity and decoration capabilities.
O
THER
G
ROUP
C
OMPANIES
Below is a brief description
of our principal group companies.
Objet Geometries Ltd.
Objet, located in Rehovot,
Israel, was founded in 1998. It employed, as of December 31, 2004, nearly 70
people. We held an approximate 22.9% interest in Objet. As discussed above, in
late June 2005, we sold all of our holdings in Objet to several other
shareholders.
Objet is a developer and
manufacturer of three-dimensional (3D) inkjet printing systems and it operates
in the rapid prototyping market. Objet’s systems enable designers and
mechanical engineers to create 3D models directly from CAD (computer aided
design) files. Objet developed the Objet Studio software that interfaces
between the CAD files and the Objet 3-D printers. The Objet’s printers use
photopolymer-jet technology to produce the model out of digital files created
in the mechanical design process in a wide variety of industries that need to physically
verify, model or prototype their designs early in the product development
process.
Following the commercial
delivery of the Objet Quadra Tempo in 2002, Objet began commercial shipments of
the Eden 330 and the Eden 260 Rapid Prototyping systems using Objet’s newly
developed Single Head Replacement (SHR) technology. Objet has a large customer
base with over 300 systems installed globally to date.
27
RealTimeImage Ltd.
RTI was formed in 1996. It
is headquartered in San Bruno, California, with research and development
operations in Or-Yehuda, Israel, and employed, as of December 31, 2004, about
42 employees. We currently hold an approximate 14.9% interest in RTI. As
discussed above, in April 2005, RTI agreed to sell its healthcare business to
IDX.
RTI is
a leading innovator and developer of Internet-based imaging products and
services for healthcare professionals and, until May 2004, for the graphic arts
market. It provides high
quality, real time, Internet imaging platforms, allowing users to transform
image-based workflows into online workflows. RTI currently offers one principal
line of products:
—
iPACS
™
is a family of digital imaging workflow
solutions designed for use by healthcare professionals in hospitals and
imaging centers. It is designed to allow a user to share medical images
instantaneously and without loss in quality over any web connection. iPACS
products are currently deployed at more than 500 hospitals and imaging
centers around the world.
In May 2004, the
RealTimeProof business of RTI, a family of online proofing and collaboration
products designed for the graphic arts market was sold to Kodak Polychrome
Graphics (KPG).
XMPie Inc.
XMPie, which was formed in
2000, develops and markets software solutions for dynamic publishing in print
and electronic media. The XMPie software platform is designed to allow
organizations and marketing service providers, such as digital commercial
printers and direct marketing agencies, to efficiently create – plan, design
and produce – highly customized and personalized documents, which are becoming
essential for direct marketing communication and any other highly targeted
messaging discipline. XMPie is headquartered in New York, New York and, as of
December 31, 2004, employed approximately 35 people. We currently hold an
approximate 3.5% interest in XMPie.
C
USTOMERS
&
S
ALES
The following table sets
forth the amounts and relative percentages of our revenues from continuing
operations by geographical markets, for the years indicated:
Year Ended
December 31,*
2004
2003
2002
(US
dollars in thousands)
America
$
46,070
35.9
%
$
34,828
33.9
%
$
26,539
31.0
%
Europe
52,344
40.8
%
36,893
35.8
%
37,504
43.8
%
Far East
19,943
15.6
%
12,460
12.1
%
16,647
19.4
%
Other countries
9,828
7.7
%
18,699
18.2
%
4,971
5.8
%
Total
$
128,185
100.0
%
$
102,880
100.0
%
$
85,661
100.0
%
* Please see Note 15c to our
consolidated financial statements included in this Annual Report. For revenues
from discontinued operations, see Note 1b.
In each of the
years 2004, 2003 and 2002, no end-user customer or distributor accounted for
more than 10% of our revenues.
28
The following table sets
forth our revenues from continuing operations for the years indicated
attributable to our principal sources of revenue/business activities:
Year Ended
December 31,*
2004
2003
2002
(US
dollars in thousands)
Products
$
78,418
61.2
%
$
60,653
59.0
%
$
52,847
61.7
%
Services
7,581
5.9
%
5,638
5.5
%
5,098
6.0
%
Supplies
42,186
32.9
%
36,589
35.5
%
27,716
32.3
%
Total revenues
$
128,185
100.0
%
$
102,880
100.0
%
$
85,661
100.0
%
* As a result
of the sale of the SDP business to Kodak in January 2004, our consolidated
financial statements for the periods ended December 31, 2001, 2002, and 2003,
were reclassified to discontinued operations. For revenues from discontinued
operations, see Note 1b to our consolidated financial statements included in
this Annual Report.
I
NTELLECTUAL
P
ROPERTY
AND
P
ROPRIETARY
R
IGHTS
The digital
printing industry is characterized to a great extent by its reliance on
proprietary technology. We believe that we own or have the license to use the
technologies used in our products. We currently rely on a combination of trade
secrets, licenses and patents, together with non-disclosure and confidentiality
agreements, to establish and protect our proprietary rights in our products.
However, no assurance can be given that our existing patents or any future
patents will not be challenged, invalidated, or circumvented, or that our
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to our technology. There can be no
assurance that further patent protection will be obtained in Israel, the United
States, or elsewhere, for existing or new products or applications, or that
such further protection, if obtained, will be effective. Moreover, the laws of
some foreign countries in which we sell or may sell our products may not fully
protect, or may not protect at all, our proprietary rights in products. We take
precautionary measures to maintain our trade secrets such as requesting our
employees and selected parties, including key dealers, subcontractors and
distributors, to sign confidentiality agreements, non-competition agreements or
non-disclosure agreements, as applicable. However, no assurance can be given
that others will not acquire equivalent trade secrets or otherwise gain access
to or disclose our proprietary technology, or that we can meaningfully protect
our rights to such proprietary technology not subject to patent protection.
We are not
aware of any material claim that our products infringe upon the proprietary
rights of third parties. However, there can be no assurance that third parties
will not assert infringement claims against us in the future, and the cost of
responding to such assertions, regardless of their validity, could be
significant. In addition, such claims may be found to be valid and could result
in awards against us, which could have a material effect on our business.
G
OVERNMENT
R
EGULATIONS
Trade &
Export
. Israel has the benefit of a free trade agreement with the United States
which, generally, permits tariff-free access into the United States for
products produced in Israel by Scitex’s Israeli subsidiaries, joint ventures
and group companies. In addition, as a result of an agreement entered into by
Israel with the European Union, or the EU, and countries remaining in the
European Free Trade Association, or EFTA, the EU and EFTA have abolished
customs duties on Israeli industrial products. However, there can be no
assurance that these agreements will not be terminated, changed, amended or
otherwise declared non-applicable to all or some of our Israeli subsidiaries,
joint ventures and group companies, thereby materially harming our and their
businesses.
29
Government
Grants & Benefits
. Scitex Vision and some of our group companies receive
grants from the Office of the Chief Scientist of the Israeli Ministry of
Industry, Trade and Labor for research and development programs. Some of our
group companies also receive or may in the future utilize tax benefits under
Israeli law for capital investments that are designated as “Approved
Enterprises.” The participation in these programs is subject to compliance with
certain conditions and imposes certain restrictions upon these companies.
For more information about the Office of the Chief
Scientist, tax benefits for Approved Enterprises and export controls, see “Item
5B – Liquidity and Capital Resources – Grants from the Office of the Chief
Scientist” and “Item 10E – Taxation – Israeli Taxation – Tax Benefits under the
Law for the Encouragement of Capital Investments, 1959,” respectively.
Banking Regulations
.
Pursuant to a directive published by the Israeli Supervisor of Banks, which
became effective on March 31, 2004, we may be deemed part of a group of
affiliated borrowers comprised of IDB Holding Corporation Ltd., the ultimate
parent of Discount and Clal, our principal shareholders, and other companies
which may be included in such group of borrowers pursuant to the directive. The
directive generally provides that an entity will be subject to limitations on
the amount of financing available to it from an Israeli bank if such entity is
included within a group of borrowers to which the amount of debt financing that
has been extended from such Israeli bank amounts to 30% of such bank’s capital,
or is a member of one of the bank’s six largest borrowers or groups of
borrowers to which, collectively, the amount of debt financing that has been
extended from the bank amounts to 150% of such bank’s capital (gradually
reduced to 135% between April 2005 and June 2006). As we are part of the IDB
affiliated group of companies which includes many companies that require, or
may in the future require, extensive credit facilities from Israeli banks
for the operation of their businesses, we cannot assure you that our banks will
not exceed these limits (if applicable to us) in the future. Should our
banks exceed these limits, they may limit our ability to draw funds and may
require us to return some or all of our outstanding borrowings (which were $42
million as of December 31, 2004), each of which may have a material adverse
effect on our business, financial condition and results of operations. The
directive also provides that a bank may request that the Israeli Supervisor of
Banks exempt certain entities from the scope of the definition of a group of
borrowers. Since we currently do not believe that the directive will impact us,
we do not currently intend to request that our banks seek an exemption on our
behalf from the Israel Supervisor of Banks. Should we decide to make such a
request of our banks, there can be no assurance that our banks would agree to
request an exemption from the Israel Supervisor of Banks on our behalf or that
the Israel Supervisor of Banks would grant an exemption, if requested.
Other.
We are also
governed by foreign and domestic federal, state and local laws of general
applicability, such as laws regulating working conditions. In addition, we are
subject, as are manufacturers generally, to various foreign and domestic
federal, state and local environmental protection laws and regulations,
including those governing the discharge of material into the environment.
Compliance with such environmental provisions is not expected to have a material
adverse effect on our operations in the foreseeable future.
C.
ORGANIZATIONAL STRUCTURE
Scitex is part of a group of
which it is the parent company. The following table sets forth the name,
jurisdiction and ownership and voting interest of our principal operating
subsidiaries, as of the date hereof:
Name
Jurisdiction
Ownership
and Voting Interest
Scitex
Vision Ltd.
Israel
77.1
%
(1)
Scitex Vision
International Ltd.
Israel
77.1
%
(1)
Jemtex Ink Jet Ltd.
Israel
74.3
%
(1) In January 2003, Scitex Vision International
became a wholly owned subsidiary of Scitex Vision and an indirect majority
owned subsidiary of ours due to our interest in Scitex Vision. See “Item 6E – Share Ownership – Subsidiaries
Stock Option Plans” with respect to options to acquire shares in these
companies.
30
We also have a number of
direct and indirect wholly owned subsidiaries, mainly regional, that carry out
ancillary operations for Scitex Vision and Scitex Vision International,
primarily sales, marketing and customer support.
A full list of our significant
subsidiaries, including name and country of incorporation is appended as
Exhibit 8 to this Annual Report
.
D.
PROPERTY, PLANT AND EQUIPMENT
In January 2004, we relocated
to new corporate administrative offices in Tel Aviv, Israel, consisting of
approximately 1,780 square feet of floor space pursuant to a Services Agreement
between us and Discount.
For more information about the Services Agreement,
please see “Item 7B. Related Party Transactions.”
That lease was terminated in
September 2004 and we lease the same premises from a successor unrelated
lessor.
Scitex Vision rents nearly
129,000 square feet in Netanya, Israel, for use as its principal
administrative, manufacturing and research and development facility. The term
of this lease is through 2015, with an option to terminate in 2010. In the
United States, Scitex Vision leases a facility of approximately 19,200 square
feet, used primarily for sales, marketing and customer support. Outside Israel
and the United States, Scitex Vision leases additional office space, primarily
in Brussels, Belgium; Hong Kong; Mexico City; Capetown, South Africa; and
various other European centers. These facilities currently comprise approximately
67,600 square feet of floor space.
Jemtex leases nearly 15,000
square feet in Lod, Israel, for use as its administrative, manufacturing and
research and development facility. The term of this lease is through 2005 with
an option to extend it until 2010. Jemtex is negotiating to amend certain terms
of the lease contract so that either party may terminate the lease
upon four months’ advance notice.
We believe that the
aforesaid offices and facilities are suitable and adequate for our operations
as currently conducted and as currently foreseen. In the event that additional
facilities are required, we believe that we could obtain such facilities at
commercially reasonable rates.
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