The following are the principal companies in the Scitex Group, or in which it currently has an interest:
The following table sets forth Scitex's total revenues for the years 1997 through
1999 and amounts and relative percentages attributable to the principal businesses:
digital preprint (including print-on-demand systems), which business is now
part of Creo, and digital printing.
** Digital printing revenues shown includes revenues, of a non-material amount, attributable to Scitex's Internet-based communication products and services. DIGITAL PRINTING BUSINESSOur digital printing operations comprise SDP, SWF, our holdings in Aprion Digital and the Karat joint venture. We believe that Scitex is preeminent in industrial inkjet printing. The inkjet product line includes SDP's high-speed, variable-data inkjet printing systems for high volume personalized and customized documents, used by specialized printers, in-house printers and data centers for printing business forms, bills and direct mail. In addition, the SWF inkjet systems are used to print short and medium runs in color of point-of-purchase and point-of-sales displays, banners and outdoor advertising. Screen printers are upgrading their operations by incorporating these printers. Aprion Digital's core technology, based on multi-layer inkjet heads, is being developed, principally, for printers in the packaging, home furnishing and book publishing markets. A digital offset press, currently undergoing beta site testing , has been developed by Karat, and is intended for printers who depend on high quality and productivity, and wish to integrate their color offset printing directly into the digital workflow. SCITEX DIGITAL PRINTING - High Speed Variable Information Printing SDP's systems produce hardcopy output of digital data files generated entirely on a computer or originating from a computer. Scitex Digital Printing focuses on long-run, high-volume, printing in monochrome, spot color and, more recently, full process color. Large amounts of variable data from a computer database can be printed by SDP products at very high speeds. Among the applications included are personalization of promotional mailings, billings, statements, books, bar codes and serially-numbered lottery tickets. SDP inkjet printing systems offer sharp character definition, flexible font selection and pinpoint registration. They primarily serve commercial and in-plant printers in digital printing of variable information, in page-wide, partial page and narrow formats. Page-Wide Format Products SDP's page-wide format systems, with multiple 9-inch printheads, are used for full-page, variable printing up to 18 inches wide on one or two sides. These systems provide high quality at ultra-high production speeds for direct mail, book printing, billings, statements, or any variable printing application. The Scitex VersaMark™ high speed printing system, introduced in early 1999, combines high speed, exceptional print quality and the low cost per page in a turnkey solution that is neatly set into a modular, and entirely upgradable package. Coupled with spot color capability and numerous versatile configurations, it positions Scitex to expand its presence in the world market for on-demand publishing, billing and financial statement printing and to strengthen SDP's position in the personalized direct mail and catalogue printing. The Scitex VersaMark Business Color Press™ ("BCP"), the world's highest speed digital full color press, was introduced at DRUPA 2000 Exhibition in Dusseldorf, in May 2000. It is aimed towards a broad range of applications, including direct mail, coupon and catalog printing, book publishing, and statement printing. At over 2,000 pages per minute, it is the most productive full color digital printing system available as well as the lowest operating cost-per-page available. The BCP is unique in its ability to print both process color as well as black-on-white jobs both at a higher throughput speed and at a lower cost per page compared to other technologies. Partial-Page Format Products Partial-page format systems, with multiple arrays of 3.4 or 4.25-inch printheads, are used for monochrome, spot color, or highlight variable printing on documents. Flexible configurations of up to 16 printheads can be used to handle the widest variations of applications in-line on webs, both offset and flexo, folders, collators, and document tables. The Scitex 6240tm inkjet printing system prints business forms, tags and labels, direct mail, booklets and billing statements. It is used for bar coding, numbering, addressing, personalization, and spot color or highlighting. This modular printing system, available in three models with speeds up to 300, 500 or 1,000 fpm, easily merges with web presses, collators, mail bases, folders and a variety of other on-line and off-line equipment. Output from two print stations can be "stitched" together to create an image area up to 8½ inches wide. The system's controller can drive a mix of 4 inch and 1 inch widths. The Scitex 3500tm and Scitex 3600tm high speed printing systems can change 100% of the printed data from one piece to the next "on the fly". The former prints at 500 fpm while the latter prints at 1,000 fpm. These Scitex 3000 series printing systems are used for high volume personalized direct mail, sweepstakes, lottery tickets, business forms, financial statements and other variable data printing applications, and can print full-page images with letter quality text, bit-mapped graphics and bar codes. Narrow Format Products Narrow format systems, with 1-inch, 2.13 inch and 2.75 inch printheads, are used in applications such as direct addressing, bar coding, spot color or highlighting. The Scitex Dijit™ printing system prints variable information for automatic direct addressing, personalization, messaging, numbering and dating at speeds up to 1,000 feet per minute (fpm). The compact and modular system can be used with a variety of third party equipment such as folders, web presses or mailing bases. The printing modules for the Scitex Dijit printing system are the Scitex 5120™, Scitex 5240™ and Scitex 5300™ printers, the latter offering significantly higher resolution than the former. The Scitex Composer™ suite includes four modules - Web Layout, PageComp, Data Merge, and IJPDS Proofer. The combination provides users all the tools required to easily design, lay-out, define, and proof variable content jobs and is compatible with industry-standard software used in a broad-range of applications. The Scitex Composer suite runs under Windows NT®; and can be run on multiple workstations over a standard network. Designed to work with QuarkXPress™ page layout software, The Scitex Composer provides a highly graphical interface for visual positioning of text and graphics. It is available in two versions, one supporting monochrome applications, including highlight colors, and the other specifically capable of supporting multiple color planes and special algorithms for optimization of print quality in process color applications. Inks A range of black, selected spot color and process color inks are manufactured and sold for use with all of the printing systems. Different inks are available for optimal use with different media and applications. SCITEX WIDE FORMAT PRINTING SWF designs, develops, manufactures and markets wide-format and super-wide format drop-on demand inkjet presses that are designed for cost-effective short and medium runs (up to about 150 copies) of display advertising. The applications include point-of-purchase and point-of-sales displays, banners, indoor and outdoor posters, billboards, fleet marking for trucks, cars and public transportation vehicles, window graphics, exhibition graphics, building covers, and others. Sold worldwide primarily to screen printers who are moving to a digital solution and to digital service bureaus, they print on a choice of various substrates, including paper, vinyl and other flexible materials. The Scitex-Novo™ wide-format, color inkjet printing system, was originally unveiled in 1995 under the name Idanit-162Adtm and commenced commercial shipping at the beginning of 1997. Recently redesigned and renamed, it prints up to forty 8 x 5 feet color sheets per hour (depending upon resolution and type of media). In October 1998, SWF acquired the super-wide format product line from the Matan group of companies. Currently the line comprises three Scitex GrandjetV™ presses (GrandjetV2™ GrandjetV3™ and GrandjetV5™), that print on formats of up to 5, 11 and 17 feet wide, respectively. In June 1999, the high quality, high throughput Scitex Pressjet™ digital press was introduced representing, for the first time, a true cost-effective alternative to for screen printing, in runs of up to 150 copies. In March 2000, SWF and the Commercial Graphics Division of 3M announced that they had formed a strategic alliance whereby SWF will offer a version of the Scitex Pressjet digital press that is designed to handle 3M inks, graphic films and software. APRION DIGITAL Aprion Digital's core technology (Multiple Array Graphic Inkjet Color or "MAGIC™"), initially developed by Scitex's former Advanced Printing Products division, is based on inkjet heads with multi-layer construction, which have a potential to support printing speeds of up to 800 feet per minute. This technology is being applied to the development of three types of inkjet printers. The first printer under development, the BEL2000 sheet-fed, flatbed digital printer, will print up to six colors for the corrugated and paperboard market. The DPS-65 roll-to-roll press, is being designed for printing home furnishings, such as wall coverings, in up to six colors on various substrates. Thirdly, the Booknet book printer is intended to deliver printed and bound books of several hundred pages in less than 10 minutes a copy, with planned Internet e-commerce capabilities. KARAT DIGITAL PRESS Karat, a Scitex joint venture with Koenig & Bauer A.G., the world's third largest press manufacturer, is developing and testing the four-color, four-page 74 Karat™ digital offset press, designed for the short-to-medium-run color printing market. The 74 Karat press will offer commercial printers offset quality printing with ease-of-use and a high level of automation and speed. The press is currently undergoing beta testing at ten customer sites. DIGITAL PREPRINT AND PRINT-ON DEMANDOn April 4, 2000, Creo acquired our digital preprint and print on demand operations. As a result of the Creo Transaction, Scitex is the largest shareholder in Creo, with approximately 28.5% of the outstanding Creo shares (26% on a fully diluted basis). Our digital preprint products, now produced and marketed by the CreoScitex division of Creo, comprised the products of our former Input Systems and Output Systems divisions, as well as the products of Iris Graphics, Inc. ("Iris Graphics"), a leading developer and manufacturer of high quality color digital inkjet printers and proofing systems. CreoScitex's digital preprint products encompass a broad range of digital imaging devices and systems that automate the preprint tasks required to prepare color images and pages for high resolution, high quality printing. They generally combine industry standard and custom-made hardware and software. These products operate on a stand-alone basis or are combined in systems and networks that meet customer requirements and production environments. CreoScitex's primary digital preprint products include the Leaf™ digital camera backs, EverSmart™ professional-quality scanners, Renaissance™ copydot scanners, Dolev™ film imagesetters for offset platemaking, Lotem™ and Trendsetter™ platesetters for offset printing, Iris proofers, Brisque Extreme™ amd Prinergy™ digital workflow managers, servers and production data managers. The preprint market consists of graphic arts enterprises, such as color trade shops, commercial printers, publishers, and digital trade services. Our Print-on-Demand Systems division, also acquired by Creo, developed, assembled and marketed digital color servers and variable information application software for color on-demand printing systems with personalized printing capabilities. In connection with the Creo Transaction, on April 4, 2000, Scitex and Creo entered into a Standstill Agreement and a Registration Rights Agreement (see under the caption "Certain Agreements with Creo" of this Item, for details of these agreements). INTERNET-BASED, NETWORKING & OTHER TELECOMMUNICATIONS SOLUTIONSThe significant opportunities for innovation in Internet imaging result from the need efficiently to handle image and data files in a bandwidth and security constrained environment. We believe our network of companies provide Internet and telecommunications technologies which could significantly effect the way visual communications are handled and distributed. Vio is an application service provider ("ASP") to the print and publishing industry. Launched in 1998, Vio (a Scitex joint venture with British Telecom) provides a secure and reliable global network combined with industry leading on-line software applications. The Vio environment enables integrated digital workflow between graphic designers, advertising agencies, brand owners, corporations, publishers and printers, within a secure, managed and fully tracked environment. The company's application services are also accessible via the Internet. RTimage is the leading innovator and developer of robust Internet-based imaging products and services for the graphic arts and medical communities. By delivering unsurpassed imaging quality and reliable collaboration in real-time, RTimage enables professionals effectively to use the global efficiencies of the Internet reviewing jobs. SciDel specializes in real time advertising insertion into television and webcasting. The systems developed by SciDel are capable of electronically overlaying advertising signage into live television broadcasts. We believe this technology could significantly effect the television advertising industry, particularly with regard to sporting events. The advertising signage appears to the television audience as if it were actually present at the event, although it is not visible to the in-arena audience. DISCONTINUED OPERATIONSScitex Digital Video In December 1998, Scitex sold the Scitex Digital Video business to Accom, Inc. for approximately $10 million and warrants convertible into approximately 10% of the stock of Accom (subject to dilution). Scitex had previously announced the intention to exit from the digital video business, which was no longer considered a core business. Accordingly, the digital video business has been presented throughout this report as discontinued operations. Truevision, Inc. Scitex's investment in Truevision, Inc. (dating back to 1993) was a strategic investment linked to the digital video business. With our decision to exit from the digital video business, the Truevision investment was therefore considered part of the Company's discontinued operations. In March 1999, Pinnacle Systems, Inc. acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. In April 1999, the Company sold its shares in Pinnacle for $3.1 million. MARKETING AND SALESThe following table sets forth the amounts and relative percentages of Scitex's total revenues by geographical markets, for the years indicated:
** Revenues from Japan (other than for SDP products) were mainly through a Japanese joint venture company, and these are reflected at the prices charged by Scitex to the joint venture and not at subsequent retail prices charged by the joint venture to customers. SDP generally markets and sells its own products through a global direct sales force. Sales organizations are strategically located throughout the United States, with several Scitex subsidiaries in Europe and the Far East providing marketing and support. In certain areas, SDP also utilizes dealers, VAR's and OEM agreements. In early 1999, SDP announced an agreement with Domino Printing Sciences Plc, U.K., under which Domino becomes the exclusive distributor in Europe of SDP's narrow format products. Domino has a well-established sales and dealer network throughout Europe. The traditional customers of SDP include professional mailers, commercial printers, publication printers (such as magazines and catalogs), and form printers utilizing our equipment for applications such as direct mail, lottery and addressing. Emerging applications include billing, data center printing, and high volume on-demand book printing. Until their acquisition by Creo in April 2000, we had several distribution units worldwide primarily responsible for marketing, sales and customer support of our digital preprint products in their geographical areas. These units comprised wholly-owned subsidiaries in North America, Europe and the Far East, a joint venture company in Japan, and a division in Israel with responsibility for the Middle East and Africa. Certain of these units were also responsible for marketing, sales and customer support of SWF's products, and to a more limited extent SDP's products and pursuant to the agreement with Creo, the CreoScitex distribution units are continuing to provide the support and services on an interim basis. We are in the process of forming several new subsidiaries worldwide to serve as sales, marketing and support units for SWF's products, and are expanding the number of subsidiaries, particularly in Europe, which provide marketing and support for SDP's products. The Company's 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 acceptance of installation. Scitex had agreements with third party financing companies for long-term financing of purchases of Scitex equipment by certain customers. (See Note 10(b)(1) to the Consolidated Financial Statements listed in Item 19.) In each of the years 1999 and 1998, no end-user customer nor distributor accounted for more than 10% of net revenues. COMPETITIONThe primary competitive factors affecting sales of Scitex equipment are performance relative to price, productivity and throughput of systems, product features and technology, quality, reliability, cost of operation, the quality and costs of training, support and service, and (with particular reference to digital printing) flexibility of adapting to customers' applications. Other competitive factors in this market include the ability to provide access to product financing, reputation of the supplier and customer confidence in continuing development programs for additional accessories and features compatible with the equipment offered. The principal competition for SDP in the page-wide format digital printing market comes from alternative technologies of companies such as the U.S. corporations, Xerox Corporation (electron beam imaging, formerly owned by Delphax Systems, Inc.) and Xeikon N.V. (magnetography formerly owned by Nipson Printing Systems Inc.), as well as Océ Printing Systems GmbH (formerly Siemens Nixdorf Printing Systems) and IBM Printing Systems Company (both electrophotography). In the narrow and partial-page format digital printing market SDP's principal competitors are U.S.-based Marconi Data Systems Inc. formerly Videojet Systems International, Inc. (owned by Marconi Plc of the U.K.), Imaje of France and Domino Printing Sciences Plc of the U.K., with whom SDP has entered in to a distribution agreement in Europe relating to SDP's narrow format systems. The principal competition for the printing systems manufactured by Scitex Wide Format Printing Ltd. comes from the superwide printers manufactured by a number of companies, including Vutek, Inc. of the United States and Nur Macroprinters Ltd. of Israel, as well as the Scotchprint 2000™ printer produced by 3M. Karat's principal competitor is likely to be Heidelberg; and the principal competitor of Vio is Wam!Net, Inc. of the United States. CUSTOMER SUPPORTTechnical support, training and customer service are important factors in system sales and the achievement of high levels of customer satisfaction. Scitex provides an equipment warranty for an agreed period following completion of installation. After the warranty period, we offer service contracts providing for equipment and software maintenance. Currently, the customer support operations worldwide of SDP and SWF engage over 160 employees, comprising engineers, technical and application specialists as well as logistics and management personnel. They are based in North America, Europe, Japan and the Pacific. In certain areas, services are provided through distributors and agents, who provide technical and applications support through locally trained engineers. In 1999, 21.3% of the Company's total revenues (nearly $147 million) was generated from service operations. In addition, during 1999, Scitex generated over $68 million of revenue from the supply of consumables, primarily ink and paper for the inkjet printing products produced by Iris Graphics, SDP and SWF, representing 9.9% of our total revenues. RESEARCH AND DEVELOPMENTScitex's research and development efforts are focused on the development of new products and technologies, as well as enhancing the quality and performance relative to price of our existing products, reducing manufacturing costs and upgrading and expanding our product line through the development of additional features and improved functionality. Following the Creo Transaction, Scitex's research and development activities engage approximately 150 employees, primarily in SWF's operations in Israel and the operations of SDP in Dayton, Ohio. In addition, a high proportion of the employees of our joint ventures and minority held affiliated companies are engaged in research and development. Scitex has taken advantage of royalty-bearing grants in the form of participations
in industrial research provided by the Government of Israel. The following
table shows the amounts and relative percentages of total research and development
expenditures and the royalty-bearing participations therein, for the years
indicated:
Primarily as a result of the Creo Transaction, future Israel Government participations in connection with Scitex's current operations are expected to decline significantly. Under the terms of the Israel Government participations, Scitex paid a royalty on the proceeds of sales of products resulting from funded projects up to the amount of the grants received. Most of the obligations for future royalties have now been assumed by Creo. The royalties payable in respect of projects approved prior to 1995 are generally 2% of the amount of such sales. However, on projects approved subsequently, the royalties generally payable are 3% for the first three years of product sales, 4% for the next three years and thereafter 5% up to the amount of the grant received (such rates being increased by 1% in respect of certain special projects). Royalties expensed by Scitex pursuant to the Israel Government and other programs amounted to approximately $ 4 million in 1999 (approximately $4.7 million in 1998 and $4.3 million in 1997). At December 31, 1999, the maximum contingent royalty payable was approximately $34 million. MANUFACTURINGScitex has manufacturing facilities in Israel and the United States, and in both countries also uses subcontractors in connection with certain types of work and activities. Karat has manufacturing facilities in both Israel and Germany. Product quality control tests and inspections are performed at various steps throughout the manufacturing process, and each product is subjected to a final test prior to delivery. Most of the parts, components and commodities used by Scitex in the manufacture and assembly of Scitex products are available from several sources, although we currently purchase 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 us. We generally purchase certain major components and commodities used in our products under annually renewable supply agreements with principal suppliers. To date, we have managed to overcome any difficulties experienced in obtaining timely deliveries. Although increased demand for these components and commodities or future unavailability could result in production delays which might adversely affect our business, we believe that, if required, alternative sources of supply could be developed for all parts, components and commodities. PATENTS AND TRADEMARKSScitex currently owns, licenses or otherwise has rights in over 330 issued patents (primarily in the United States) and has over 300 patent applications pending in the United States and elsewhere. As part of the Creo Transaction in April 2000, we assigned to Creo approximately 250 issued patents and 140 pending patent applications relating to our digital preprint and print-on demand business. Creo granted back to Scitex and its affiliates a non-exclusive license of such intellectual property, including patents, used by Scitex and its affiliates prior to the Creo Transaction. Scitex also claims proprietary rights in various technology and trade secrets relating to its products and operations. On May 25, 1999, an action was commenced in the United States District Court of the Southern District of Ohio Western Division against SDP by Varis Corporation, alleging that SDP is infringing a patent issued to Varis and that SDP's use of the VersaScript trademark infringes the VarisScript trademark used by Varis. Varis has recently amended its suit to add Scitex Corporation Ltd. as a defendant. The suit against SDP is presently in the early stages of discovery. Both defendants deny the allegations of the complaint, have filed defenses of non-infringement and are aggressively defending the action. Scitex also holds a number of trademarks and service marks in the United States and elsewhere, particularly for the word Scitex and the Scitex logo in respect of which we have granted Creo an exclusive license to use the same in its digital preprint and print-on-demand business. EMPLOYEE AND LABOR RELATIONSWe currently have a total worldwide workforce of approximately 910. The workforce in Israel numbers approximately 140. There are approximately 670 employees in the United States (including approximately 65 temporary employees) and 100 employees in Europe and elsewhere. In addition, our two principal joint ventures employ approximately 320 persons (almost all outside the United States). We consider our relations with our employees to be good and we have never experienced a strike or work stoppage. Our employees are not generally represented by labor unions. Nevertheless, as regards our employees in Israel, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and Israel's Coordination Bureau of Economic Organizations (including the Manufacturers' Association) are applicable to such employees by order of the Israel Ministry of Labor and Welfare. However, we generally provide our employees with benefits and conditions beyond the required minimums, including contributing to funds to provide severance. CERTAIN AGREEMENTS WITH CREOOn January 17, 2000, Scitex entered into an Asset Purchase Agreement with Creo and certain wholly-owned direct and indirect subsidiaries of Creo, pursuant to which Scitex agreed to sell Creo its digital preprint operations and print-on-demand systems business. Scitex and Creo agreed that as a condition to the closing of the transactions contemplated by the Asset Purchase Agreement, they would enter into a Standstill Agreement and Registration Rights Agreement. The transaction was consummated on April 4, 2000 and Creo and Scitex entered into a Standstill Agreement and Registration Rights Agreement as of that date. STANDSTILL AGREEMENT Scitex agreed that during the period from April 4, 2000 through April 4, 2005 (the "Standstill Period"), it would not acquire, offer or propose to acquire or agree to acquire any additional voting shares of Creo if following the acquisition Scitex would own in excess of the greater of (i) 15 million common shares of Creo and (ii) 26.1% of the voting shares of Creo on a fully diluted basis. To the extent the number of outstanding shares of Creo increases, Scitex may purchase additional shares to maintain its percentage ownership at 26.1%. During the Standstill Period, Scitex agreed not to vote against the election of Creo's nominees for election as directors, and that if it votes on an election of directors it will do so in the same way in respect of all nominees proposed by the Creo Board of Directors for election. Scitex also agreed that during the Standstill Period it would vote its shares, at its election, either as recommended by a majority of the Creo's Board or in the same proportion as Creo's other shareholders vote, on any proposal for the adoption or modification of take-over defenses. For a period of three years from April 4, 2000, Scitex agreed to vote its shares on any proposal for a sale of Creo, including a sale of substantially all of its assets or a merger, consolidation or amalgamation in which it is not the survivor, provided that the transaction has been approved by at least 51% of Creo's shareholders (or, if less, 75% of those unaffiliated with Scitex) and that Scitex receives a total profit in respect of the shares issued to it in the Creo Transaction, calculated as provided in the Standstill Agreement. Scitex sales of the common shares of Creo are limited during the term of the Standstill Agreement, to the following circumstances; (i) at any time with the consent of a majority of the non-Scitex directors of Creo; (ii) during the first six months after April 4, 2000, only to an affiliate which agrees to be bound by the Standstill Agreement; (iii) during the second six months after April 4, 2000, (A) to an affiliate which agrees to be bound by the terms of the Standstill Agreement or (B) up to an aggregate of 10% of its shares in compliance with the provisions set out in clause (iv); and (iv) during years two to five following April 4, 2000: (a) pursuant to a registered underwritten offering in which no transfer representing more than 2% of the outstanding shares is made to any person or group; (b) pursuant to Rule 144 under the Securities Act; (c) to an affiliate which agrees to be bound by the Standstill Agreement; (d) pursuant to a tender offer for all outstanding shares of Creo by a third party that is not rejected by Creo's Board of Directors; (e) up to 4.9% of the outstanding shares of Creo to any investor in a private sale provided that the investor does not as a result hold, either alone or as part of a group, more than 5% of the outstanding Creo common shares; or (f) to shareholders of Scitex by way of a dividend, provided that as a result, no shareholder holds more than 17% of the outstanding Creo common shares, unless the shareholder agrees to be bound by the standstill Agreement to the extent it is still in force. During the term of the Standstill Agreement, neither Scitex nor any of its majority-owned subsidiaries may (i) seek to exercise controlling influence over Creo (otherwise than through its representation on Creo's Board of directors or through exercising voting rights in a manner consistent with the Standstill Agreement); (ii) present any proposal to Creo or a third party that would result in a change in control of Creo or increase Scitex's then percentage ownership, including a merger, recapitalization, sale of substantially all of the assets or other business combination, or a tender offer for Creo securities; (iii) encourage or assist any other person to make such a proposal; (iv) publicly announce its interest in engaging or having some other person engage in such proposal; (v) solicit or participate in a proxy solicitation in opposition to a recommendation of Creo's Board; (vi) for or become part of a group for the purpose of acquiring, holding, voting or disposing of Creo securities; (vii) make a shareholder proposal to Creo's shareholders or seek to elect any person to Creo's Board, except consistent with the Standstill Agreement; or (viii) engage in any other conduct, whether alone or in concert with others, designated to effect a change in control of Creo or to circumvent any of the preceding restrictions. REGISTRATION RIGHTS AGREEMENT Pursuant to the Registration Rights Agreement, commencing on April 4, 2001 and continuing until April 4, 2005, subject to certain conditions and limitations, Scitex will have the right to demand that Creo (i) register Scitex's common shares of Creo for sale, provided that Creo is only obligated to register Scitex's common shares on two occasions and no more than once during any 12 month period; and (ii) include Scitex's common shares in any registration statement pursuant to which Creo proposes to register common shares, whether or not for sale for its own account. POLITICAL, MILITARY AND ECONOMIC CONDITIONS IN ISRAELScitex's corporate headquarters and the principal offices, research and development, engineering and manufacturing operations of SWF, as well as principal facilities of several of our joint ventures and minority held affiliated companies, are located in Israel, and therefore our operations and financial results are directly affected by economic, political and military conditions in Israel. In addition, such companies are heavily dependent upon components imported into Israel, primarily from the United States, and all but a small percentage of their sales are made outside Israel. Accordingly, our operations and financial results could be adversely affected if major hostilities involving Israel should occur in the Middle East or if trade between Israel and its present trading partners should be curtailed or interrupted. From the establishment of the State of Israel in 1948, a state of hostility has existed, varying from time to time in degree and intensity, between Israel and its various Arab neighbors. Many Israeli male employees are obligated to perform annual reserve duty in the Israel Defense Forces. An emergency involving mobilization in Israel could require a substantial increase in the time Israeli personnel are required to devote to active military service, which could result in disruption of our Israeli operations and effect our financial results. Israel has signed peace treaties with two of its principal Arab neighbors, Egypt in 1979 and Jordan in 1994, and has entered into several agreements with the Palestine Liberation Organization (the "PLO") relating to territories which Israel had administered following the Six Day War of 1967 (the "Territories"). From time to time since 1987 Israel has experienced civil unrest from the local Arab population in the Territories. Pursuant to the agreements with the PLO, civil administration of a significant part of the Territories, including the major areas of population, has been transferred by Israel to a self-rule Palestinian Authority. However, Israel has not reached agreement with its other neighboring Arab countries, Syria and Lebanon, and there are still a number of major unresolved issues between Israel and the Palestinian Authority. No predictions can be made as to whether or when a final resolution of the area's problems will be achieved or the nature thereof and to what extent the situation will impact Israel's economic development or the operations of Scitex. Scitex has been favorably affected by certain Israel Government programs and tax legislation, principally related to research and development grants and capital investment incentives. The operations of Scitex's Israeli subsidiaries, joint ventures and minority held affiliated companies could be adversely affected if these programs or tax benefits were reduced or eliminated and not replaced with equivalent programs or benefits, or if their ability to participate in the programs were significantly reduced. There can be no assurance that such programs and tax legislation will continue in the future or that the available benefits will not be reduced or that we will continue to meet the conditions to benefit from such programs and legislation. The defense burden, the absorption of a substantial number of new immigrants, development of the economy and the provision of a minimum standard of living have resulted in high balance of payments deficits for Israel for many years. The main sources of funds to finance the deficits in the Israeli balance of payments have been military and economic aid from the United States, personal remittances, sales of bonds (primarily in the United States), inter-governmental, institutional and free market loans and guarantees, as well as contributions from world Jewry. Israel's economy could suffer serious adverse consequences if current sources of funds were to be reduced by material amounts. Israel has the benefit of a free trade agreement with the United States which, generally, permits tariff free access into the United States of products produced in Israel by Scitex's Israeli subsidiaries, joint ventures and minority held affiliated companies. In addition, as a result of an agreement entered into by Israel with the European Union (the "EU") and countries remaining in the European Free Trade Association ("EFTA"), the EU and EFTA have abolished customs duties on Israeli industrial products. ITEM 2. DESCRIPTION OF PROPERTYWe are currently considering a number of possible alternative locations for our new corporate administrative offices, in or around Herzlia, Israel, and estimate that approximately 4,000 square feet of floor space will be required. In the meantime, we are continuing to utilize, on a interim basis, the offices occupied by our corporate management prior to the closing of the Creo Transaction, which offices are now part of CreoScitex's facilities. These facilities are situated in several adjacent buildings within an industrial park located in Herzlia. In April 2000, SWF moved all its Israel operations, including its manufacturing operations, into new facilities in Herzlia, close to the CreoScitex facilities, comprising approximately 42,000 square feet of floor space, of which approximately 16,000 square feet are leased from Bayside Land Corporation Ltd. ("Bayside"), an affiliate of Discount Investment Corporation Ltd., one of our major shareholders. (See "Item 4. Control of Registrant".). Scitex, through its wholly-owned subsidiaries, leases various facilities outside Israel, the principal facility being that of SDP in Dayton, Ohio. Other locations include Tokyo, Japan; Singapore; Brussels, Belgium; St. Prex, Switzerland; and various other European centers. These facilities currently comprise approximately 350,000 square feet of floor space. A manufacturing facility in Radebeul, near Dresden, Germany, comprising approximately 10,000 square feet, is leased to Karat, and Karat leases from CreoScitex nearly 12,000 square feet of floor space in a building previously owned by Scitex in Herzlia, both facilities for the production of the 74 Karat digital press. In addition, Vio Worldwide Limited leases approximately 6,300 square feet of office space in an business park in Watford, Hertfordshire, UK, approximately twenty miles northwest of London. ITEM 3. LEGAL PROCEEDINGSThe Company is from time to time named as a defendant in certain routine litigation incidental to its business. The Company does not believe that the results of such litigation will have a material adverse effect on its business or its financial condition. See also "Item 1. Description of Business - Patents and Trademarks" for details of certain patent litigation; and "Year 2000 Readiness" section of "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations" for certain litigation relating to Year 2000 issues. ITEM 4. CONTROL OF REGISTRANTUnless otherwise stated, all data in this Item is as June 12, 2000. Scitex Corporation Ltd. has authorized one class of equity securities, designated Ordinary Shares (NIS 0.12 nominal value) (in this Item "Shares"). On May 6, 1998, the Scitex board of directors approved a program for the repurchase by Scitex of up to two million Shares, to be held by the trustee for the benefit of employees within the framework of Scitex's existing stock option plans (see "Item 12. Options to Purchase Securities of the Registrant or Subsidiaries"). Under the approved program Scitex may not purchase Shares from its principal shareholders. As at June 12, 2000, 589,500 Shares, at an average price per share of $9.37, had been repurchased by the trustee pursuant to the program, with funds provided by Scitex. As of June 12, 2000, there were 42,825,787 Shares outstanding, excluding the 589,500 Shares purchased by the trustee pursuant to the repurchase program. The following table sets forth the number of fully paid Shares owned by (1)
any person who is known to Scitex to own beneficially more than 10% of the
Shares, and (2) all directors and executive officers as a group:
DIC, an Israeli corporation and PEC, a Maine corporation wholly owned by DIC, hold investments in Israeli companies, predominately companies which are located in Israel or are Israel related, operating mainly in the fields of advanced technology, communications, commerce, industry and services. DIC may be deemed to share with PEC and with DIC Loans Ltd., an Israeli corporation also wholly owned by DIC, the power to vote and dispose of the outstanding Scitex shares held by PEC and DIC Loans Ltd. Clal and DIC are both controlled by IDB Development Corporation Ltd. ("IDBD"). In December 1999, Clal accepted a proposal to be merged into IDBD. The merger procedure is subject to various approvals and is expected to be completed in July 2000. Companies controlled by Oudi Recanati and his children, Leon Y. Recanati and his children, Judith Yovel Recanati and her children, and Elaine Recanati, together beneficially own approximately 51.9% of the equity and voting power in IDB Holding Corporation Ltd. ("IDBH"), the parent of IDBD. Leon Y. Recanati and Judith Yovel Recanati, who are brother and sister, and their cousin Oudi Recanati, are the nephews and niece of Elaine Recanati. Leon Y. Recanati is Co-Chairman and Co-Chief Executive Officer of IDBH, Chairman of the boards of directors of Clal and Clal Industries, Co-Chairman of IDBD and a director of Scitex. Based on the foregoing, IDBH and IDBD (by reason of their control of Clal and DIC) and the members of the Recanati family referred to above may be deemed to share with CEI and DIC the power to vote and dispose of the outstanding Shares held by such companies (including DIC's wholly owned subsidiaries, amounting, in the aggregate, to 39.52% of such Shares. On December 1, 1980, Clal Industries (whose holdings of the Shares are now held by CEI), PEC and DIC entered into an agreement in writing that they would votes their Shares of the Company in concert with respect to the election of directors of Scitex and with respect to any Ordinary Resolution submitted to shareholders. The Agreement also granted certain rights of first refusal if one of the parties wish to sell their shares to a third party. The Agreement was for an initial term of ten years, subject to renewal for additional periods of ten years unless and until prior notice was given by one party of its intention not to renew. ITEM 5. NATURE OF TRADING MARKETScitex's Shares trade on The Nasdaq Stock Market under the symbol "SCIX". The following table sets forth the high and low sales prices of the Shares on The Nasdaq Stock Market's National Market for each calendar quarter during the periods indicated, rounded to the nearest U.S. cent:
As of June 12, 2000, there were approximately 480 shareholders of record of Scitex, of whom approximately 440 were registered with addresses in the United States, representing approximately 68% of the outstanding Shares. ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERSThere are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. The ownership or voting of our Company's Shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association nor by the laws of the State of Israel. ITEM 7. TAXATIONThe following discussion represents a summary of certain Israeli tax laws affecting our shareholders, including U.S. and other non-Israeli shareholders, for general information only and is not intended to substitute for careful or specific tax planning. To the extent that the discussion is based on legislation yet to be judicially or administratively interpreted, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion is not intended, and should not be construed, as legal or professional tax advice, and does not cover all possible tax considerations. Accordingly, each investor should consult his or her own tax advisor as to the particular tax consequences of an investment in the ordinary shares including the effects of applicable Israeli or foreign or other tax laws and possible changes in the tax laws. CAPITAL GAINS TAX Israeli law imposes on residents and non-residents of Israel a tax on the sale of capital assets in Israel. The law distinguishes between the inflationary surplus and the real gain. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset's purchase price that is attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus. Inflationary surplus accumulated after December 31, 1993 is exempt from any capital gains tax in Israel. The real gain is added to ordinary income, which is taxed at ordinary rates of 30% to 50% for individuals and 36% for corporations. Under current law, gains on sales of our ordinary shares by shareholders that are not Israeli companies are exempt from Israeli capital gains tax for so long as the shares are quoted on Nasdaq or another stock exchange recognized by the Israeli Controller of Foreign Currency and we qualify as an Industrial Company. The Israeli tax authorities might determine that we do not qualify as an Industrial Company. In addition, under a possible interpretation of an Israeli statute, non?Israeli companies may be subject to Israeli taxation on the sale of our shares regardless of whether the shares are traded on a recognized stock exchange. We might not maintain our listing on Nasdaq or our status as an Industrial Company in the future. Notwithstanding the foregoing, dealers in securities in Israel are taxed at regular tax rates applicable to business income. Pursuant to a treaty between the governments of the United States and Israel, the sale of shares by a person who qualifies as a resident of the United States within the meaning of the treaty and who is entitled to claim the benefits afforded to a resident by the treaty will not be subject to Israeli capital gains tax. This exemption does not apply if the person holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12?month period preceding the applicable sale. However, the person would be permitted to claim a credit for the capital gains tax paid in Israel against the U.S. income tax imposed with respect to the applicable sale, subject to the limitations in U.S. laws applicable to foreign tax credits. TAX ON DIVIDENDS Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares, or stock dividends, we would be required to withhold income tax at the rate of 25%. If the income out of which the dividend is being paid is attributable to an Approved Enterprise under the Law for the Encouragement of Capital Investments, 5719-1959, the rate is 15%. A different rate may be provided in a treaty between Israel and the shareholder's country of residence. Under the U.S.-Israel tax treaty, if the income out of which the dividend is being paid is not attributable to an Approved Enterprise, then income tax with respect to shareholders that are U.S. corporations holding at least 10% of our voting power is required to be withheld at the rate of 12.5%. PROPOSED TAX REFORM On May 7, 2000, the Israeli government approved the recommendations of the Public Committee on the Reform of Taxes on Income, to broaden the categories of taxable income, and to reduce the tax rates imposed on employment income. The Committee recommended, among other things, to impose a tax upon capital gains at a rate of up to 25% for individuals, including capital gains derived from the sale of shares in publicly traded companies (which is currently exempt from capital gains tax); to impose a tax upon all income of Israeli residents (individuals and corporations) regardless of the territorial source of income; and to increase the tax rate from zero to 10% during the exempt period under the alternative package of benefits for approved enterprises under the Law for the Encouragement of Capital Investments, 5719-1959. In order to be enacted as legislation the report must be approved by the Knesset and published, and the substance of the recommendations could undergo significant revision during that process. If implemented, the recommendation might result in the imposition of Israeli capital gains taxes on non-Israeli residents who are not eligible for an exemption under a relevant tax treaty. ITEM 8. SELECTED FINANCIAL DATASTATEMENT OF OPERATIONS DATA
BALANCE SHEET DATA
DIVIDENDSThe Company declared a cash dividend each quarter from the beginning of 1990 until the third quarter of 1996. No dividend was declared in respect of the last quarter of 1996 nor in respect of 1997 through 1999. The Company continually reviews its dividend policy and the payment, or non-payment, of a dividend should not be considered indicative as to the payment of future dividends. During the last five years, the rate of tax generally withheld at source at the time of payment by the Company of cash dividends ranged from 16.6% to 17.7%. For shareholders of record registered with an address in a country, other than the United States, with which a bilateral double taxation treaty with Israel was in effect, the rate of tax withheld at source was 15.0%. ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSGENERALOn April 4, 2000, Creo acquired our digital preprint operations and print-on-demand systems division in consideration for 13.25 million Creo shares. As a result, Scitex holds approximately 26% of Creo's shares on a fully diluted basis. The results of operations and other financial information for 1999 and prior years include the digital preprint and print-on-demand business. The Creo Transaction resulted in a significant net gain for Scitex that will be recorded in our results of the second quarter of the year 2000. However, computation of such gain and related tax and other consequences are not anticipated to be completed until after the publication of Creo's financial results for the quarter ended June 30, 2000. From the second quarter of 2000, the revenues, costs and expenses of the operations acquired by Creo will not appear as such in our Consolidated Financial Statements, but will form part of income or losses of equity investments. In addition, intangible amortization will be significantly higher as a result of the Creo Transaction. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTSCertain information contained in this Annual Report on Form 20-F, including, without limitation, information appearing under "Item 1. Description of Business" and "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations", are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The following important factors, together with others that appear with the forward-looking statements, or in Scitex's other Securities and Exchange Commission filings, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Scitex in this Annual Report on Form 20-F.
IMPACT OF INFLATION AND EXCHANGE RATESVirtually all Scitex's revenues are in non-Israel currencies. Sales in the United States and other areas outside of Western Europe and Japan are typically made in dollars. Sales in Europe are primarily in pounds sterling or in Euro. Sales in Japan are made in Japanese yen. Although a material portion of Scitex's costs relate to the operations of SWF in Israel, much of these Israel costs are in dollars or linked to the dollar. Until the Creo Transaction, Scitex had significantly more costs in Israel, the majority of which were in dollars or linked to the dollar. Costs not denominated in, or linked to, dollars are translated to dollars, when recorded, at prevailing exchange rates for the purposes of our financial statements, and may increase if the rate of inflation in Israel exceeds the rate of devaluation of Israel's currency, the New Israel Shekel (the "shekel" or "NIS"), against the dollar or if the timing of such devaluations were to lag considerably behind inflation. Conversely, such costs may in dollar terms decrease if the rate of inflation is lower than the rate of devaluation of the shekel against the dollar. In 1997 and 1998, the annual rates of inflation in Israel were 7.0% and 8.6%, respectively, and the annual rates of devaluation of the shekel against the dollar were 8.8% and 17.6%, respectively. This imbalance was reversed in 1999 when the annual rate of inflation was 1.3% and the shekel strengthened compared to dollar by 0.2%. As a result, our Israeli operations experienced decreases in dollar costs in 1997 and 1998 and an increase in 1999. The representative dollar exchange rate for converting the shekel to dollars, as reported by the Bank of Israel, was NIS 4.153 on December 31, 1999 (NIS 4.160 on December 31, 1998). Until the Creo Transaction, we had substantial operations outside the United States and Israel, and accordingly maintained substantial non-dollar balances of assets, including substantial accounts receivable balances related to sales made in non-dollar currencies, mostly European currencies and Japanese yen. Our general policy was to hedge against the exchange rate exposure arising from the existence of such non-dollar business activities. This was done using a number of commercially available financial tools, including forward transactions and currency options. The net impact of currency exchange rate and remeasurement differences (after hedging) between the dollar and other currencies accounted for net gains of $0.1 million, $1.3 million and $2.2 million in 1999, 1998 and 1997, respectively. In addition to the exchange rate exposure resulting from the existence of large non-dollar balances of assets, since sales to Europe and Japan were generally made in local currencies, our competitive position and future results of operations, including our ability to maintain attractive profit margins, could be adversely affected if the dollar significantly increased in value in comparison to the primary European currencies and the Japanese yen. From time to time, we purchased currency options for a portion of our projected sales net of projected operating expenses for the corresponding periods. Gains and losses from such transactions were recorded in revenues in the period when revenue from the related transaction were recognized, while the premiums on the options were amortized equally over the period from the time of purchase until expiration, and are included under "Financial Expenses". During the year 1999, the dollar strengthened compared to primary European currencies. At December 31, 1999, one dollar equaled 1.0053 Euro compared to 1.16 Euro at December 31, 1998. In the years 1999, 1998 and 1997, our hedging activity regarding future sales had a positive impact on revenues of $3.3 million, $5.5 million and 6.1 million, respectively. Our hedging policy is decided upon from time to time by our management under approval of the board of directors, as appropriate. However, this type of hedging was limited in its time horizon and therefore could not eliminate the longer term impact on a company's competitive position and results of operations of a sustained change in the value of the dollar. (See "Item 9A. Quantitative and Qualitative Disclosures about Market Risk" and Notes 1p, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.) 1999 COMPARED WITH 1998The net income in 1999 was $31 million, consisting of income from continuing operations of $24 million and income from discontinued operations of $7 million. Total revenues in 1999 increased 8% to $690 million from $640 million in 1998. Sales of equipment were $475 million in 1999, up 8% from $441 million in 1998. The increase was primarily due to higher sales in the U.S. and Europe. Service revenue (mainly from maintenance contracts, time and material charges and advanced customer training) rose 7% in 1999 to $147 million from $138 million in 1998. The increase was mainly in the US and Europe. Sales of supplies for our inkjet printers rose 11% in 1999 to $68 million, the increase being mainly due to SWF's enlarged customer base. Revenues in Europe were $259 million, an increase of 9% from 1998. The increase was primarily due to higher sales of digital preprint products. Revenues in North and South America were $319 million, 7% above 1998. This was also largely a result of growth in digital preprint sales. Sales to Japan were $50 million, a decrease of 22% from the 1998 level of $65 million, reflecting continued difficulties in the Japanese market. Revenues in the rest of the world were $62 million compared to $42 million in 1998, reflecting a strong performance in several Asian countries. Consolidated gross margin in 1999 was 43%, compared with 42% in 1998. Equipment gross margin in 1999 was 49%, compared with 48% in 1998. Service gross margin was 20% in 1999 compared with 21% in 1998. Gross margin on sales of supplies, mainly paper and inks for our digital inkjet printers, was 47% in 1999, compared with 46% in 1998. Research and development expenditures, before government grants decreased from $77 million in 1998 to $73 million in 1999 due mainly to tight control over such expenditures. A portion of Scitex's research and development expenses incurred in Israel was funded by the Government of Israel pursuant to programs entitling the Government to receive royalties on sales of products developed therein. Total government R&D funding was $7 million in 1999 (10% of gross R&D expenditures) and $11 million in 1998 (14%). Royalty expense pursuant to the Government of Israel funding programs, included in selling expenses, was $3.8 million in 1999, compared with $4.7 million in 1998. Selling and marketing expenses in 1999 were $101 million (15% of revenues), unchanged from 1998. General and administrative expenses were $66 million in 1999, compared with $74 million in 1998. The large decrease resulted from a number of factors including lower occupancy costs in Israel and Europe and a reduction in legal fees following settlement of a large patent suit. Amortization of goodwill and other intangible assets was $11 million in 1999 and $9 million in 1998. The increase in 1999 was primarily due to the acquisition of Idanit and Matan in 1998 and additional earnout payments during 1999 related to Matan. Most of the goodwill relates to entities that were not transferred to Creo. Net financial income was $3 million in 1999 compared with $5 million in 1998, principally due to lower average cash balances. Scitex recorded a tax provision in 1999 of $9.2 million compared with a tax provision of $2.2 million in 1998. The 1999 provision is in large part to cover taxes which will be payable on taxable income in certain European countries and the deferred tax impact from the expected use of carryforward tax losses in other European countries, as well as the U.S. Following the sale of the digital video business (see below), Scitex has tax loss carryforwards in the U.S. Scitex also had significant carryforward tax losses in Israel. After valuation allowances, Scitex had a net deferred tax asset of $44 million at December 31, 1999 which primarily related to net operating loss and credit carryforwards, allowances for doubtful accounts, inventory reserves and accrued liabilities (see Note 12d to the Consolidated Financial Statements). The deferred tax asset will be significantly reduced following the Creo Transaction due to the sale to Creo of subsidiaries or assets that were the sources of the deferred tax assets and the expected use of tax losses. However, the realizability of the net deferred tax asset will also depend upon the timing of reversal of the temporary differences as well as the timing, amount and geographic distribution of future taxable income. A number of factors may impact future taxable income, including those discussed above under "Certain Factors That May Affect Future Results" as well as any tax planning strategies. To the extent that estimates of future taxable income are reduced or not realized, the amount of the deferred tax asset considered realizable could be adversely affected. Scitex's share in the losses of equity investments was $21 million in 1999, compared with an equity loss of $15 million in 1998. The losses were primarily from three joint ventures: Nihon Scitex Ltd. (now Nihon CreoScitex Ltd., a Creo joint venture, in Japan), Karat and Vio. In 1998, Scitex recorded a provision of $63 million for the estimated loss on the exit from the digital video business. The provision was comprised of $50 million related to the estimated loss on sale of Scitex Digital Video (SDV), and $13 million to recognize permanent impairment of the value of Scitex's investment in Truevision, Inc. ("Truevision"), which in view of the intention to exit from the digital video business, was reclassified in the balance sheet to short term investments. The discontinued operations section of the 1998 Consolidated Statement of Income included the $63 million loss on disposal and the $14 million loss from digital video operations through the third quarter. In December 1998, Scitex sold substantially all of the assets and liabilities of the SDV business for $10 million, of which $8 million of the proceeds was received in cash. The balance was to be be paid over a period of 18 months. In 1999, the accrued liabilities related to the sale of SDV were reduced by $7 million, the effect of which is shown in the 1999 Consolidated Statement of Income as income from from discontinued operations. In March 1999, Pinnacle Systems, Inc. ("Pinnacle") acquired all of the outstanding shares of Truevision through the issuance of new shares of Pinnacle. Scitex sold its shares in Pinnacle in April 1999 for $3.1 million. 1998 COMPARED WITH 1997The net loss in 1998 was $111 million, consisting of loss from continuing operations of $34 million and loss from discontinued operations of $77 million. The loss from continuing operations includes a $44 million charge for acquired in-process research and development. The loss from discontinued operations and the charge for in-process R&D are discussed in further detail below. Prior years amounts have been reclassified for the effect of the discontinued operations. Total revenues in 1998 increased 4% to $640 million from $618 million in 1997. Sales of equipment were $441 million in 1998, up 3% from $427 million in 1997. The increase was primarily due to higher sales in the U.S. and Europe and the acquisition of Idanit, discussed further below. Service revenue (mainly from maintenance contracts, time and material charges and advanced customer training) rose 3% in 1998 to $138 million from $134 million in 1997. The increase was mainly in North America. Sales of supplies for our inkjet printers rose 7% in 1998 to $61 million, the increase being mainly due to the acquisition of Idanit. Revenues in Europe were $237 million, an increase of 6% from 1997. The increase was primarily due to higher sales of our digital preprint products. Revenues in North and South America were $297 million, 8% above 1997. This was also largely a result of growth in digital preprint sales. Sales to Japan were $65 million, a decrease of 4% from the 1997 level of $67 million. The relatively small decrease in Japanese sales is principally due to major sales by SDP in Japan during 1998. Revenues in the rest of the world were $42 million compared to $52 million in 1997, reflecting the economic difficulties in the Far East. Sales in Europe and Japan are generally denominated in local currencies and therefore the sales reported in U.S. dollars are affected by the exchange rate of the dollar against the European currencies and the yen. However, Scitex operated a hedging program designed to protect operating profits from being eroded by exchange rate fluctuations. Consolidated gross margin in 1998 was 42%, compared with 40% in 1997. Equipment gross margin was 48%, compared with 45% in 1997. The continued improvement in equipment gross margin in 1998 was due to product sales mix as well as lower cost of components, manufacturing efficiencies and lower inventory provisions, which resulted in a lower cost of sales. Service gross margin was 21% in 1998 compared with 17% in 1997. The improvement in service contribution in 1998 was primarily due to better reliability of products. Gross margin on sales of supplies, mainly paper and inks for our digital inkjet printers, was 46% in 1998, compared with 50% in 1997. The margin decline mainly reflected increasing competition in this market. Research and development expenditures, before government grants and not including acquired in-process R&D, were $77 million in 1998 compared with $68 million in 1997. The increase in R&D spending was mainly due to acquisitions and increased efforts in the development of new digital printing products. A portion of Scitex's research and development expenses incurred in Israel was funded by the Government of Israel pursuant to programs entitling the Government to receive royalties on sales of products developed therein. Total government R&D funding was $11 million in 1998 (14% of gross R&D expenditures) and $11 million in 1997 (15%). Royalty expense pursuant to the Government of Israel funding programs, included in selling expenses, was $4.7 million in 1998, compared with $4.3 million in 1997. The increase reflected product mix and an increase in the average royalty percentage. In February 1998, Scitex acquired Idanit (now Scitex Wide Format Printing Ltd.) for $63 million, of which $44 million represented the allocated value of in-process R&D with no alternative future use. Accordingly, this amount was charged to expense. The remaining purchase price was allocated to tangible assets, existing technology and goodwill. See note 2a to the Consolidated Financial Statements. Selling and marketing expenses in 1998 increased 10% to $101 million (16% of revenues) from $91 million (15%) in 1997. The increase was due to higher sales-related costs at the U.S. and European distribution units, including increased sales force, as well as the effect of acquisitions. General and administrative expenses were $74 million in 1998, compared with $73 million in 1997. Amortization of goodwill and other intangible assets was $9 million in 1998 and $6 million in 1997. The increase was primarily due to the acquisition of Idanit and the final $7 million contingent payment in respect of the acquisition of SDP based on the 1997 financial results of SDP. Net financial income was $5 million in 1998 compared with $6 million in 1997, principally due to lower average cash balances. Scitex recorded a tax provision in 1998 of $2.2 million compared with a tax provision of $1.5 million in 1997. The 1998 provision is in large part to cover taxes which will be payable on 1998 taxable income in certain European countries. Following the sale of the digital video business (see below), Scitex had tax loss carryforwards in the U.S. Scitex also had significant carryforward tax losses in Israel. After valuation allowances, Scitex had a net deferred tax asset of $28 million at December 31, 1998 which primarily related to net operating loss and credit carryforwards, allowances for doubtful accounts, inventory reserves and accrued liabilities (see Note 12d to the Consolidated Financial Statements). Scitex's share in the losses of equity investments was $15 million in 1998, compared with an equity loss of $3 million in 1997. The losses were primarily from three joint ventures: Nihon Scitex Ltd. (in Japan), which had a loss of $5.7 million compared with $2.2 million in 1997, and two new joint ventures established in 1998 - Karat and Vio - which had equity losses totaling $8.2 million, primarily from start-up expenses. In the third quarter of 1998, Scitex recorded a provision of $63 million for the estimated loss on the exit from the digital video business. The provision was comprised of $50 million related to the estimated loss on sale of SDV (including estimated losses in the fourth quarter through the sale date) and $13 million to recognize permanent impairment of the value of our investment in Truevision. The discontinued operations section of the Consolidated Statement of Income includes the $63 million loss on disposal and the $14 million loss from digital video operations through the third quarter. No additional losses were recorded in the fourth quarter of 1998 related to the exit from the digital video business. In December 1998, Scitex sold substantially all of the assets and liabilities of the SDV business for $10 million, of which $8 million of the proceeds was received in cash. The balance was to be over a period of 18 months. LIQUIDITY & CAPITAL RESOURCESCash, cash equivalents and short-term marketable investments at the end of 1999 were $82 million, almost unchanged from the end of 1998. Net cash provided by operating activities totaled $62 million in 1999 compared with $81 million in 1998. The larger amount in 1998 was primarily due to the liquidation of short-term investments. Without the change in short-term investments, there was an increase of $33 million, mainly due to the operating income of the digital preprint, and to a lesser extent, the digital printing business. The major uses of cash for investing activities included investment in the Karat and Vio joint ventures and other investments in affiliated companies ($22 million) and capital expenditures ($30 million). We regularly review our cash funding requirements on a consolidated basis and attempts to meet those requirements through a combination of cash on hand, cash provided by operations, and available borrowings under revolving credit facilities. Management believes that existing cash and short-term investments together with available credit lines and funds generated from operations of subsidiaries and other affiliated companies will be sufficient to meet operating requirements in the year 2000. We may use our remaining cash resources to invest in other technology-related businesses, to fund strategic opportunities and the acquisition of our own shares under an approved repurchase program. In January 1991, Scitex reached agreements with its principal banks, under which all floating and specific charges over its assets in favor of such banks were removed. Scitex undertook a negative pledge commitment as well as obligations to meet certain covenants common in such cases, if it wishes to draw upon certain lines of credit. NEW ACCOUNTING STANDARDSIn June 1998, the Financial Accounting Standards Board of the United States issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 established a new model for accounting for derivatives and hedging activities. FAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the sue of derivatives and whether it qualifies for hedge accounting. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (in the case of the Company - as from January 1, 2001). The Company is currently evaluating the impact FAS 133 will have on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements. " SAB summarizes some of the Securities and Exchange Commission's interpretations of the application of generally accepted accounting principles. Based upon numerous discussions held in the industry with SEC staff, and further clarifications as to how the SEC expects SAB 101 to be applied, the Company is currently re-evaluating the impact of SAB 101 on its financial statements and related disclosures. The accounting and disclosures prescribed by SAB 101 will be effective for our fiscal year ended December 31, 2000. YEAR 2000 MATTERSThe "Year 2000" issue arose from the potential for computers or equipment with embedded systems to fail or to operate incorrectly primarily because their programs incorrectly interpreted the two digit date fields "00" as 1900 or some other year, rather than the year 2000. We identified the following three areas for which the Year 2000 issue created potential risk for Scitex:
Failures of our or third parties' computer systems or Year 2000 problems affecting our products could have resulted in an interruption in, or a failure of, certain normal business activities or operations, and could have had a material adverse effect on our business, operating results and financial condition. In anticipation of such potential problems, we took what we believed were appropriate measures to address the possible impact of the Year 2000 issue on our operations, in each of the areas of risk identified above, and to date we have not experienced any material Year 2000 related problems. While we are encouraged by the success of our Year 2000 efforts and that of our customers and partners, Scitex will continue to offer Year 2000 support to customers and monitor our own operations. In January 1999, a suit was filed against Scitex America Corp. (then our principal U.S. sales and marketing subsidiary, and now CreoScitex America, Inc., a subsidiary of Creo) and the Registrant in the United States District Court for the District Court of Massachusetts, alleging various claims and potential losses due to a purported lack of Year 2000 readiness of certain Scitex PS/2-based equipment. The Plaintiff had also requested to the Court to certify the suit as a class action. The Court has not to date certified the class nor has it ruled on Scitex's motion to dismiss the complaint. During 1999, Scitex developed and issued certain software patches for its PS/2-based equipment, which it believes addresses any material alleged non-Year 2000 technical readiness of the Scitex PS/2-based equipment. We believe that the claims asserted in the suit are without merit and the defendants intend to defend the lawsuit. However, because of the unprecedented nature of such litigation, there can be no assurance as to the extent Scitex or Creo may be affected by the lawsuit filed or by any other such litigation, which could have a material adverse effect on the our business, operating results and financial condition. The aggregate cost to Scitex over the last few years of replacing substantially its entire computer system infrastructure to a Year 2000 ready system was approximately $10 million. We believe that a significant portion of this cost related to the replacement of systems that had already served their useful life and would have been replaced, or faced replacement in the near future, even without the approach of the Year 2000. Accordingly it is not possible accurately to estimate the portion of such costs attributable directly to the Year 2000 issue. Primarily we used existing personnel to evaluate our Year 2000 exposure, and the financial impact on Scitex in implementing Year 2000 compliance was not material to our business, operating results and financial condition in any given year, and was funded from operating cash flows. Other than as mentioned herein, we are not aware of any remaining significant exposures or risks to us as a result of the Year 2000 issue. There can be no assurance, however, that material problems (and costs associated therewith) with respect to Year 2000 related issues will not occur in the future. ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe have used derivative financial instruments ("derivatives") in order to limit our exposure to risk deriving from changes in foreign currency exchange rates. The derivatives were used for hedging of non-dollar assets and liabilities as well as certain future operating exposure. We do not hold or issue derivatives for trading purposes. Our functional currency and that of our consolidated subsidiaries is the dollar. Accordingly, we protected ourselves from balance sheet exposure deriving from the gap between assets and liabilities in each currency other than the dollar. The majority of this exposure has in the past been in European currencies, Japanese yen and Israel shekels. The exposure (after any "natural hedging" by offset of unrelated transactions in the same currency) was limited by the use of derivatives on a consolidated basis. The table below details the balance sheet exposure, by currency and geography, as of December 31, 1999 (at fair value). All data in the table has been translated for convenience into the dollar equivalent (in millions). Explanatory notes are provided below the table.
The table below details the hedging value acquired with forward transactions in order to limit the exposure to exchange rate fluctuations. The data is as of December 31, 1999 as recorded in our financial records and is presented in dollar equivalent terms (in millions).
For anticipated sales, we generally hedged the projected net exposure resulting from projected sales less related projected operating expenses in non-dollar currencies. We have used options to hedge our future operating exposure by purchasing calls on the dollar, usually together with selling put options on the dollar at a lower exchange rate and selling a call option on the dollar at a higher exchange rate (risk reversal strategy). The interest income on our cash equivalents and short-term investments is sensitive to changes in the general level of market interest rates. We mitigate the impact of fluctuations in interest rates primarily through diversification and by limiting the average duration of its interest-bearing investment portfolio. We do not have any long-term interest-bearing debt. From time to time, we use our short-term bank credit facilities for temporary needs. (See "Impact of Inflation and Exchange Rates" section of "Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1p, 13, 14 and 15d to the Consolidated Financial Statements listed in Item 19.) ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANTThe following table sets forth certain information with respect to the directors, executive officers and corporate secretary of Scitex as at June 12, 2000:
(1) Member of the remuneration committee of the board of directors and the
committees administering the Scitex key employee stock option and share incentive
plans. Rimon Ben-Shaoul was appointed Chairman of the board of directors of Scitex in October 1999, having served as Vice Chairman of the board of directors of Scitex since May 1999. He is President of Clal Industries, appointed in May 1997, and for the previous eleven years, Mr. Ben-Shaoul served as President of Clal Insurance Company Ltd. and a member of its board of directors. He is Chairman of the board of directors of CEI and serves as a director of a number of other companies within the Clal group, or in which it has an interest, including ECI Telecom Ltd. Mr. Ben-Shaoul holds a bachelors degree in economics and a masters degree in business administration, both from Tel Aviv University. Yoav Z. Chelouche was appointed President and Chief Executive Officer of Scitex in November 1995, having previously held the office of Executive Vice President - Marketing and Business Development from December 1993. Prior to then, Mr. Chelouche had served as Corporate Vice President - Marketing from 1983, such position being expanded in 1986 to include Business Development. He joined Scitex in 1979 as Vice President for Finance and Administration at Scitex Europe S.A., Scitex's then principal European sales and marketing subsidiary, and from 1982 to 1983 held the position of Corporate Marketing Manager. He holds a bachelors degree in economics and statistics from Tel Aviv University and a masters degree in business administration from INSEAD, Fontainebleau, France. Mendy (Menachem) Erad was Managing Director of CEI from February 1995 until December 31, 1998 and Vice Chairman of the board of directors of Scitex from November 1996 until May 1999. He was previously General Manager of Koor Tourist Enterprises Ltd. from 1993 to 1995 and, prior thereto, General Manager, Group Systems Division at Tadiran Ltd. from 1990. Mr. Erad is a consultant to CEI and serves as a director of a number of companies. He holds a bachelors degree in electrical engineering from the Ben Gurion University of the Negev, Beersheba, Israel. Ami Erel was appointed Chairman of the board of directors, President and Chief Executive Officer of Elron Electronic Industries Ltd. ("Elron") on November 1, 1999. Prior to that he served as President and Chief Executive Officer of Bezeq The Israel Telecommunication Corporation Ltd. from 1997, and as Chairman of the board of directors of PelePhone Communications Ltd. from 1997 to 1998. From 1993 to 1997, Mr. Erel served as Chief Executive Officer and Director of ForSoft Ltd. and as director of its subsidiaries. From 1990 to 1997, he served as Chief Executive Officer and Director of F.C.T. Formula Computer Technologies Ltd. and as director of its subsidiaries. Mr. Erel is also a Director of Aprion Digital. He holds a bachelors degree in electronic engineering from the Technion - Israel Institute of Technology (the "Technion"), in Haifa. Jacob Eshel served until December 1997 as a director and until March 1998 as a Senior Manager of DIC, after having held various executive positions with DIC and PEC for over thirty years. He served as DIC's designee on the boards of directors of a large number of Israeli industrial enterprises associated with DIC and PEC, and, in addition to Scitex, he continues to serve as a director of Elbit Ltd., Elbit Systems Ltd. and Elron. Mr. Eshel holds a bachelors degree in economics from the School of Law and Economics in Tel Aviv. Roger Gallois was, until 1994, a Senior Vice President and a member of the Executive Committee of Groupe Bull, a major French-based information technology concern (having been appointed to such posts in 1981 and 1982, respectively). Subsequently, Mr. Gallois continued to serve as a consultant to Groupe Bull until December 1996. Mr. Gallois also held the posts of General Counsel and Board Secretary of Bull from 1976 to 1994. He holds a degree in electrical engineering from E.S.M.E. (Ecole Spéciale Mécanique Electricité), Paris and a law degree from Paris University and was a registered European Patent Attorney. Leon Y. Recanati was appointed Chairman of the board of directors of Clal with effect from March 1997, and has served as Co-Chief Executive Officer of IDBH since 1986 and as Co-Chairman of the boards of directors of IDBH and IDBD since June 1, 1999. From 1986 until November 1996, Mr. Recanati was also Joint Managing Director of IDBD. Prior to such appointments, Mr. Recanati had been a director of Clal since 1988, and of IDBH and IDBD since 1981. Mr. Recanati also serves as Chairman of the board of Clal Industries, and is a director of other companies within the IDB and Clal groups, or in which they have an interest. He holds a bachelors degree in economics and a masters degree in business administration, both from the Hebrew University of Jerusalem. Dr. Sasson Somekh was appointed Senior Vice President, Office of the President, of Applied Materials, Inc. ("Applied") in 1998 and a member of Applied's executive committee from 1996. Prior to his appointment to the Office of the President, Dr. Somekh was Senior Vice President - Worldwide Products Operations of Applied, a position held by him from 1993. He joined Applied in 1980. Dr. Somekh holds a bachelors degree in physics from Tel Aviv University and a masters degree and a Ph.D. in electrical engineering from the California Institute of Technology. Dwight T. Johnson, an Executive Vice President of Scitex since June 1996, was appointed President of SDP at the time of its acquisition by Scitex in 1993, having previously served, since 1990, as General Manager of Kodak's Dayton Operations division (under which name SDP operated prior to Scitex's acquisition). Mr. Johnson joined Kodak in 1963, in which he held numerous management positions, including President of Kodak Japan Industries Ltd. He holds a bachelors degree in electrical engineering from the University of Detroit and a masters degree in business administration from Rochester Institute of Technology. Itai Halevy was appointed Corporate Vice President, Business Development and Strategic Planning of Scitex in October 1997, having previously held the position of Director of Strategic Planning and Business Development from August 1995. He joined Scitex in 1991 and subsequently held various product and industry marketing positions. Mr. Halevy holds a bachelors degree in industrial engineering from Tel Aviv University and a masters degree in business administration from INSEAD, Fontainebleau, France. Dr. Michael Nagler was appointed a Corporate Vice President of Scitex in November 1996 and served as General Manager, Graphic Arts Products, of Scitex from November 1996 to September 1999, when he was appointed President and Chief Executive Officer of Aprion Digital. From 1994 until 1996, Dr. Nagler was a Vice President of Scitex Israel and Manager of its Output Imaging Systems Division. He joined Scitex in 1983 and held a number of managerial and product development positions before serving as Vice President - Research & Development of Iris Graphics, Inc. (then a wholly owned subsidiary of Scitex) from 1992 until 1994. He holds a bachelors degree in physics from Tel Aviv University, a masters degree in applied physics from the Weizmann Institute of Science and a Ph.D. in optics and electro-optics from the University of Arizona, and is a graduate of the Senior Executive Course of the Sloan School of Management, Cambridge, Massachusetts. David Reis was appointed President of SWF on joining the company (then known as Idanit Technologies Ltd.) in September 1996, and continued to serve in such capacity following its acquisition by Scitex in 1998. Prior to that he served as Vice President, Operations and Vice President, Sales & Marketing in the building and management of commercial operations of Pacer Cats Corp., Colorado. In 1995, Mr. Reis joined Rapac Electronics Ltd. in Israel as Vice President, Business Development and also served as executive chairman of several start-up operations within that group. He holds a bachelors degree in economics and management from the Technion, Haifa and a masters degree in business administration from the University of Colorado. David Shulman joined Scitex in May 1987 and, in July of that year, was appointed Corporate Secretary. He is a lawyer and practiced as a Solicitor of the Supreme Court in England from 1971 to 1979 and qualified as an Advocate in Israel in 1980. Prior to joining Scitex, Mr. Shulman was an in-house attorney with Bank Leumi le-Israel B.M. (See "Item 4. Control of Registrant" for details of agreement among principal shareholders relating to the election of directors.) ALTERNATE DIRECTORS Our articles of association provide that a director may appoint another person to serve as an alternate director. To qualify as an alternate director, a person must be qualified to serve as a director but cannot be a director or the alternate director of another director. An alternate director shall have all the rights and obligations of the director who appointed him or her. The alternate director may not act for such director at any meeting at which the director appointing him or her is present. Unless the time or scope of any appointment is limited by the appointing director, the appointment is effective for all purposes until the appointing director ceases to be a director or terminates the appointment. At present, there are no appointments of alternate directors. OUTSIDE DIRECTORS; INDEPENDENT DIRECTORS; INTERNAL AUDITOR Under the requirements for continued listing on the Nasdaq Stock Market, we are required to have at least two independent directors, as defined by Nasdaq rules, on our board of directors and to establish an audit committee, a majority of whose members are independent, as defined by the Nasdaq rules. Jacob Eshel, Mendy Erad, Roger Gallois and Sasson Somekh currently serve on our audit committee. We are also subject to the provisions of the Israel Companies Law, 5759-1999 (the "Companies Law"), which became effective on February 1, 2000 and supersedes most of the provisions of the Israel Companies Ordinance (New Version), 5743-1983. Under the Companies Law, Israeli companies that have offered securities to the public in or outside of Israel are required to appoint at least two "Outside Directors". Roger Gallois and Sasson Somekh have been designated as our Outside Directors. To qualify as an Outside Director, an individual may not have, and may not have had at any time during the previous two years, any affiliations with the company or its affiliates, as such terms are defined in the Companies Law. In addition, no individual may serve as an Outside Director if the individual's position or other activities create or may create a conflict of interest with his or her role as an Outside Director. For a period of two years from termination from office, a former Outside Director may not serve as a director or employee of the company or provide professional services to the company for consideration. The Outside Directors generally must be elected by the shareholders, including at least one-third of the shares of non-controlling shareholders voted on the matter. However, the Outside Directors can be elected by shareholders without this one-third approval if the total shares of non-controlling shareholders voted against the election do not represent more than one percent of the voting rights in the company. The term of an Outside Director is three years and may be extended for an additional three years. Other directors are elected annually. Each committee of a company's board of directors empowered with powers of the board of directors is required to include at least one Outside Director. The Companies Law also requires the appointment by our board of directors of an audit committee, which must be comprised of at least three directors, including all of the Outside Directors. The audit committee may not include the chairman of the board, a controlling shareholder or any director who is employed by the company or provides services to the company on a regular basis. The role of the audit committee is to examine flaws in the business management of the company, in consultation with the internal auditor and the independent accountants, and to propose remedial measures to the board. The audit committee also reviews for approval transactions between the company and office holders or interested parties, as described below. Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The internal auditor may be an employee of the company, but may not be an interested party or officer holder, or a relative of any interested party or officer holder, and may not be a member of the company's independent accounting firm. The role of the internal auditor is to examine, among other things, whether the company's activities comply with the law and orderly business procedure. Pursuant to the terms of a court approved settlement of a purported class action, we agreed in 1997 that our board of directors will, for a period of five years, include two directors deemed to be independent of our management and of our principal shareholders ("Independent Directors"). It was also agreed that, for such five year period, certain formal and informal offers to acquire a majority of our shares or substantially all of our assets shall be evaluated by a special committee of the board (consisting of not more than six directors) that shall include the two Independent Directors, which committee may make recommendations to the our board concerning any such offers. Roger Gallois and Sasson Somekh were designated as Independent Directors for this purpose. APPROVAL OF TRANSACTIONS UNDER ISRAELI LAW The Companies Law imposes fiduciary duties that "office holders," including directors and executive officers, owe to their company. An office holder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care generally requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty generally requires an office holder to act in good faith and for the good of the company. Specifically, an office holder must avoid any conflict of interest between the office holder's position in the company and his or her other positions or personal affairs. In addition, an office holder must avoid competing against the company or exploiting any business opportunity of the company for his or her own benefit or the benefit of others. An office holder must also disclose to the company any information or documents relating to the company's affairs that the office holder has received due to his or her position in the company. Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the board of directors. Arrangements as to compensation of directors also require audit committee and shareholder approval. The Companies Law requires that an office holder promptly disclose any personal interest that he or she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes an interest of a company in which the office holder is, directly or indirectly, a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. In the case of an extraordinary transaction, the office holder's duty to disclose applies also to a personal interest of the office holder's relative. An extraordinary transaction is a transaction not in the ordinary course of business, not on market terms, or likely to have a material impact on the company's profitability, assets or liabilities. Under the Companies Law, once the office holder complies with the above disclosure requirement, the board of directors is authorized to approve the transaction, unless the articles of association provide otherwise. A transaction that is adverse to the company's interest may not be approved. If the transaction is an extraordinary transaction, then it also must be approved by the company's audit committee and board of directors, and, under certain circumstances, by the shareholders of the company. When an extraordinary transaction is considered by the audit committee and board of directors, the interested directors may not be present or vote. DUTIES OF SHAREHOLDERS Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, require the approval of the audit committee, the board of directors and the shareholders. The shareholder approval must include at least one-third of the shares of non-interested shareholders voted on the matter. However, the transaction can be approved by shareholders without this one-third approval if the total shares of non-interested shareholders voted against the transaction do not represent more than one percent of the voting rights in the company. In addition, under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint an office holder or any other power with respect to the company. However, the Companies Law does not define the substance of this duty of fairness. INDEMNIFICATION Our articles provide that, subject to the provisions of applicable law, we may procure insurance for or indemnify any person who is not an office holder, including without limitation, any of our employees, agents, consultants or contractors, or procure insurance for or indemnify any office holder to the fullest extent permitted under law, provided that the procurement of any such insurance or provision of any such indemnification is approved by our audit committee. ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERSThe following table sets forth with respect to all directors and executive officers of Scitex as a group, including all persons who were at any time during the period indicated directors or executive officers of Scitex, all cash and cash-equivalent forms of remuneration paid by Scitex during the fiscal year ended December 31, 1999:
Each of Scitex's Independent Directors received an annual director's fee of $20,000 and an attendance fee of $1,000 for each meeting attended outside his country of residence. A director's fee of $10,000 per annum was paid in respect of each of the other directors (other than the director who is an officer of Scitex). Except as aforesaid, Scitex has not compensated directors who are not officers of Scitex. Upon termination of their employment within eighteen months following a change in control of Scitex, certain members of Scitex's management are entitled to receive a severance payment in the amount of two to three years of annual compensation, the acceleration of vesting of stock options then held by them and certain other benefits. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIESAll data in this Item is as of June 12, 2000. In September 1991, our shareholders approved two plans, the Scitex Israel Key Employee Share Incentive Plan 1991 primarily designed for employees of Scitex and its subsidiaries located in Israel (the "Israel Plan") and the Scitex International Key Employee Stock Option Plan 1991 designed for employees of Scitex's non-Israel subsidiaries (the "International Plan", and together with the Israel Plan, the "Plans"). The aggregate number of Shares that have been authorized and reserved for issuance under the Plans is 2,650,000 Shares under the Israel Plan and 1,750,000 Shares under the International Plan. Outstanding options under the Plans will expire at various dates from 2001 through 2009. The following table sets forth certain information with respect to the Plans.
Directors and executive officers of Scitex hold under the Plans unexercised options aggregating 681,875 Shares, including options for the purchase of an aggregate of 30,000 Shares awarded to the two Outside Directors serving on Scitex's board of directors (see "Item 10. Directors and Officers of the Registrant") at an exercise price of $11.375 per Share. In 1998, our board of directors approved a program for the repurchase by Scitex of up to two million of our Shares, to be held for the benefit of employees within the framework of the Plans. These Shares are to be held by a trustee for the reissue to employees upon the exercise of existing stock options. Under the approved program, we may not purchase Shares from our principal shareholders. (see "Item 4. Control of Registrant") In February 2000, the Board of Directors of SWF approved the adoption of the
Scitex Wide Format Printing Ltd. Stock Option Plan (the "SWF Plan"),
primarily designed for employees of SWF and its subsidiaries. The SWF Plan
permits the granting of options for the purchase of shares in SWF. The aggregate
number of shares that have initially been reserved for issuance under the
SWF Plan represents up to 13% of the share capital of SWF, assuming exercise
of all options for such shares. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONSThroughout 1999 and until April 2000, Scitex leased part of its principal administrative, engineering and systems integration facilities from Bayside Land Corporation Ltd. ("Bayside"), an affiliate of DIC. The rent attributable to such premises for the year 1999 was approximately $2.1 million. In addition, effective from April 2000, SWF leased part of its principal facilities from Bayside. (See "Item 2. Description of Property", "Item 4. Control of Registrant" and Note 10a(2) to the Consolidated Financial Statements listed in Item 19.) Scitex purchased insurance policies in Israel with a number of insurance companies in respect of which Clal Insurance Company Ltd. ("Clal Insurance"), an affiliate of CEI, acted as leader. During the year ended December 31, 1999, Scitex paid premiums on such insurance in the amount of $1.1 million. The extent to which Clal Insurance, or other insurance companies to which it is affiliated, participated varied from policy to policy. All insurance was effected at normal business rates. (See "Item 4. Control of Registrant".) In September 1999, CEI, DIC and PEC, together with other third party investors, purchased an equity interest in the company subsequently named Aprion Digital Ltd., formed by Scitex on the basis of Scitex's Advanced Printing Products division. Following closing of the transaction, CEI, DIC and PEC held in aggregate approximately 51% of the issued shares of Aprion Digital in consideration of an investment of approximately $9.5 million in the company. In addition, warrants convertible into shares of Aprion Digital, upon the reaching of certain milestones, are held by the principal shareholders of Aprion Digital, which if exercised, would require an additional aggregate investment by CEI, DIC and PEC of approximately $4.9 million. (See "Item 4. Control of Registrant" and, for a description of the operations of Aprion Digital, "Item 1. Description of Business".) During 1999, Scitex maintained business relationships and entered into various other transactions in the ordinary course of business with a number of other companies affiliated with its principal shareholders (see "Item 4. Control of Registrant"), all on terms which management believes were no less favorable to Scitex than would be obtained in transactions with unaffiliated third parties. (See Note 9a to the Consolidated Financial Statements listed in Item 19.) PART IIITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTEREDNot applicable. PART IIIITEM 15. DEFAULTS UPON SENIOR SECURITIESNone. ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDSNone. PART IVITEM 17. FINANCIAL STATEMENTSNot applicable. ITEM 18. FINANCIAL STATEMENTSSee Item 19(a). ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
SIGNATURESPursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. SCITEX CORPORATION LTD. By: /s/ Yoav Z. Chelouche Date: June 30, 2000 |
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