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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
(Mark One)
( ) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28584
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
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(Exact name of Registrant as Specified in Its Charter)
ISRAEL
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(Jurisdiction of Incorporation or Organization)
3A Jabotinsky Street, Ramat-Gan 52520, Israel
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(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
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Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares
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of NIS 0.01 nominal value
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Ordinary shares (par value NIS 0.01) of registrant outstanding at December 31,
2000 -235,464,986 (end of reporting period).
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17 Item 18 X
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TABLE OF CONTENTS
PART 1
Item 1. Identity of Directors, Senior Management and Advisors..................................
Item 2. Offer Statistics and Expected Timetable................................................
Item 3. Key Information........................................................................
Item 4. Information on the Company.............................................................
Item 5. Operating and Financial Review and Prospects...........................................
Item 6. Directors, Senior Management and Employees.............................................
Item 7. Major Shareholders and Related Party Transactions......................................
Item 8. Financial Information..................................................................
Item 9. The Offer and Listing..................................................................
Item 10. Additional Information.................................................................
Item 11. Quantitative and Qualitative Disclosures About Market Risk.............................
Item 12. Description of Securities Other than Equity Securities.................................
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies........................................
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...........
Item 15. Reserved...............................................................................
Item 16. Reserved...............................................................................
PART III
Item 17. Financial Statements...................................................................
Item 18. Financial Statements...................................................................
Item 19. Exhibits...............................................................................
Item 20. Independent Auditors' Report...........................................................
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
The following selected consolidated statements of income data for the
years ended December 31, 1998, 1999 and 2000, and the selected consolidated
balance sheet data as of December 31, 1999 and 2000 have been derived from the
Company's audited consolidated financial statements, set forth elsewhere in
this Form 20-F. These financial statements have been prepared in accordance
with Generally Accepted Accounting Principles in the United States ("US
GAAP"). The selected consolidated statement of income data for the years ended
December 31, 1996 and 1997 and the selected consolidated balance sheet data as
of December 31, 1996, 1997, and 1998, have been derived from audited
consolidated financial statements not included in this Form 20-F and have also
been prepared in accordance with US GAAP. The selected consolidated financial
statements set forth below should be read in conjunction with and are
qualified by reference to our consolidated financial statements and the
related notes as well as "Item 5: Operating and Financial Review and
Prospects" included elsewhere in this Annual Report on Form 20-F.
YEAR ENDED DECEMBER 31,
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1996 (*) 1997 (*) 1998 (*) 1999 2000
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(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................. $34,580 $86,352 $141,941 $219,567 $425,283
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Cost of revenues......................... 2,884 6,839 13,623 22,423 35,265
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Gross profit............................. 31,696 79,513 128,318 197,144 390,018
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Operating expenses:
Research and development, net........... 3,803 7,105 10,629 18,923 30,309
Sales and marketing..................... 10,275 26,611 39,966 68,229 110,003
General and administrative.............. 3,641 7,766 10,886 13,069 20,409
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Total operating expenses................. 17,719 41,482 61,481 100,221 160,721
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Operating income......................... 13,977 38,031 66,837 96,923 229,297
Financial income, net.................... 1,490 4,556 4,406 12,770 29,147
Capital gain -- -- 2,581 192 --
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Income before taxes on income............ 15,467 42,587 73,824 109,885 258,444
Taxes on income.......................... 346 2,309 3,947 14,104 37,231
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15,121 40,278 69,877 95,781 221,213
Equity in losses of an affiliate......... - 760 - - -
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Net Income............................... $15,121 $39,518 $69,877 $95,781 $221,213
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Basic net earnings per share (1)......... $0.08 $0.19 $0.33 $0.43 $0.95
Shares used in computing basic net
earnings per share (1)................... 190,476 203,622 212,610 222,930 232,611
Diluted net earnings per share (1)....... $0.07 $0.17 $0.30 $0.39 $0.84
Shares used in computing diluted net
earnings per share (1)................... 215,958 228,312 232,170 246,456 262,515
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DECEMBER 31,
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1996 (*) 1997 (*) 1998 (*) 1999 2000
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ......................... $56,603 $60,817 $80,872 $198,204 $313,218
Total Assets............................. 66,572 124,964 212,235 394,346 777,639
Shareholder's equity .................... 58,170 100,025 175,707 292,508 549,283
(1) See Note 2q of Notes to consolidated financial statements for an
explanation of the determination of shares used in computing net earnings per
share.
(*) Reported financial results reflect the acquisition of MetaInfo, Inc.,
which was accounted for as a pooling-of-interest transaction, and all prior
period amounts have been restated.
RISK FACTORS
This Form 20-F contains forward-looking statements that involve risks
and uncertainties. The statements contained in this Form 20-F that are not
purely historical are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
including, without limitation, statements regarding the Company's
expectations, beliefs, intentions, goals, plans, investments or strategies
regarding the future. Forward-looking statements also include statements in
(i) Item 4 - Information on the Company regarding increased acceptance of
Internet technologies, expansion of connectivity services, acceleration of the
use of networks, increasing demands on enterprise security systems, the impact
of the Company's OEM relationships on its sales goals, the contribution of the
FireWall-1 and VPN-1 products to the Company's future revenue and the
development of future products and (ii) "Item 5: Operating and Financial
Review and Prospects" regarding future sources of revenue, ongoing
relationships with current and future end-user customers and resellers, future
costs and expenses, adequacy of capital resources and the Company's Year 2001
and Euro conversion readiness, exposure and expected expenditures. These
statements involve risks and uncertainties and actual results could differ
materially from such results discussed in these statements as a result of the
risk factors set forth below in this Form 20-F. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements.
COMPETITION
The market for enterprise security products and services is intensely
competitive and the Company expects competition to increase in the future. The
Company's principal network security competitors include Cisco Systems and
Nortel Networks. Other competitors include 3Com Corporation, Lucent
Technologies, Microsoft Corp., Network Associates, NetScreen Technologies
Inc., Nokia (the Company and Nokia jointly develop Firewall-1 and VPN-1
security appliances, however Nokia sells separately its own VPN solution which
excludes a firewall), Novell Inc., SonicWALL Inc., Symantec Inc., WatchGuard
Technologies Inc., and Secure Computing. The Company expects additional
competition from other emerging and established companies. There can be no
assurance that the Company's current and potential competitors, including its
current OEM partners, will not develop network security products that may be
more effective than the Company's current or future products or that the
Company's technologies and products will not be rendered obsolete by such
developments. In particular, the enterprise security market has historically
been characterized by low financial entry barriers.
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical and marketing resources than
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote
greater resources to the promotion and sale of their products than the
Company. In addition, certain of the Company's competitors may determine, for
strategic reasons, to consolidate, to substantially lower the price of their
enterprise security products or to bundle their products with other products,
such as hardware products or other enterprise software products. The Company
expects that there will be increasing consolidation in the enterprise security
market and that there can be no assurance that such consolidation will not
materially adversely impact the Company's competitive position. In addition,
current and potential competitors have established or may establish financial
or strategic relationships among themselves, with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully against current and future competitors.
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Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which would materially adversely affect the
Company's business, operating results and financial condition.
In the future, vendors of operating system software or networking
hardware may enhance their products to include functionality that is currently
provided by the Company's VPN-1/FireWall-1 family of products. The widespread
inclusion of the functionality of the Company's software as standard features
of operating system software or networking hardware could render the
VPN-1/FireWall-1 family of products obsolete and unmarketable, particularly if
the quality of such functionality were comparable to that of the Company's
products. Furthermore, even if the network security functionality provided as
standard features by operating systems software or networking hardware is more
limited than that of the Company's VPN-1/FireWall-1 software, there can be no
assurance that a significant number of customers would not elect to accept
more limited functionality in lieu of purchasing additional software. In the
event of any of the foregoing, the Company's business, operating results and
financial condition would be materially and adversely affected. See "Item 4 -
Information on the Company."
RAPID TECHNOLOGICAL CHANGE
The enterprise security industry is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. As a result, the Company must continually
change and improve its products in response to changes in operating systems,
application software, computer and communications hardware, networking
software, programming tools and computer language technology. The introduction
of products embodying new technologies and the emergence of new industry
standards may render existing products obsolete or unmarketable. In
particular, the market for Internet and intranet applications is relatively
new and is rapidly evolving. The Company's future operating results will
depend upon the Company's ability to enhance its current products and to
develop and introduce new products on a timely basis that address the
increasingly sophisticated needs of its resellers and that keep pace with
technological developments, new competitive product offerings and emerging
industry standards. There can be no assurance that the Company will be
successful in developing and marketing new products or product enhancements
that respond to technological change and evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products, or that
any new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company
does not respond adequately to the need to develop and introduce new products
or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition would be materially adversely
affected. See "Item 4 - Information on the Company."
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS; POTENTIAL DECLINE IN
MARGINS
The quarterly operating results of the Company can vary significantly
due to several factors, any of which could have a material adverse effect on
the Company's operating results, and there can be no assurance that the
Company will continue to be profitable on a quarterly or annual basis.
Historically, the Company has not been dependant on significant amounts of
revenues being generated during the end of a quarter. This trend may change
in the future and the Company could experience a dependency of significant
amounts of revenues being generated during the end of a quarter thereby
increasing the risk of revenues being realized in the following quarter.
Other factors which can cause fluctuations in operating results include
seasonal trends in customer purchasing, the volume and timing of orders and
the ability to fulfill orders, the level of product and price competition,
the Company's ability to develop new and enhanced products and control
costs, the mix of products and goods sold, the mix of distribution channels
through which products are sold, the Company's ability to integrate the
technology and operations of acquired businesses with those of the Company,
changes in customer capital spending budgets, fluctuations in foreign
currency exchange rates and general economic factors.
The Company's sales to the Far East (including Japan), in millions,
were $22, $36, and $70 in 1998, 1999 and 2000 respectively, representing 16%
of revenues for the years 1998, 1999, and 2000. The economy in this region is
still unstable, and therefore the Company cannot predict if similar levels of
sales in the region are sustainable.
During the last quarter of 2000, in general, purchases of information
technology products in the United States showed a significant slowdown. The
Company cannot predict the length of this current negative economic climate
and indeed whether this slowdown will affect other parts of the world such as
Asia and Europe.
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The Company's revenues are subject to seasonal fluctuations related to
the slowdown in spending activities in Europe for the quarter ending September
30 and the year-end purchasing cycles of many end-users of the Company's
products. The Company believes that, in the absence of exceptional factors
such as new product introductions, it will continue to encounter
quarter-to-quarter seasonality that could result in proportionately lower
sales in the quarters ending September 30 and March 31 relative to sales in
the quarters ending June 30 and December 31, respectively.
The Company operates with virtually no backlog and, therefore, the
timing and volume of orders within a given period and the ability to fulfill
such orders determines the amount of revenues within a given period. The
Company's sales are principally derived through indirect channels, which make
revenues from such sales difficult to predict. Furthermore, the Company's
expense levels are based, in part, on expectations as to future revenues. If
revenue levels are below expectations, operating results are likely to be
adversely affected. Net income may be disproportionately affected by a
reduction in revenues due to the relatively small amount of the Company's
expenses, which vary with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is likely that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Ordinary
Shares would likely be materially adversely affected. See "Item 5: Operating
and Financial Review and Prospects."
The Company may experience a decline in operating margins as it
expands its customer and technical support organization. The Company also
expects that it will experience increasing competition and pricing pressure,
which may result in lower operating margins. In 2001, the Company intends to
continue to make significant investments in the further development and
expansion of its sales and marketing organization, including the expansion of
its field organization both in the United States and additional countries in
Europe, Asia, and Latin America. In addition, the Company expects to further
expand its research and development organization and make additional
investments in its general and administrative infrastructure. As a result, the
Company expects operating margins to decrease from historical levels. The
amount and timing of these additional expenditures are likely to result in
fluctuations in operating margins. See "Item 5: Operating and Financial Review
and Prospects."
RISKS ASSOCIATED WITH EMERGING NETWORK SECURITY, INTERNET AND INTRANET MARKETS
The markets for the Company's products are rapidly evolving. There can
be no assurance that the Internet or common public protocols will continue to
be used to facilitate communications or that the market for enterprise
security systems in general will continue to expand. Continued growth of this
market will depend, in large part, upon the continued expansion of Internet
usage and the number of organizations adopting or expanding intranets, upon
the ability of their respective infrastructures to support an increasing
number of users and services, and upon the continued development of new and
improved services for implementation across the Internet, and between the
Internet and intranets. If the necessary infrastructure or complementary
products and services are not developed in a timely manner and, consequently,
the enterprise security, Internet and intranet markets fail to grow or grow
more slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially adversely
affected. See "Item 4 - Information on the Company."
DEPENDENCE UPON LIMITED NUMBER OF KEY RESELLERS; PRODUCT CONCENTRATION; IMPACT
OF NEW PRODUCT INTRODUCTIONS
The Company expects that it will continue to be dependent upon a
limited number of resellers for a significant portion of its revenues. If
anticipated orders from these resellers fail to materialize, the Company's
business, operating results and financial condition will be materially
adversely affected.
The Company has derived substantially all of its revenues from sales
of its FireWall-1 product and VPN-1 product family and expects to continue to
derive the vast majority of its revenues in the foreseeable future from sales
of its FireWall-1 product and VPN-1 product family. During the first quarter
of 2001, the Company announced the Check Point Next Generation release of
VPN-1/FireWall-1, which will begin shipping in the third quarter of 2001. The
Company's future financial performance will depend in significant part on the
successful development, introduction, marketing and customer acceptance of new
products and enhancements and new features for its existing product lines. If
resellers delay ordering products or cancel orders for existing products in
anticipation of new releases, the Company's business, operating results and
financial condition would be materially adversely affected. See "Item 5:
Operating and Financial Review and Prospects" and "Item 4 - Information on the
Company."
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DEPENDENCE UPON KEY PERSONNEL
The Company's future performance depends, in significant part, upon
the continued service of its key technical, sales and management personnel,
including Gil Shwed, Marius Nacht and Jerry Ungerman. The loss of the services
of one or more of the Company's key personnel could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's future success also depends on its continuing ability to attract
and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and managerial employees or
that it can attract, motivate or retain other highly qualified technical,
sales and managerial personnel in the future. If the Company cannot retain or
is unable to hire such key personnel, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Item 4 - Information on the Company."
PRINCIPAL OPERATIONS IN ISRAEL; INTERNATIONAL OPERATIONS
The Company is incorporated under the laws of, and its principal
offices and research and development facilities are located in the State of
Israel. Although substantially all of the Company's sales currently are being
made to resellers outside Israel, the Company is nonetheless directly
influenced by the political, economic and military conditions affecting
Israel, and any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
have a material adverse effect on the Company's business, operating results
and financial condition.
The Company intends to expand its international operations, which will
require significant management attention and financial resources. In order to
expand worldwide sales, the Company must establish additional marketing and
sales operations, hire additional personnel and recruit additional resellers
internationally. To the extent that the Company is unable to do so
effectively, the Company's growth is likely to be limited and the Company's
business, operating results and financial condition would be materially
adversely affected. In addition, as the Company expands its international
operations, a portion of revenues generated in international jurisdictions may
be subject to taxation by such jurisdictions at rates higher than those to
which the Company is subject in Israel. Most of the Company's worldwide sales
are currently denominated in United States dollars. An increase in the value
of the United States dollar relative to foreign currencies would make the
Company's products more expensive and, therefore, potentially less competitive
in those markets. Additional risks inherent in the Company's worldwide
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of localizing products
for foreign countries, lack of acceptance of localized products in foreign
countries, longer accounts receivable payment cycles, difficulties in
operations management, potentially adverse tax consequences, including
restrictions on the repatriation of earnings, and the burdens of complying
with a wide variety of foreign laws. There can be no assurance that such
factors will not have a material adverse effect on the Company's future
international sales and, consequently, the Company's business, operating
results and financial condition. See "Item 4 - Information on the Company" and
"Item 5: Operating and Financial Review and Prospects."
PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS
The Company's sales agreements typically contain provisions designed
to limit the Company's exposure to potential product liability or related
claims. In selling its products, the Company relies primarily on "shrink wrap"
licenses that are not signed by the end-user, and, for this and other reasons,
such licenses may be unenforceable under the laws of certain jurisdictions. As
a result, the limitation of the liability provisions contained in the
Company's agreements may not be effective. The Company's products are used to
manage network security, which may be critical to organizations, and, as a
result, the sale and support of products by the Company may entail the risk of
product liability and related claims. A product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition. Software products as
complex as those offered by the Company may contain undetected errors or
failures when first introduced or when new versions are released. In
particular, the personal computer hardware environment is characterized by a
wide variety of non-standard configurations that make pre-release testing for
programming or compatibility errors very difficult and time-consuming. Despite
testing by the Company and by current and potential resellers, there can be no
assurance that errors will not be found in new products or releases after
commencement of commercial shipments. The occurrence of these errors could
result in adverse publicity, loss of or delay in market acceptance or claims
by resellers against the Company, any of which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Item 4 - Information on the Company."
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DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; TRADEMARK
LITIGATION
The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights as set forth below in the section
entitled "Proprietary Rights and Trademark Litigation in "Item 4 - Information
on the Company." In 1998, 1999 and 2000, the Company's sales to resellers in
individual countries other than the United States, Japan, Great Britain and
other countries in Europe, not including Israel, were less than 9% of total
revenue. There can be no assurance that the Company's patent applications will
be issued within the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that any issued patent will not be
challenged, and if such challenges are brought, that such patents will not be
invalidated. In addition, there can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology
or design around any patents issued to the Company. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may copy
aspects of the Company's products or obtain and use information that the
Company regards as proprietary. Policing any of such unauthorized uses of the
Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States or Israel. To date, the Company has
not conducted any material amount of business in such countries. There can be
no assurance that the Company's efforts to protect its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology.
There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that software companies will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Responding to such claims, regardless of merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
A number of governments have imposed controls, export license
requirements and restrictions on the export of certain technology, and
specifically encryption technology. As a result, the Company has not received
and may not receive approval to sell certain of its encryption security
products in certain markets. The Company conducts its research and development
activities in Israel, and as a result is required to obtain export permission
from the Israeli government before exporting certain encryption technologies.
In addition, to the extent that its resellers operating from the United States
seek to sell the Company's software products outside the United States, or to
the extent that the Company's products incorporate certain encryption
technology developed in the United States, additional export controls are
imposed by the United States.
APPROVED ENTERPRISE STATUS
The Company receives certain tax benefits in Israel, particularly as a
result of the "Approved Enterprise" status of the Company's facilities and
programs. To be eligible for tax benefits, the Company must meet certain
conditions, relating principally to adherence to the investment program filed
with the Investment Center of the Israeli Ministry of Industry and Trade and
to periodic reporting obligations. The Company believes that it will be able
to meet such conditions. Should the Company fail to meet such conditions in
the future, however, it would be subject to corporate tax in Israel at the
standard rate of 36%, and could be required to refund tax benefits already
received. There can be no assurance that such grants and tax benefits will be
continued in the future at their current levels or otherwise. The termination
or reduction of certain programs and tax benefits (particularly benefits
available to the Company as a result of the Approved Enterprise status of the
Company's facilities and programs) or a requirement to refund tax benefits
already received would have a material adverse effect on the Company's
business, operating results and financial condition. See "Item 4 - Information
on the Company" and the section entitled "Israeli Taxation, Foreign Exchange
Regulation and Investment Programs" in "Item 10: Additional Information."
ANTI-TAKEOVER EFFECTS OF ISRAELI LAWS
Under the Israeli Companies Law, a merger is generally required to be
approved by the shareholders and board of directors of each of the merging
companies. Shares held by a party to the merger are not counted toward the
required
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approval. If the share capital of the company that will not be the surviving
company is divided into different classes of shares, the approval of each
class is also required. A merger may not be approved if the surviving company
will not be able to satisfy its obligations. At the request of a creditor, a
court may block a merger on this ground. In addition, a merger can be
completed only after all approvals have been submitted to the Israeli
Registrar of Companies and 70 days have passed from the time that a proposal
for approval of the merger was filed with the Registrar.
The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer, if as a result of the
acquisition, the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the
company. Similarly, the Israeli Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 45% shareholder of the
company, unless someone else already holds a majority of the voting power of
the company. These rules do not apply if the acquisition is made by way of a
merger.
Regulations promulgated under the Israeli Companies Law provide that
these tender offer requirements do not apply to companies whose shares are
listed for trading outside of Israel if, according to the law in the country
in which the shares are traded, including the rules and regulations of the
stock exchange on which the shares are traded, either:
- There is a limitation on acquisition of any level of control of the
company; or
- The acquisition of any level of control requires the purchaser to do so
by means of a tender offer to the public.
The Israeli Companies Law provides specific rules and procedures for
the acquisition of shares held by minority shareholders, if the majority
shareholder holds 90% or more of the outstanding shares.
Finally, Israeli tax law treats specified acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his Ordinary shares for shares in a foreign
corporation to immediate taxation.
PROVISIONS AFFECTING A POTENTIAL CHANGE OF CONTROL; POTENTIAL RIGHTS OF
UNISSUED PREFERRED SHARES
The Company's Board of Directors has the authority to issue up to
5,000,000 Preferred Shares and to determine the price, rights (including
voting rights), preferences, privileges and restrictions of such Preferred
Shares, without any vote or actions by the Company's shareholders. The rights
and preferences of such Preferred Shares could include a preference over the
Ordinary shares on the distribution of the Company's assets upon a liquidation
or sale of the Company, preferential dividends, redemption rights, and the
right to elect one or more directors and other voting rights. The rights of
the holders of the Ordinary shares will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Shares that may be
issued in the future. The Company has no current plans to issue Preferred
Shares. The issuance of Preferred Shares, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting shares of the Company.
Furthermore, certain provisions of the Company's Articles of Association could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. These provisions stipulate that the Company cannot engage in a
business combination with an interested shareholder (defined generally as the
beneficial owner of 15% of the outstanding shares and its affiliates) for a
period of three years following the date that such shareholder became an
interested shareholder, unless certain conditions are met.
CONCENTRATION OF SHARE OWNERSHIP
As of May 31, 2001, the directors, executive officers and principal
shareholders of the Company and their affiliates beneficially own
approximately 29% of the outstanding Ordinary shares. As a result, these
shareholders are able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Item 7: Major Shareholders and Related Party Transactions."
The Company's Board of Directors and shareholders have adopted
resolutions that provide that, subject to the provisions of Israeli law, the
Company may indemnify its Office Holders (in general, directors and senior
officers) for (a) any monetary obligation imposed upon them for the benefit of
a third party by a judgment, including a settlement agreed to in writing by
the Company, or an arbitration decision certified by the court, as a result of
an act or omission of such person in his capacity as an Office Holder of the
Company, and (b) reasonable litigation expenses, including legal
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fees, incurred by such Office Holder or which he is obligated to pay by a
court order, in a proceeding brought against him by or on behalf of the
Company or by others, or in connection with a criminal proceeding in which he
was acquitted, in each case relating to acts or omissions of such person in
his capacity as an Office Holder of the Company.
EUROPEAN CURRENCY ISSUES
The Company is aware of the issues raised by the introduction of the
Single European Currency ("Euro") on January 1, 1999 and during the transition
period through January 1, 2002. The Company's internal systems that are
affected by the initial introduction of the Euro have been made Euro capable
without material system modification costs. Further internal systems changes
will be made during the balance of the transition phase in preparation for the
ultimate withdrawal of the legacy currencies in July 2002, and the costs of
these changes are not expected to be material. The Company does not presently
expect that introduction and use of the Euro will materially affect the
Company's foreign exchange and hedging activities, or the Company's use of
derivative instruments, or will result in any material increase in costs to
the Company. While Check Point will continue to evaluate the impact of the
Euro introduction over time, based on currently available information,
management does not believe that the introduction of the Euro will have a
material adverse impact on the Company's financial condition or overall trends
in results of operations.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY-HOLDERS
Until May 1998, Israel imposed restrictions on transactions in foreign
currency. These restrictions affected the Company's operations in various
ways, and also affected the right of non-residents of Israel to convert into
foreign currency amounts they received in Israeli currency, such as the
proceeds of a judgment enforced in Israel. Despite these restrictions, foreign
investors who purchased shares with foreign currency were able to repatriate
in foreign currency both dividends (after deduction of withholding tax) and
the proceeds from the sale of the shares. In 1998, the Israeli currency
control regulations were liberalized significantly, as a result of which
Israeli residents generally may freely deal in foreign currency and
non-residents of Israel generally may freely purchase and sell Israeli
currency and assets. There are currently no Israeli currency control
restrictions on remittances of dividends on the Ordinary shares or the
proceeds from the sale of shares; however, legislation remains in effect
pursuant to which currency controls can be imposed by administrative action at
any time.
Neither the Memorandum of Association nor the Articles of Association
of the Company nor the laws of the State of Israel restrict in any way the
ownership or voting of Ordinary shares by non-residents of Israel, except with
respect to subjects of countries which are at a state of war with Israel.
ITEM 4. INFORMATION ON THE COMPANY
Check Point Software Technologies Ltd. (together with its subsidiaries
the "Company" or "Check Point") develops, markets and supports Internet
security solutions for enterprise networks, and service providers (Telcos,
ISPs, ASPs and MSPs) including Virtual Private Networks (VPNs), firewalls,
intranet and extranet security. The Company delivers solutions that enable
secure, reliable and manageable business-to-business communications over any
Internet Protocol ("IP") network--including the Internet, intranets and
extranets. Check Point product offerings also include traffic control/quality
of service (QoS) and IP address management. Check Point products are fully
integrated as a part of the Company's Secure Virtual Network (SVN)
architecture and provide centralized management, distributed deployment, and
comprehensive policy administration. The capabilities of Check Point products
can be extended with the Open Platform for Security (OPSEC), enabling
integration with best of breed hardware, security applications and enterprise
software applications.
INDUSTRY BACKGROUND
Information, and the ability to access and distribute it, is one of
the main strategic assets in today's competitive business environment. This
need to effectively use and communicate information as well as work more
collaboratively has driven the extensive deployment of network-based
communications systems. The resulting explosion in connectivity is in turn
driving the need for technology to safeguard and manage the access to
information available over these increasingly global networks.
Explosion of Connectivity
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The network computing market has undergone two major transitions over
the past decade, the convergence of which has contributed to the recent
dramatic increase in global connectivity. The first of these transitions was
the migration of corporate computing environments from centralized mainframe
systems to distributed client/server environments. The ability to access and
share information through client/server technology has expanded the need for
connectivity beyond workgroup LANs to enterprise-wide networks spanning
multiple LANs and WANs. The second major transition has been the widespread
adoption of the Internet for business-to-business communications.
Internet-based business applications have rapidly expanded beyond e-mail to a
broad range of business applications and services including electronic
publishing, direct to customer transactions, product marketing, advertising
and customer support. The emergence of eBusiness increases the challenges in
enabling secure access to information and applications.
At the same time, the convergence of these two major transitions and
the need for secure, managed communications, has led to the emergence of
virtual private networks, or VPNs, using the public Internet infrastructure
and associated protocols and applications to share information and services
both within the enterprise and with business partners and customers. As a
result, businesses are able to share internal information and to run
enterprise applications across geographically dispersed facilities as well as
enable customers, suppliers and other business partners to inexpensively link
into their enterprise information systems. As Internet protocols and
infrastructure gain increasingly widespread acceptance for global
communication, new wide-area connectivity services continue to emerge at a
rapid rate, such as database access, transaction processing services, audio
and telephone services and video teleconferencing services. This expansion of
services and applications is further accelerating the use of networks as
global communication systems.
The Need for Network Security
Although the explosion of connectivity and information exchange
provides tremendous benefits, it also exposes an organization's sensitive
information and mission critical applications to unauthorized access, both
through connections to the public Internet and from within the enterprise. In
addition, the transmission of data over the Internet also exposes the data to
unauthorized interception. These risks create a critical need for enterprises
to protect their information and information systems from unauthorized access
and use.
Historical methods for securing information resources are no longer
adequate to meet the security requirements of today's global networks. In the
centralized mainframe environments that dominated the information systems
landscape in previous years, organizations were able to secure a limited
number of access points through physical barriers and controlled access to
data through log-on procedures and password protection. However, in today's
distributed network environments with multiple points of access and multiple
network resources, it is impractical to individually secure every application
and resource on the network. Therefore, an additional layer of security at the
network level is needed to act as a "virtual" barrier to control access to the
network and to regulate and protect the flow of data between network segments.
Traditional Approaches to Network Security
The increasing demands placed on enterprise security systems by the
expansion of Internet services and global enterprise networking are quickly
outpacing the capabilities of many traditional Internet firewall
architectures. These demands include the need to define and transparently
enforce an integrated, enterprise-wide security policy that can be managed
centrally and implemented on a distributed basis. An effective network
security solution also needs to be open and extensible to enable it to address
the rapidly changing requirements of the Internet and intranets, including the
addition of new security applications, such as authentication, encryption, URL
filtering, anti-virus protection, and Java and ActiveX security services and
functions.
THE CHECK POINT SOLUTION
With the introduction of the Secure Virtual Network (SVN)
architecture, Check Point delivers a fundamentally new approach to Internet
security deployment. With a single security framework, an organization can
connect and secure all elements of the enterprise network: networks,
applications, systems and users.
Check Point's Stateful Inspection technology, the foundation of all
Check Point solutions, enables system administrators to define and
transparently enforce an integrated, centrally managed, enterprise-wide
network traffic policy that provides for secure and reliable communications.
In addition, the Company's Open Platform for Security (OPSEC) framework
provides a single platform that enables integration with multiple third-party
security applications, computer hardware, internetworking hardware, appliances
and enterprise applications from within Check Point's open, extensible
management framework. The following are the key factors that differentiate
Check Point's solution from historical network
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security approaches:
Stateful Inspection technology. Check Point's VPN-1 and FireWall-1
product offerings are based upon Stateful Inspection technology that enables
the screening of all communications attempting to pass through a gateway in a
highly secure but efficient way. By being able to extract and maintain
extensive "state information" from all relevant communications layers, the
system can verify the data for full compliance with the security and traffic
policy and make intelligent security and traffic prioritization decisions. By
extracting and analyzing data in place without copying, VPN-1 and FireWall-1
cause virtually no performance degradation, enabling it to scale effectively
as network bandwidth increase. In addition, Check Point's proprietary
implementation of Stateful Inspection in a "virtual machine" design provides
in-place upgradability and is designed to enable the Company's products to be
easily ported to a wide range of platforms. In addition, because Check Point's
products reside at network access points, which is the critical convergence
point for network security and traffic management, the Company has a unique
advantage by being able to apply this same architectural foundation to manage
traffic flow and network performance, inspecting traffic only once for both
critical network decisions. State information is extracted data maintained to
provide context for future screening decisions.
Open Platform for Security Enterprise Connectivity ("OPSEC"). Check
Point's Open Platform for Security, or OPSEC, allows users to integrate,
manage, and deploy all aspects of network security through an open, extensible
management framework. Today, more than 270 vendors have joined the OPSEC
Alliance, embracing OPSEC as the industry's de-facto framework for securing
the Internet. OPSEC partners develop specialized solutions that span the range
of enterprise network security technologies - from high-performance
internetworking, server and appliance platforms with embedded Check Point SVN
software, to authentication, public key infrastructure, content security,
intrusion detection, and other solutions. Additionally, through the OPSEC
Check Point Certified Managed Service Provider (CCMSP) program, customers have
the option to select a complete managed service offering from among a group of
the world's leading MSPs participating in this program. The OPSEC framework is
designed to allow end-users to choose system components that best meet their
requirements, whether from the Company or various third-party vendors, and to
rapidly exploit new developments in security technology.
Broad, Integrated Internet Security Solution. The VPN-1 and FireWall-1
product families extend across all major market segments, from small
businesses to large enterprise networks. Most products support a broad range
of platforms, including Sun Microsystems (Solaris), IPSO, Microsoft (Windows
NT), Linux, Hewlett-Packard (HP-UX) and IBM Corporation (AIX). Both VPN-1 and
FireWall-1 also support all major networking technologies, including 10BaseT,
100BaseT, ATM, FDDI and Token Ring. Check Point's Internet security solutions
provide a broad range of features and functionality including the following:
Integration of Third-Party Security Applications. Through OPSEC,
end-users of VPN-1and FireWall-1 are able to integrate the product
into various network management systems and add new features and
functionality such as public key infrastructure, authentication,
encryption, URL categorization, content security, anti-virus
protection, intrusion detection, auditing and reporting controls and
enterprise directory integration.
Implementation of the Virtual Private Networks. The VPN-1 architecture
supports multiple authentication methods including digital
certificates, password-based techniques, biometrics and authentication
tokens. In addition, VPN-1 provides data encryption capabilities to
shield communications over public networks from unauthorized
monitoring or alteration, enabling companies to set up "virtual
private networks" offering a level of privacy comparable to private
communication lines. The VPN-1 product family supports multiple
encryption and key management methods including IPSec, DES, IKE, AES,
and 3DES. The Company extends the VPN to the mobile desktop users with
its SecuRemote and SecureClient software. In addition, the
multi-vendor interoperability offered by VPN-1 enables the deployment
of secure and reliable intranet and extranet VPNs for business
communications.
Extensive, Scaleable Application Support. VPN-1 and FireWall-1 support
over 150 pre-defined applications, including database and enterprise
applications such as Oracle SQL*Net, network management protocols such
as SNMP, multimedia applications such as RealAudio, Microsoft's
NetMeeting and Microsoft's NetShow, and Internet applications such as
Secure HTTP. In addition, through the easy-to-use graphical user
interface, system administrators can easily add support for new or
custom applications by completing simple, on-line templates, or by
writing simple macros using INSPECT, the Company's high-level
scripting language.
Centralized Management. Check Point's products are capable of
configuring and managing an enterprise-wide network policy at multiple
enforcement points from a single, centralized administrative
workstation, eliminating the need to configure each gateway and server
independently. The system administrator can define a single
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security policy for the enterprise that is then automatically
distributed to each gateway. The Company's products contain extensive
monitoring and reporting capabilities designed to improve the
manageability of the system.
PRODUCTS
Check Point's product lines offer a broad range of policy-based
solutions for securing and managing networks. The Company's Security product
line includes its FireWall-1 family of products, its VPN-1 family of virtual
private networking solutions and some associated products. The Company's
Traffic Control product line includes its FloodGate-1 bandwidth management
solution. The Management product line includes Meta IP address management
products.
The Company is currently shipping version 4.1 for all of its products.
FireWall-1
Check Point FireWall-1 is a comprehensive application suite that
integrates access control, authentication, network address translation,
content security, auditing and enterprise policy management. FireWall-1 is
based on Check Point's patented Stateful Inspection technology to deliver high
performance security, application support and scalability. The most widely
used network security suite on the market today, FireWall-1 is ICSA and
E3-certified. It is available on a variety of platforms including UNIX and
Windows NT servers and several industry-leading third-party internetworking
platforms.
The Company's FireWall-1 product contains the full flexibility of the
FireWall-1 management and security capabilities, including a rule-based
editor, object managers and authentication features. In addition to the single
site functionality provided by FireWall-1 Internet Gateway, the FireWall-1
Enterprise products also enable centralized management of multiple gateways
with distributed implementation, as well as remote management of the network
security system. FireWall-1 Enterprise and Internet Gateway products consist
of one Management Module and one firewall Module. Additional Inspection or
firewall Modules for the support of multiple gateway environments are sold
separately. All FireWall-1 products are compatible and FireWall-1 Internet
Gateway products can be upgraded while retaining the same management and user
interface capabilities.
VPN-1
The Company's VPN-1 product family is designed to meet the need of
organizations to protect the privacy and integrity of network communications
by establishing a confidential communications channel for virtual private
networking. Multiple encryption schemes are supported, including emerging
standards for interoperability between different vendors. Encryption,
decryption and key management, including digital signatures and certificate
authority, are all fully integrated with VPN-1's Management Module and rule
base editor and log viewer. Included in the Company's VPN-1 product family is
VPN-1 SecuRemote to extend the VPN to the desktop and laptop by providing
end-to-end encryption support, and VPN-1 SecureClient incorporating all VPN-1
features plus a personal firewall.
FloodGate-1
FloodGate-1 is a policy-based bandwidth management solution that
alleviates traffic congestion on oversubscribed Internet and Intranet links.
The flagship product of the Company's Traffic Control product line,
FloodGate-1 enables organizations to define and manage enterprise-wide
policies that precisely control valuable bandwidth resources to optimize
network performance and alleviate network congestion.
Meta IP
Meta IP is an automated solution for managing IP addressing and
naming. Meta IP is designed to ensure control and reliability of address
allocation and services while improving TCP/IP management efficiency. Meta
IP's modular, replicated architecture enables multi-level fault-tolerance,
cross-platform compatibility and distributed administration. Through its
User-to-Address Mapping(TM) (UAM) technology, Meta IP associates IP addresses
with user login names, enabling comprehensive auditing and improved
troubleshooting. The combination of UAM and FireWall-1 is the first and only
solution to automatically enforce security policies by users in a dynamic
addressing environment.
Provider-1
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Check Point Provider-1 pairs network security capabilities with
powerful policy-based management capabilities developed specifically for
Managed Service Providers (MSPs). Provider-1 enables MSPs to centrally create
and manage the network security policies of multiple corporate customers on a
single hardware server, while maintaining complete and secure isolation
between individual customer databases. Provider-1 is designed to enable MSPs
to significantly reduce the hardware and personnel costs associated with
managed security services.
SofaWare
Check Point is a financial and strategic investor in SofaWare
Technologies Ltd., a company established in 2000. Check Point has the right to
acquire a controlling interest in SofaWare. SofaWare's goal is to provide the
home and home office market with Internet security solutions, based on Check
Point's Stateful Inspection technology. SofaWare's Safe@Home product protects
the entire home network and enables consumers to easily manage and configure
their security settings. Safe@Home also enables service providers to offer
managed security solutions including content filtering and other value-added
services to their subscribers.
TECHNOLOGY
The FireWall-1 Technology
Check Point's FireWall-1 technology provides a powerful, easy-to-use
solution for the implementation of an integrated network security policy
across an enterprise-wide network. The cornerstone of the FireWall-1
technology is the Company's patented Stateful Inspection technology, which
enables the highly efficient, transparent screening of all communications
attempting to pass through a network gateway, and its OPSEC architecture.
OPSEC provides a single platform that manages various aspects of network
security through an open, extensible management framework. Various third party
security applications plug into the OPSEC framework through published
application programming interfaces (APIs) such as CVP (Content Vectoring
Protocol) which integrates virus scanning software and other content
inspection programs, UFP (URL Filtering Protocol) which integrates URL list
services and SAMP (Suspicious Activity Monitoring Protocol) which integrates
suspicious activity monitoring programs, and through industry-standard
protocols such as RADIUS, Manual IPSec, SKIP and SNMP. Once integrated into
the OPSEC framework, all applications can be set up and managed from a central
point, utilizing a single policy editor. In addition, the behavior of the
inspect engine can be customized by end-users and third parties through
programs written in the Company's INSPECT programming language.
FireWall-1 technology is implemented in both the Management Module and
the Inspection or firewall Module. The Management Module defines the security
policy through a set of rules established by the system administrator that the
Inspection and firewall Module enforces.
SALES AND MARKETING
The Company's sales and marketing strategy is designed to promote its
products as strategic components of enterprise networks. The Company's
marketing efforts are focused on promoting FireWall-1 and VPN-1 as the leading
brand names in enterprise security. Sales efforts focus on expanding the
installed base and increasing penetration levels of end-user customers
worldwide by leveraging multiple channels of distribution: distributors, Value
Added Resellers (VARs), Original Equipment Manufacture (OEMs), system
integrators, and Managed Service Providers (MSPs).
The Company has OEM bundling relationships with server and workstation
vendors such as Compaq and IBM; internetworking device manufacturers such as
Nokia and Intrusion.com, and other suppliers of enterprise network products.
The Company believes that strategic OEM relationships can significantly
contribute to the achievement of its sales and marketing goals by integrating
complementary technologies. Additionally, OEM partners provide primary support
and training to their customers enabling Check Point to concentrate its
support efforts on high-level technical assistance for these resellers. See
the section "Risk Factors" in "Item 3: Key Information."
The Company also currently sells its products to end-user customers
through numerous resellers and distributors worldwide. The Company expects
that it will continue to be dependent upon a limited number of resellers for a
significant portion of its revenues. If anticipated orders from these
resellers fail to materialize, the Company's business, operating results and
financial condition will be materially adversely affected. In 2000 and 1998,
no reseller exceeded 10% of the Company's revenues. Approximately 12% of the
Company's revenues were derived from a single reseller in 1999. See the
section "Risk Factors" in "Item 3: Key Information." The Company's agreements
with its OEM partners and resellers are
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non-exclusive. These agreements generally provide for discounts based on
minimum purchase commitments and/or expected or actual volumes purchased or
resold by the reseller.
The Company has derived substantially all of its revenues and expects
to continue to derive the majority of its revenues in the foreseeable future
from sales of its FireWall-1 and VPN-1 products. See the section "Risk
Factors" in "Item 3: Key Information."" Revenues from the sales to customers
in the Americas, Europe and Japan were 57%, 26% and 7% in 1998, 53%, 29% and
11% in 1999, and 48%, 34%, and 9% in 2000 respectively, of total revenues.
To further expand the awareness of the Company's products, the Company
has established informal marketing relationships with system integrators and
vendors of complimentary products. System integrators with which the Company
maintains informal cooperative relationships include Accenture, Computer
Sciences Corporation, Electronic Data Systems, Integrated Network Services,
Inc. and PriceWaterhouse Coopers. The Company's OPSEC Alliance program is
focused on establishing integration and/or compatibility with complimentary
products and developing marketing relationships with these companies to
promote the solutions. The integration and compatibility of these products
with the Company's products provides customers with a more complete enterprise
security solution, and provides the Company's channels with additional revenue
opportunities. Companies that maintain a marketing relationship with the
Company to promote their integrated products include Aladdin, Baltimore
Technologies, Entrust, Hewlett-Packard, IBM, Network Associates, Novell, RSA
Security, Symantec, Trend Micro and VeriSign, as well as many others. The
Company also has informal marketing relationships with BackWeb, BMC Software,
Microsoft, Netscape/AOL, Oracle and Progressive Networks to promote compatible
products.
The Company conducts a number of marketing programs to support the
sale and distribution of its products. These programs are designed to inform
existing and potential OEM partners, resellers, and end-user customers about
the capabilities and benefits of the Company's products.
CUSTOMER SERVICE AND SUPPORT
The Company operates a Worldwide Technical Services (WTS)
organization, based in Dallas, Texas, with field locations throughout the
world, which offers a wide range of professional services, technical support
and training, enabling the Company to partner with resellers in implementing
secure, reliable business communications solutions.
The Company's OEM partners and resellers generally provide the
installation, training, maintenance and support for their customers, with
Check Point providing the high-level technical backup support. Check Point
also offers direct support agreements to end users who prefer to purchase
directly from the manufacturer. As part of Check Point's direct market
participation, the Company employs technical consultants and systems engineers
who work closely with OEM partners, resellers and territory sales managers to
assist with the pre-sales configuration, use and application support.
The Company operates a worldwide 24-hour by 7-day call center, based
in Dallas, Texas. The Company supports resellers, partners, and sales
personnel through standard systems and processes and are available via e-mail,
the Internet, fax and telephone. The support structure includes "front line"
call center engineers for resolving the majority of issues and questions
during the first call. If necessary, bench testing using real-world
configurations are performed by senior support engineers. Third level support
is provided by the Escalation Group, an organization that resides with the
Company's multiple research and development groups in Ramat Gan, Israel and
Seattle, Washington, to provide an extremely close coupling between customer
issues and usage and product development. The Escalation Group conducts code
analysis and detailed troubleshooting and delivers updated code, as
appropriate. Analysis of historical trouble tickets is conducted and tracked.
This information is used in the development of features and enhancements in
new product releases
To provide hands-on training, education and certification, Check Point
has an in-house educational services group. The group develops courses and
curricula for Check Point classes conducted directly by the Company or by an
affiliate company. Such classes include both lecture-taught and computer-based
training sessions on Check Point products, including installation, management
and advanced implementations. The Company offers industry level certification
programs including Check Point Certified Security Engineer (CCSE) and Check
Point Certified Security Administrator (CCSA). Using a leveraged model, Check
Point has trained hundreds of partners, and these partners have in turn
established Authorized Training Centers. There are now over 222 Check Point
Authorized Training Centers in 47 countries around the world.
The Company also has an established professional services organization
with consultants in locations throughout the world. They offer a set of
consulting services that includes on-site support for installation of its
products, and assistance in developing sound security business practices.
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Prospective customers typically receive 30-day evaluation copies of
the Company's software products. If the customer elects to purchase the
Company's product, they place their order through their reseller, who in turn
places the order to the Company. The Company issues an invoice to the
reseller, and sends a software key to the reseller to provide to the customer
which allows the evaluation copy to continue to function. The Company offers a
variety of fee-based software services programs, including support of the
Company's software products in accordance with specifications contained in the
user's guide, and access to technical support personnel and product
enhancements.
Customers are encouraged to purchase software subscription, which is a
component of the services program that provides product updates and version
upgrades for Check Point's products. In addition, once the software
subscription has been purchased, customers can then purchase a variety of
support programs. These software support programs can be sold and delivered by
the Company's resellers and OEM partners or the customer can choose to
purchase a Check Point software support program that is sold by the reseller
but delivered by Check Point through its Worldwide Technical Services (WTS)
organization directly to the customer.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend upon its
ability to enhance its existing products and develop and introduce new
products that address the increasingly sophisticated needs of end-users. The
Company works closely with its distribution channels and major resellers, who
provide significant feedback for product development and innovation. See the
section "Risk Factors" in "Item 3: Key Information."
The Company's new product development efforts are focused on
enhancements to its current family of products and new products for network
security and management. Although the Company expects to develop its new
products internally, it may, based upon timing and cost considerations,
acquire or license certain technologies or products from third parties.
RESEARCH AND DEVELOPMENT
The Company's research and development activities involve the
development of new products and modules in response to identified market
demands and the support and enhancement of our existing products. We regard
significant portions of our software products and systems as proprietary and
rely on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights.
The Company generally enters into confidentiality agreements with employees,
consultants, customers and potential customers and limit access to, and
distribution of its proprietary information. Some of the Company's products
are co-developed with and co-owned by its technology and business partners.
Net research and development expenses for 1998, 1999 and 2000 were
$10.6 million, $18.9 million and $30.3 million, respectively. At December 31,
2000, the Company had 311 employees dedicated to research and development
activities, quality assurance and backline support. The Company is a member of
the International Computer Security Association (ICSA) and the Secure Wide
Area Networking Task Force.
COMPETITION
See "Item 3, Key Information, Risk Factors"
PROPRIETARY RIGHTS AND TRADEMARK LITIGATION
The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
The Company has patents pending worldwide and holds two U.S. patents,
No. 5,606,668 and No. 5,835,726. The Company also has corresponding patent
applications to U.S. Patent No. 5,606,668 pending in Canada and Japan, as well
as
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under the European Patent Convention (designating Germany, France, United
Kingdom, Italy, and Sweden as countries in which patent coverage may
potentially be sought). The Company has also filed co-pending PCT national
phase patent applications in Canada, Japan, Korea, Norway, and under the
European Patent Convention (designating France, United Kingdom, Ireland,
Sweden, Germany, Switzerland, and Finland) based on an earlier patent
application filed in Israel currently pending. A patent issued from the
European Patent Office becomes effective as though it were a national patent
in each designated member nation once national fees are paid, and all other
local requirements are met. The EPO opposition period of nine months from
grant of the patent at the EPO can effect the enforcement of that patent
nationally if an opposition is filed during that time. If the opposition is
won, it can negate the patent altogether or result in the protection being
offered by the patent being narrowed. There can be no assurance that the
Company's applications, whether or not currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design around any patents issued to the Company.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may copy aspects of the Company's products or obtain and use
information that the Company regards as proprietary. Policing any of such
unauthorized uses of the Company's products is difficult, and although the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States or Israel. To
date, the Company has not conducted any material amount of business in such
countries. There can be no assurance that the Company's efforts to protect its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products, which
are or will be subject to protection under intellectual property laws. The
Company expects that software companies will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Responding to such claims, regardless of merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
On July 5, 1996, Checkpoint Systems, Inc. ("CSI") a manufacturer of
theft prevention devices for retail stores, filed an action alleging trademark
infringement and unfair competition against the Company in the United States
District Court for the District of New Jersey. CSI seeks to enjoin the Company
from using the "Check Point" name in connection with the Company's products
and services. The trial court dismissed CSI's claim for damages on summary
judgment. The trial was conducted in November, 1999. The District Court issued
its opinion in Check Point's favor on July 12,2000. CSI has filed its
appellant's brief alleging that the District Court misapplied the governing
law. On April 5th 2001, oral argument was presented to the Appellate court.
The matter has been taken under advisement. The Company is unable to predict
the outcome of this litigation. In the event that CSI is granted the full
injunctive relief it is seeking and the Company is required to cease using the
"Check Point" name in connection with its products and services, the Company
may incur material expenses in launching a new name.
EMPLOYEES
As of March 31, 2001, the Company had 1137 employees, of whom 331 were
engaged in research, development, quality assurance and backline support, 456
were engaged in marketing and sales, 223 were engaged in customer support and
operations, and 127 were engaged in MIS, administration and finance. The
Company believes that its relations with its employees are satisfactory.
The Company is subject to various Israeli labor laws and labor
practices, and to administrative orders extending certain provisions of
collective bargaining agreements between the Histadrut (Israel's General
Federation of Labor) and the Coordinating Bureau of Economic Organizations
(the Israeli federation of employers' organizations) to all private sector
employees. For example, mandatory cost of living adjustments, which compensate
Israeli employees for a portion of the increase in the Israeli consumer price
index, are determined on a nationwide basis. Israeli law also requires the
payment of severance benefits upon the termination, retirement or death of an
employee. The Company meets this requirement by contributing on an ongoing
basis towards "managers' insurance" funds that combine pension, insurance and,
if applicable, severance pay benefits. In addition, Israeli employers and
employees are required to pay specified percentages of wages to the National
Insurance Institute, which is similar to the United States Social Security
Administration. Other provisions of Israeli law or regulation govern matters
such as the length of the workday, minimum wages, other terms of employment
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and restrictions on discrimination.
ORGANIZATIONAL STRUCTURE
The Company is organized under the laws of the State of Israel, which wholly
owns the subsidiaries specified below.
NAME OF SUBSIDIARY COUNTRY OF INCORPORATION
Check Point Software Technologies Inc. (*) United States of America
Check Point Software Technologies (Canada) Inc. Canada
Check Point Software Technologies (Australia) PTY, Ltd. Australia
Check Point Software Technologies (Japan) Ltd. Japan
Check Point Software Technologies (Singapore) PTE Ltd. Singapore
Check Point Software Technologies SARL France
Check Point Software Technologies (Netherlands) B.V. Holland
Check Point Software Technologies (Netherlands) B.V. acts as a holding company
and wholly owns the following principal operating subsidiaries specified
below.
NAME OF SUBSIDIARY COUNTRY OF INCORPORATION
Check Point Software Technologies B.V. Holland
Check Point Software Technologies (Italia) S.R.L. Italy
Check Point Software Technologies (Switzerland) A.G. Switzerland
Check Point Software Technologies Norway A.S. Norway
Check Point Software Technologies (Spain) S.A. Spain
Check Point Software Technologies Mexico S.A. de C.V. Mexico
Check Point Software Technologies (Brazil) LTDA Brazil
Check Point Software Technologies (UK) Ltd. United Kingdom
Check Point Software Technologies GmbH Germany
C.P.S.T. Sweden A.B. Sweden
(*) Check Point Software Technologies Inc wholly owns MetaInfo Inc,
incorporated in the United States of America
Israel Check Point Software Technologies Ltd. China is a representative office
of Israel located in Beijing, China.
PLANTS, PROPERTY AND EQUIPMENT
The Company's headquarters and Research and Development facilities are
located in Ramat-Gan, Israel, near Tel-Aviv, where the Company leases
approximately 135,000 square feet of office space. These facilities are leased
pursuant to leases that expire 2003, 2004, and 2006 including renewal options.
The Company also leases approximately 40,465 square feet of office space for
its marketing and field representatives at its United States sales and
marketing headquarters in Redwood City, California, and approximately 31,275
square feet of office space for its support center in
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Dallas. These facilities are leased pursuant to leases for periods of up to
five years. In addition the Company leases office space in its US regional
offices in Texas, Colorado, Michigan, Illinois, Massachusetts, Washington,
Georgia, North Carolina, New York, Arizona, Florida, Pennsylvania, New Jersey,
Virginia and Ontario. Other leased offices include Canada, England, France,
Singapore, Germany, Japan, Holland, Italy, Australia, Sweden, Norway, Spain,
Brazil and Mexico.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OVERVIEW
Check Point develops, markets, and supports policy-based enterprise
security, traffic control and IP address management solutions that protect
information assets and enhance the performance of enterprise networks. Check
Point was founded in July 1993, introduced its first product, FireWall-1, in
April 1994 and began generating revenues in the third quarter of 1994. The
Company's revenues totaled $141.9 million, $219.6 million and $425.3 million
in the years 1998, 1999 and 2000, respectively, substantially all of which
were derived from the sales of its FireWall-1 and VPN-1 product families
including related software subscriptions, technical services and training
programs.
Although the Company has experienced significant percentage growth in
revenues and net income, the Company does not believe that such growth rates
are sustainable. The Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
The Company accounts for software sales in accordance with Statement
of Position (SOP) 97-2, "Software Revenue Recognition," as amended. SOP 97-2,
generally requires revenues earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair value of
the element. The Company has adopted SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions", for all
multiple element transactions entered into after January 1, 2000. SOP 98-9
requires that revenue be recognized under the "residual method" when vendor
specific objective evidence ("VSOE") of fair value exists for all undelivered
elements and VSOE does not exist for the delivered elements.
Revenue from license fees is recognized when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee
is fixed or determinable, and collectibility is probable. The Company
maintains certain provisions for product returns and rebates in accordance
with SFAS No. 48 "Revenue Recognition when Right of Return Exists". Such
provisions amounted to $ 7.1 million and $ 10.1 million as of December 31,
1999 and 2000, respectively. The Company from time to time considers
arrangements regarding certain customers with payment terms extending beyond
customary payment terms not to be fixed or determinable. If the fee is not
fixed or determinable, revenue is deferred and recognized when payments become
due from the customer, providing that all other revenue recognition criteria
have been met.
Software subscription, specified upgrades, support, consulting
services and training program revenue included in multiple element
arrangements is deferred and recognized on a straight-line basis over the term
of the software subscription and support agreement. The VSOE of fair value of
the undelivered elements (software subscription, specified upgrades, support,
consulting services and training) is generally determined based on the price
charged for the undelivered element when sold separately. Deferred revenues
also include amounts received from customers for which services have not been
provided.
The Company has derived substantially all of its revenues from sales
of its FireWall-1 and VPN-1 families of software products including related
software subscriptions, support, technical services and training programs. The
Company expects to derive the vast majority of its revenues in the near future
from sales of its FireWall-1 product suite and VPN-1 product family, and
specifically the Internet Gateway and Enterprise product categories. If
FireWall-1 or VPN-1 should fail to receive widespread market acceptance, or if
end-users should subsequently adopt an alternative approach to enterprise
security or VPNs, the Company's business, operating results and financial
condition would be materially adversely affected.
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No customer, distributor or reseller, exceeded 10% of the Company's
revenues in either 1998 or 2000. During 1999 approximately 12% of the revenues
were derived from a single distributor.
During each of the three years 1998, 1999 and 2000, the Company
significantly increased the number of its distributors, resellers, system
integrators and managed service providers on a worldwide basis.
The following table sets forth, for the periods indicated, the
percentage of total consolidated revenues derived from sales into each of the
regions identified in the table.
YEAR ENDED DECEMBER 31,
---------------------------------------
REGION 1998 1999 2000
------ ---- ---- ----
Americas 57% 53% 48%
Great Britain 9% 9% 8%
Europe (excluding Great Britain) 17% 20% 26%
Japan 7% 11% 9%
Other - mostly Asia Pacific 10% 7% 9%
The Company may experience declining operating margins as it expands
its customer and technical support organization. The Company also expects that
it will experience increasing competition and pricing pressure, which would
result in lower operating margins. In 2001, the Company intends to continue to
make significant investments in the further development and expansion of its
sales and marketing organization, including the expansion of its field
organization both in the United States and additional countries in Europe,
Asia, and Latin America. In addition, the Company expects to further expand
its research and development organization and make additional investments in
its general and administrative infrastructure. As a result, the Company
expects operating margins to decrease from historical levels. The amount and
timing of these additional expenditures are likely to result in fluctuations
in operating margins.
Research and development costs, net of grants received, are charged to the
statement of operations as incurred. SFAS No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed", requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working models and the point at which the products are ready for general
release have been insignificant. Therefore, all research and development costs
have been expensed.
RESULTS OF OPERATIONS:
The following table presents, for the periods indicated, line items from the
Company's statements of income (in thousands of US$).
1998 1999 2000
---- ---- ----
Revenues $141,941 $219,567 $425,283
Cost of revenues 13,623 22,423 35,265
-------------------------------------
Gross profit 128,318 197,144 390,018
-------------------------------------
Operating expenses:
Research and development, net 10,629 18,923 30,309
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Sales and marketing 39,966 68,229 110,003
General and administrative 10,886 13,069 20,409
-------------------------------------
Total operating expenses 61,481 100,221 160,721
-------------------------------------
Operating income 66,837 96,923 229,297
Financial income, net 4,406 12,770 29,147
Capital gain 2,581 192 ---
-------------------------------------
Income before taxes on income 73,824 109,885 258,444
Taxes on income 3,947 14,104 37,231
-------------------------------------
Net income $69,877 $95,781 $221,213
The following table presents, for the periods indicated, line items from the
Company's statements of income as a percentage of the Company's revenues.
1998 1999 2000
---- ---- ----
Revenues 100% 100% 100%
Cost of revenues 10 10 8
--------------------------------------
Gross profit 90 90 92
--------------------------------------
Operating expenses:
Research and development, net 7 9 7
Sales and marketing 28 31 26
General and administrative 8 6 5
--------------------------------------
Total operating expenses 43 46 38
--------------------------------------
Operating income 47 44 54
Financial income, net 3 6 7
Capital gain 2 --- ---
--------------------------------------
Income before taxes on income 52 50 61
Taxes on income 3 6 9
--------------------------------------
Net income 49% 44% 52%
Revenues. The Company's revenues are derived from the sale of software
products and related software subscriptions, support contracts, consulting
services and training. The Company's revenues were approximately $141.9
million, $219.6 million and $425.3 million in 1998, 1999 and 2000,
respectively. These increases resulted primarily from the growth in the market
for the Company's enterprise security products, expanded awareness of the
Company's products, increased sales through OEMs and other resellers and the
introduction of new versions of FireWall-1, VPN-1 and Provider-1. Revenues
from sales to the Americas resellers were 57%, 53% and 48% of revenues in
1998, 1999 and 2000, respectively. However, the Company believes that since it
sells its products to resellers and OEMs in the United States that have
significant international reseller bases, a significant portion of its
products are resold by these resellers and OEMs outside the United States.
Cost of Revenues. The Company's cost of revenues is comprised of the
cost of freight, media, software production, manuals and packaging, the cost
of post-sale customer support and royalties. Cost of revenues was $13.6
million, $22.4 million and $35.3 million for 1998, 1999 and 2000,
respectively. Gross margins were 90%, 90% and 92% of the Company's revenues
for 1998, 1999 and 2000, respectively.
Research and Development, Net. Research and development expenses
consist primarily of salaries and other related expenses for research and
development personnel, as well as the cost of facilities and depreciation of
capital equipment. Net research and development expenses were $10.6 million,
$18.9 million and $30.3 million in 1998, 1999 and 2000, respectively,
representing 7%, 9% and 7% of revenues, respectively. The increases in
absolute dollars were due to the addition of new
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development personnel. The Company received non-royalty bearing grants of
$450,000, $60,000 and $392,000 in 1998, 1999 and 2000, respectively. The
Company anticipates that research and development expenditures will increase
in the short term and may fluctuate as a percentage of revenues thereafter as
the Company continues to expand its research and development organization.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, trade shows, travel and other related
expenses. Sales and marketing expenses were $40.0 million, $68.2 million and
$110.0 million in 1998, 1999 and 2000, respectively, representing 28%, 31% and
26% of revenues, respectively. The substantial increase in absolute dollars
each year was due to the costs associated with the expansion of the Company's
sales and marketing activities. Sales and marketing expenses decreased as a
percentage of revenues in 2000 as compared with 1999, primarily due to a
significant increase in revenues. The Company anticipates that its sales and
marketing expenditures will increase in absolute dollars and may fluctuate as
a percentage of revenues thereafter as the Company continues to expand its
sales and marketing activities.
General and Administrative. General and administrative expenses
consist primarily of outside professional fees, salaries and other related
expenses. General and administrative expenses were $10.9 million, $13.1
million and $20.4 million in 1998, 1999 and 2000, respectively, representing
8%, 6% and 5% of revenues, respectively. The increase in absolute dollars was
primarily due to the addition of staff, and increased costs associated with
the expansion of the Company's business. The decreases in general and
administrative expenses as a percentage of revenues for all periods were
attributable to the significant increases in revenues. The Company anticipates
that general and administrative expenses will increase in absolute dollars and
may fluctuate as a percentage of revenues as the Company expands its financial
and administrative infrastructure, and continues to incur additional costs
associated with being a public company.
QUARTERLY RESULTS OF OPERATIONS. The following table sets forth certain
unaudited consolidated statements of income data for each of the quarters in
1999 and 2000, as well as the percentage of the Company's revenues represented
by each item. The unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements
contained herein and include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of such information when read in conjunction with the Company's
consolidated financial statements and Notes thereto appearing elsewhere in
this annual report. The Company believes that quarter-to-quarter comparisons
of its financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance.
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Quarter ended, US$ in thousands, except per share data
FISCAL YEAR 1999 FISCAL YEAR 2000
----------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------------------------------------------
Revenues $43,772 $50,051 $57,799 $67,945 $78,166 $90,668 $116,014 $140,435
Cost of revenues 4,711 5,092 6,053 6,567 7,644 8,006 9,407 10,208
----------------------------------------------------------------------------------------------------------------
Gross profit 39,061 44,959 51,746 61,378 70,522 82,662 106,607 130,227
----------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and
development, net 4,043 4,353 4,892 5,635 6,175 6,659 8,344 9,131
Sales and marketing 12,643 15,744 18,34 21,49 24,218 27,733 28,46 29,58
General and
administrative 2,862 3,219 3,385 3,603 5,199 4,502 5,094 5,614
----------------------------------------------------------------------------------------------------------------
Total operating
expenses 19,548 23,316 26,620 30,737 35,592 38,894 41,905 44,330
----------------------------------------------------------------------------------------------------------------
Operating income 19,513 21,643 25,126 30,641 34,930 43,768 64,702 85,897
Financial income, net 2,624 2,705 3,609 3,832 5,494 6,411 7,800 9,442
Capital gain --- 192 --- --- --- --- --- ---
----------------------------------------------------------------------------------------------------------------
Income before taxes on income 22,137 24,540 28,735 34,473 40,424 50,179 72,502 95,339
Taxes on income 2,434 3,008 4,010 4,652 5,545 6,508 10,858 14,320
----------------------------------------------------------------------------------------------------------------
Net income $19,703 $21,532 $24,725 $29,821 $34,879 $43,671 $61,644 $81,019
Basic net earnings per share $0.09 $0.10 $0.11 $0.13 $0.15 $0.19 $0.26 $0.34
---------------------------------------------------------------------------
Shares used in computing basic net
earnings per share 219,540 220,914 224,106 227,160 230,256 231,663 233,418 235,362
---------------------------------------------------------------------------
Diluted net earnings per share $0.08 $0.09 $0.10 $0.12 $0.13 $0.17 $0.23 $0.31
---------------------------------------------------------------------------
Shares used in computing diluted
net earnings per share 241,830 243,354 248,526 256,704 262,941 263,637 264,280 263,982
AS A PERCENTAGE OF REVENUES
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 11 10 10 10 10 9 8 7
Gross profit 89 90 90 90 90 91 92 93
Operating expenses:
Research and development, net 9 9 8 8 8 7 7 7
Sales and marketing 29 31 32 32 31 31 25 21
General and administrative 6 6 6 5 7 5 5 4
Total operating expenses 44 46 46 45 46 43 37 32
Operating income 45 44 44 45 44 48 55 61
Financial income, net 6 5 6 6 7 7 7 7
Income before taxes on income 51 49 50 51 51 55 62 68
Taxes on income 6 6 7 7 7 7 9 10
Net income 45% 43% 43% 44% 45% 48% 53% 58%
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The Company's future revenues and operating results are uncertain and
may fluctuate from quarter to quarter and from year to year due to a
combination of factors, including the timing of new product releases and
acceptance of new products, the demand for the Company's products, the volume
and timing of orders and the ability to fulfill orders, the level of product
and price competition, the expansion of the Company's sales and marketing
organizations, the Company's ability to develop new and enhanced products and
control costs, the Company's ability to attract and retain key technical,
sales and managerial employees, the mix of distribution channels through which
product is sold, the mix of products and services sold, the growth in the
acceptance of and activity on, the Internet and World Wide Web, the growth of
intranets, seasonal trends in customer purchasing, customer capital spending
budgets, foreign currency exchange rates and general economic factors. The
Company's revenue is subject to seasonal fluctuations related to the slowdown
in spending activities in Europe for the quarter ending September 30 and the
year-end purchasing cycles of many end-users of the Company's products. The
Company believes that it will continue to encounter quarter-to-quarter
seasonality that could result in proportionately lower sales in the quarters
ending September 30 and March 31 relative to sales in the quarters ending June
30 and December 31, respectively.
The Company's expense levels are based, in part, on expectations as to
future revenues. If revenue levels are below expectations, operating results
are likely to be adversely affected. Net income may be disproportionately
affected by a reduction in revenues due to the relatively small amount of the
Company's expenses, which vary with its revenues. As a result, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Ordinary Shares would likely be materially adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations through cash
generated from operations. Cash and cash equivalents and short term
investments were $438.4 million, and long term investments were $219.3
million, totaling $657.7 million as of December 31, 2000, as compared with
cash and cash equivalents and short term investments of $242.5 million and
long term investments of $82.9 million totaling $325.4 million as of 1999. The
Company generated net cash from operations of $70.3 million, $144.3 million
and $315.7 million in 1998, 1999 and 2000. Net cash from operations for these
periods consisted primarily of net income plus increases in deferred revenues,
accrued expenses and other liabilities offset by increases in trade
receivables, other receivables and prepaid expenses. The Company's capital
investments amounted to approximately $6.1 million, in each of 1998 and 1999
and $9.1 million in 2000. Capital investments during 2000 were primarily for
computer equipment and software for the Company's research and development and
technical service organization efforts. As of December 31, 2000, the Company
had no material commitments for capital expenditures. Net cash provided by
financing activities was approximately $5.2 million, $15.7 million and $25.8
million in 1998, 1999 and 2000, respectively, primarily as a result of stock
options exercised. Excess cash is invested in marketable securities and bank
deposits of varying maturities, depending on projected cash needs for
operations, capital purchases and other business purposes.
The Company believes that its existing sources of liquidity and cash
flow will be adequate to fund its operations through at least the middle of
2002.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The cost of the Company's operations in Israel, as expressed in
dollars, is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the NIS in relation to the dollar. The rate of inflation in
Israel was zero in 2000 (compared to 1.3% in 1999 and 8.6% in 1998), while the
NIS was revaluated upwards by 2.8% against the dollar (compared to 0.2% in
1999 and a devaluation of 17.6% in 1998). These decreases did not materially
adversely affect the Company's results of operations in such periods, although
there can be no assurance that there will not be a material adverse effect on
the Company's business, operating results and financial condition in the
future should this pattern recur. Most of the Company's revenues are
denominated in United States dollars. In addition, a substantial portion of
the Company's costs is incurred in dollars. Since the dollar is the primary
currency in the economic environment in which the Company and its subsidiaries
operate, the dollar is their functional and reporting currency, and,
accordingly, monetary accounts maintained in currencies other than the dollar
(principally cash and cash equivalents, short-term deposits, marketable
securities, long-term investments and liabilities) are remeasured using the
foreign exchange rate at the balance sheet date. Operational accounts and
non-monetary balance sheet accounts are measured and recorded at the rate in
effect at the date of the transaction. The effects of foreign currency
remeasurement are reported in current operations. The Company's consolidated
financial statements are also presented in United States dollars. Transactions
and balances denominated in United States dollars are presented in the
consolidated financial statements at their original amounts. Non-dollar
transactions and balances have been translated into United States dollars in
accordance with the principles set forth in SFAS No. 52 "Foreign Currency
Translation". The Company has not engaged in any significant hedging
activities
24
25
in the years up to and including 2000.
EFFECTIVE CORPORATE TAX RATE
The Company's effective tax rate was 5.3%, 12.8% and 14.4% in 1998,
1999 and 2000, respectively. These low tax rates were achieved due to the tax
holiday prescribed by the Company's Approved Enterprise status of its
production facilities in Israel.
The Company has been granted "Approved Enterprise" status by the
Israeli government for four investment plans. The Approved Enterprise status
allows for a tax holiday for a period of two to four years and a reduced
corporate tax rate of 10%-20% for an additional six to eight years on the
respective investment plans' proportionate share of taxable income. The tax
benefits under these investment plans are scheduled to gradually expire from
2004 to 2008. See Note 8b of Notes to the consolidated financial statements.
Almost all of the Company's Israeli income has been generated from its
Approved Enterprises. To date, almost all of the Company's sales of products
have been made from Israel. The Company's United States subsidiary, which
commenced operations in July 1995, operated pursuant to a cost plus agreement
with the Company through 1998 and has operated as a distributor since 1999.
The Company's United States subsidiary incurred income taxes of $1 million,
$2.5 million and $5.1 million in 1998, 1999 and 2000, respectively. See Note
8d of Notes to the consolidated financial statements. In addition, as the
Company expands its international operations, a portion of revenues generated
in foreign jurisdictions may be subject to taxation by such jurisdictions at
rates higher than those to which the Company is subject in Israel.
If the retained tax exempt income is distributed in a manner other
than in the complete liquidation of the Company, it would be taxed at the
corporate tax rate applicable to such profits as if the Company had not chosen
the alternative tax benefits and an income tax liability would be incurred of
approximately $80 million as of December 31, 2000.
EUROPEAN CURRENCY ISSUES
The Company is aware of the issues raised by the introduction of the
Single European Currency ("Euro") on January 1, 1999 and during the transition
period through January 1, 2002. The Company's internal systems that are
affected by the initial introduction of the Euro have been made Euro capable
without material system modification costs. Further internal systems changes
will be made during the balance of the transition phase in preparation for the
ultimate withdrawal of the legacy currencies in July 2002, and the costs of
these changes are not expected to be material. The Company does not presently
expect that introduction and use of the Euro will materially affect the
Company's foreign exchange and hedging activities, or the Company's use of
derivative instruments, or will result in any material increase in costs to
the Company. While Check Point will continue to evaluate the impact of the
Euro introduction over time, based on currently available information,
management does not believe that the introduction of the Euro will have a
material adverse impact on the Company's financial condition or overall trends
in results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily
from weak economic conditions in the markets in which the Company sells its
products and from changes in exchange rates and from changes in interest
rates. Other than forward exchange currency contracts described below which
are used for hedging cash flow in transactions which are not denominated in
U.S. Dollars, the Company does not use derivative financial instruments in its
investment portfolio.
FOREIGN CURRENCY RISK
Most of the Company's sales are denominated in US dollars. In
addition, a substantial portion of the Company's costs are incurred in
dollars. The Company's management believes that the dollar is the primary
currency of the economic environment in which the Company and its subsidiaries
operate, and thus the dollar is their functional and reporting currency.
Accordingly, monetary accounts maintained in currencies other than the dollar
(principally cash and cash equivalents, short-term deposits, marketable
securities, long-term investments and liabilities) are remeasured into US
dollars using the foreign exchange rate at the balance sheet date. Operational
accounts and non-monetary balance sheet accounts are measured and recorded at
the rate in effect at the date of the transaction. All transaction gains and
losses of the remeasurement of monetary
25
26
balance sheet items are reflected in the statement of income as financial
income or expenses, as appropriate.
The Company enters into foreign exchange forward contracts to minimize
the short-term impact of foreign currency fluctuations on assets denominated
in Japanese Yen. These contracts are highly inversely correlated to the hedge
items and are designated as, and considered effective as, hedges of the
underlying assets.
Gains and losses on the contracts are included in net financial
income, and offset foreign exchange gains and losses from the revaluation of
intercompany balances or other current assets and liabilities denominated in
currencies other than the functional currency of the reporting entity.
Company's management is of the opinion that, due to the fact that the
above transactions are carried out with well established institutions,
liabilities owing to the Company will be fulfilled as of December 31, 2000.
Total outstanding transactions to sell/purchase U.S. dollars in exchange for
the Japanese yen, were in the amount of $ 6,669,000. The above transactions
were for a period of 1.5 months. Gain and losses, which are included in the
financial statements for the year ended December 31, 2000, were insignificant.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment in marketable securities. The
Company's marketable securities comprise of Israeli Government debts and U.S.
corporate debts. The fair value of the Company's long and short-term
securities is based upon their market values as of December 31, 2000.
The table below presents principal amounts and related weighted average rates
by date of the maturity for the Company's Marketable Securities.
(In thousands U.S. Dollars)
-----------------------------------------------------------------------------------------
TOTAL FAIR
BOOK VALUE AT
MATURITY VALUE 12/31/2000
-----------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006
-----------------------------------------------------------------------------------------
INVESTMENT IN
MARKETABLE SECURITIES
-----------------------------------------------------------------------------------------
U.S. dollar linked
debt securities -
Changing Interest
Rate 15,694 6,312 11,486 1,144 34,636 35,529
-----------------------------------------------------------------------------------------
Weighted Average
Interest Rate* 5.90% 5.94% 6.77% 7.00%
-----------------------------------------------------------------------------------------
U.S. Corporate debts -
Fixed Interest Rate 55,519 41,935 38,498 23,550 42,900 14,549 216,951 216,977
-----------------------------------------------------------------------------------------
Weighted Average
Interest Rate 7.77% 7.11% 6.54% 7.12% 7.20% 6.55%
-----------------------------------------------------------------------------------------
U.S. Corporate debts -
Zero coupon 1,194 1,194 1,171
-----------------------------------------------------------------------------------------
o Based upon the Libor as of December 31, 2000
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The directors and executive officers of the Company as at December 31,
2000 are as follows:
NAME POSITION
---- --------
Gil Shwed (1)............................. President, Chief Executive Officer and
Chairman of the Board
Marius Nacht.............................. Senior Vice President, Director
Jerry Ungerman............................ Executive Vice President
Eyal Desheh............................... Chief Financial Officer
Shlomo Kramer............................. Founder, Director
Irwin Federman (1)(2)(3).................. Director
David Rubner.............................. Director
Ray Rothrock (1)(2)(3).................... Director
Alex Vieux................................ Director
Tal Shavit................................ Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Outside Director
Gil Shwed, a co-founder of the Company, has served as the Company's
President and Chief Executive Officer and as a director of the Company since
its inception in July 1993. In 2001, the position of President was transferred
from Mr. Shwed to Mr. Ungerman. From June 1992 until June 1993, Mr. Shwed
founded and served as a Software Manager for Heliogram, a software development
company. From May 1991 until June 1992, Mr. Shwed served as a Consultant and
Chief Developer at Graphics Arts, a division of Optrotech Ltd., an automated
optical imaging company. From February 1987 until February 1991, Mr. Shwed
served in the Israel Defense Forces. Additionally, from February 1991 to July
1993, Mr. Shwed served as a Consultant for E&M Computing, a Sun Microsystems
representative in Israel.
Marius Nacht, a co-founder of the Company, has served as the Company's
Senior Vice President since January 1, 1999. Mr. Nacht served as the Company's
Vice President of International Operations from September 1995 until December
1998, and from July 1993 to September 1995 Mr. Nacht served as a
Vice-President of the Company. Mr. Nacht has served as a director of the
Company since its inception in July 1993. In 2001, Mr. Nacht was appointed
Vice President of the Board. Mr. Nacht received a Masters degree in Electrical
Engineering and Communication Systems from Tel Aviv University, as well as a
B.S. in Physics and Mathematics from Hebrew University of Jerusalem.
Jerry Ungerman is Executive Vice President of the Company and has
global responsibility for sales, marketing, business development and technical
services. He has served in this position since November of 1998. In 2001, Mr.
Ungerman was appointed President of the Company. He began his career with IBM
in 1967 and from July 1971 to October 1998, Mr. Ungerman held a number of
senior management positions with Hitachi Data Systems Corp., a provider of
computer networking and data storage solutions for computing environments. Mr.
Ungerman holds a B.S.B. in business from the University of Minnesota and is on
the board of Serena Software.
Eyal Desheh, chief financial officer, joined the Company in May 2000.
Prior to this appointment, he served as chief financial officer for Scitex
Corporation Ltd., a world leader in digital imaging solutions for graphics
communications, where he was responsible for all the major finance functions,
investor relations, risk management, mergers and acquisitions and legal
affairs. Before joining Scitex, he served in numerous finance and business
development roles at Bezeq, The Israeli Telecommunications Corp. Ltd., Teva
Pharmaceuticals Ltd., H.L. Financial Services Ltd. and Bank Hapoalim. Mr.
Desheh holds a B.A. in Economics and an M.B.A in Finance both from Hebrew
University of Jerusalem.
Shlomo Kramer, a co-founder of the Company, served as the Company's
Executive Vice President from October 1996 until December 1998, and served as
Vice President of Product and Business Development from October 1995 to
October 1996. From July 1993 to October 1995, Mr. Kramer served as a Vice
President of the Company. Mr. Kramer has served as a director of the Company
since its inception in July 1993. Mr. Kramer received a Masters degree in
Computer Science from Hebrew University of Jerusalem as well as a B.S. in
Mathematics and Computer Science from Tel Aviv University.
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Irwin Federman has served as a director of the Company since November
1995. Mr. Federman has been a General Partner of U.S. Venture Partners, a
venture capital firm, since April 1990. From 1988 to 1990, he was a Managing
Director of Dillon Read & Co., an investment banking firm, and a general
partner in its venture capital affiliate, Concord Partners. Mr. Federman is a
director of Centillium Communications, Inc., Komag Incorporated, MMC Networks,
Inc., NeoMagic Inc., Netro Corporation, Nuance Communications, Inc.,
QuickLogic, Inc., SanDisk Corp., and a number of private companies. Mr.
Federman received a B.S. in Economics from Brooklyn College.
Ray Rothrock has served as a director of the Company since November
1995. Mr. Rothrock has been a member of Venrock Associates, a venture capital
firm, since 1988 and a General Partner of Venrock Associates since 1995. Mr.
Rothrock is also a director of USinternetworking, Fogdog Sports, Inc., and a
number of private companies. Mr. Rothrock received a B.S. in engineering from
Texas A&M University, an M.S. from the Massachusetts Institute of Technology
and an M.B.A. from the Harvard Business School.
David Rubner has served as a director of the Company since June 1999.
Mr. Rubner is chairman & chief executive officer of Rubner Technology Ventures
Ltd. Prior to starting this company, David Rubner served as president and
chief executive officer of ECI Telecommunications Ltd, Israel's largest
high-tech company. Prior to this appointment, he held the positions of chief
engineer, vice president of operations and executive vice president and
general manager of the telecommunications division. Mr. Rubner holds a B.S.
degree in engineering from Queen Mary College, University of London, and an
M.S. degree from Carnegie Mellon University. Mr. Rubner is a member of the
Presidium of the Electronics Industries Association and was a recipient of the
Industry Prize in 1995.
Alex Serge Vieux has served as a director of the Company since
September 1998. He is chief executive officer of DASAR Brothers, Inc., which
he founded in 1989, the owner of ETRE, the European Technology Roundtable
Exhibition. He is a member of the board of several public and private
technology companies in the United States (Saqqara, NextAge) and Europe (BVRP
Software, Cibox, Lernout & Hauspie, Oxydian, Keeboo), and has served as a
senior advisor to both government and industry. Mr. Vieux is currently a
visiting professor at the French University Paris Dauphine, where he is
teaching telecommunications in the United States. Mr. Vieux is a graduate of
the Institut d'Etudes Politiques in Paris and HEC. He also holds a law degree
from the Universite de Paris II-Assas and an M.B.A. from Stanford University,
where he was a Fullbright Scholar.
Dr. Tal Shavit became a director of the Company in June 2000. Dr. Shavit is an
organizational consultant who heads her own consulting firm, "Insight", which
she founded 12 years ago. Dr. Shavit specializes in consulting to global
high-tech companies, as well as venture capitalists and start-ups, on
international collaboration, mergers and acquisitions, and rapid
organizational growth. She also lectures at the Technion-Israel Institute of
Technology and the New York Polytechnic University on issues relating to
high-tech management.
BOARD COMPOSITION
The Company's Articles of Association provide for a Board consisting
of not less than 6 or more than 12 members. Each director (other than an
outside director, as explained below) is elected to serve until the next
annual general meeting of shareholders and until his or her successor has been
elected. Each officer is elected by and serves at the discretion of the Board
of Directors. Each of the Company's officers and directors, other than
nonemployee directors, devotes substantially full time to the affairs of the
Company. The Company's nonemployee directors devote such time to the affairs
of the Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers or key employees of the
Company.
The Articles of Association of the Company provide that any director
may, by written notice to the Company, appoint another person to serve as an
alternate director and may cancel such appointment. Any person, whether or not
already a director, may act as an alternate and the same person may act as the
alternate for several directors. An alternate has the number of votes
equivalent to the number of the directors who appointed him. The term of
appointment of an alternate director may be for one meeting of the Board or
for a specified period or until notice is given of the cancellation of the
appointment. To the Company's knowledge, no director currently intends to
appoint any other person as a substitute director, except if the director is
unable to attend a meeting of the Board.
The Company's Articles of Association provide that the Board of
Directors may delegate all of its powers to committees of the Board of
Directors, as it deems appropriate, subject to the provisions of Israeli law.
The Board of Directors has appointed a Compensation Committee and Audit
Committee.
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OUTSIDE AND INDEPENDENT DIRECTORS
In accordance with Israel's Companies Law and the regulations
promulgated under the Companies Law, the Company must have two outside
directors. The outside directors must meet certain statutory requirements of
independence. The term of office of an outside director is three years. An
outside director can be removed from office only under very limited
circumstances. Both of the outside directors must serve on the company's
statutory audit committee, and at least one outside director must serve on
each committee of the Board of Directors. The Company has appointed Irwin
Federman and Ray Rothrock as its outside directors under Israel's Companies
Law. In addition, the Nasdaq National Market requires at least three
independent directors, all of who are financially literate and one of whom has
accounting or related financial management expertise. The responsibilities of
the audit committee under the Nasdaq rules include evaluating the independence
of a company's outside auditors. Our current audit committee complies with the
Nasdaq rules.
AUDIT COMMITTEE
The Israeli Companies Law requires public companies to appoint an
audit committee. The responsibilities of the audit committee include
identifying irregularities in the management of the company's business and
approving related party transactions as required by law. An audit committee
must consist of at least three directors, including both of the outside
directors. The Chairman of the Board of Directors, any director employed by or
otherwise providing services to the company, and a controlling shareholder or
any relative of a controlling shareholder may not be a member of the audit
committee. An audit committee may not approve an action or a transaction with
a controlling shareholder, or with an office holder, unless at the time of
approval two outside directors are serving as members of the audit committee
and at least one of the outside directors was present at the meeting in which
an approval was granted. In addition, the Nasdaq National Market requires the
Company to establish an audit committee, at least a majority of whose members
are independent of management. The Company's Board of Directors has appointed
an audit committee that satisfies both the Israeli law and the Nasdaq National
Market requirements.
APPROVAL OF CERTAIN TRANSACTIONS; OBLIGATIONS OF DIRECTORS, OFFICERS AND
SHAREHOLDERS
The Israeli Companies Law codifies the fiduciary duties that office
holders, including directors and executive officers, owe to a company. An
office holder's fiduciary duties consist of a duty of care and a duty of
loyalty. The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and such person's personal
affairs, avoiding any competition with the company, avoiding exploiting any
corporate opportunity of the company in order to receive personal advantage
for such person or others, and revealing to the company any information or
documents relating to the company's affairs which the office holder has
received due to his or her position as an office holder. Each person listed in
the table that appears above at the beginning of this Item 10 is an office
holder.
Under the Israeli Companies Law, all arrangements as to compensation
of office holders who are not directors require approval of the Board of
Directors unless the Articles of Association provide otherwise. Arrangements
regarding the compensation of directors also require audit committee and
shareholder approval. The Israeli 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. In addition, if the
transaction is an extraordinary transaction, the office holder must also
disclose any personal interest held by the office holder's spouse, siblings,
parents, grandparents, descendants, spouse's descendants and the spouses of
any of the foregoing, or by any corporation in which the office holder is a
five percent 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. An extraordinary transaction is defined as a transaction not in the
ordinary course of business, a transaction that is not on market terms, or a
transaction that is likely to have a material impact on the company's
profitability, assets or liabilities.
In the case of a transaction that is not an extraordinary transaction,
after the office holder complies with the above disclosure requirements, only
Board approval is required unless the Articles of Association of the company
provide otherwise. Such approval must determine that the transaction is not
adverse to the company's interest. If the transaction is an extraordinary
transaction, then in addition to any approval required by the Articles of
Association, it also must be approved by the audit committee and by the Board
and, under specified circumstances, by a meeting of the shareholders. An
Israeli company whose shares are publicly traded shall not be entitled to
approve such a transaction unless, at the time the approval was granted, two
members of the audit committee were outside directors and at least one of them
was present at the meeting at which the audit committee decided to grant the
approval. An office holder who has a personal interest in a matter that is
considered at a meeting of the Board of Directors or the audit committee
generally may not be present at this meeting or vote on this matter.
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The Israeli Companies Law applies the same disclosure requirements to
a controlling shareholder of a public company, which includes a shareholder
that holds 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights in the company. Extraordinary transactions with
a controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the Board of
Directors and the shareholders of the company. The shareholder approval must
either include at least one-third of the disinterested shareholders who are
present, in person or by proxy, at the meeting or, alternatively, the total
shareholdings of the disinterested shareholders who vote against the
transaction must not represent more than one percent of the voting rights in
the company.
Under the Israeli Companies Law, a shareholder has a duty to act in
good faith towards the company and other shareholders and refrain from abusing
his or her power in the company, including, among other things, voting in the
general meeting of shareholders on the following matters:
- any amendment to the Articles of Association;
- an increase of the company's authorized share capital;
- a merger; or
- approval of interested party transactions that require shareholder
approval.
In addition, any controlling shareholder, any shareholder who can determine
the outcome of a shareholder vote and any shareholder who, under the company's
Articles of Association, can appoint or prevent the appointment of an office
holder, is under a duty to act with fairness towards the company. The Israeli
Companies Law does not describe the substance of this duty.
INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY
Israeli law permits a company to insure an office holder in respect of
liabilities incurred by him or her as a result of the breach of his or her
duty of care to the company or to another person, or as a result of the breach
of his or her fiduciary duty to the company, to the extent that he or she
acted in good faith and had reasonable cause to believe that the act would not
prejudice the company. A company can also insure an office holder for monetary
liabilities as a result of an act or omission that he or she committed in
connection with his or her serving as an office holder. Moreover, a company
can indemnify an office holder for (a) monetary liability imposed upon him or
her in favor of other persons pursuant to a court judgment, including a
compromise judgment or an arbitrator's decision approved by a court, and (b)
reasonable litigation expenses, including attorneys' fees, actually incurred
by him or her or imposed upon him or her by a court, in an action, suit or
proceeding brought against him or her by or on behalf of the company or other
persons, or in connection with a criminal action which does not require
criminal intent in which he or she was convicted, in each case in connection
with his or her activities as an office holder. The Company's Articles of
Association allow for insurance and indemnification of office holders to the
fullest extent permitted by law, provided such insurance or indemnification is
approved by the audit committee. The Company has acquired directors' and
officers' liability insurance covering the officers and directors of the
Company and its subsidiaries for certain claims.
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate direct remuneration paid to all 10 persons as a group
who served in the capacity of director or executive officer during the year
ended December 31, 2000 was $1,348,164. In addition, the Company set aside
$92,715 for pension and disability insurance for certain executive officers.
This does not include amounts expended by the Company for automobiles made
available to its officers, expenses (including business travel, professional
and business association dues and expenses) reimbursed to officers and other
fringe benefits commonly reimbursed or paid by companies in Israel. The
Company's directors who are also officers will not receive any compensation
for serving in their capacity in 2001; the Company's directors who are not
also officers may receive compensation in 2001.
STOCK OPTIONS
Israel Stock Option Plan
The Company's 1996 Israel Stock Option Plan (the "1996 Israel Plan")
was adopted by the Board of Directors on April 12, 1996. The number of
Ordinary shares authorized for issuance under the 1996 plan is 56,760,000. As
of May 31, 2001, 8,567,203 shares had been issued under the 1996 Israel Plan,
18,144,055 options to purchase Ordinary shares were outstanding (including
options incorporated from previous grants to employees in Israel prior to the
adoption of the
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31
1996 Israel Plan) and 30,048,742 shares remained available for future grant.
The exercise prices range between $0.002 and $86.54. As of May 31, 2001, the
Company's officers and directors hold options to purchase an aggregate of
8,321,500 shares under all the Company's stock option plans.
The 1996 Israel Plan is administered by the Board of Directors, which
has broad discretion, subject to certain limitations, to determine the persons
entitled to receive options, the terms and conditions on which options are
granted and the number of shares subject to each grant. Pursuant to Section
102 of the Israel Income Tax Ordinance, grantees that receive options under
the 1996 Israel Plan (excluding grantees who previously received options that
were incorporated upon the adoption of the 1996 Israel Plan, and those who are
not employees of the Company) are afforded certain tax benefits. In order to
qualify for these benefits, the options are registered in the name of the
Trust Company of Israel General Bank, as trustee (the "Trustee") for each of
the employees who is granted options. Each option, and any Ordinary shares
acquired upon the exercise of the option, must be held by the Trustee until
the expiration of two years from the date of the grant of the option. The 1996
Israel Plan provides for the options granted under the Plan to have a maximum
exercise period of seven years from the date of grant, and for tax-qualified
options to become exercisable in equal installments on the second, third,
fourth and fifth anniversaries of the date of grant. Options that are not
tax-qualified options may become exercisable beginning one year from the date
of grant. Options that are not exercised will become available for further
grant by the Board under the 1996 Israel Plan.
United States Stock Option Plan
The Company's 1996 United States Stock Option Plan (the "1996 Plan")
was adopted by the Board of Directors on April 12, 1996, and was approved by
the shareholders as the successor to the Company's 1995 Stock Option Plan (the
"1995 Plan"). The number of Ordinary shares authorized for issuance under the
1996 Plan is 78,240,000. As of May 31, 2001, 31,867,570 Ordinary shares have
been issued under the U.S. plan, options to purchase 9,632,806 shares were
outstanding (including options incorporated from the 1995 Plan) and 36,739,624
shares remained available for future grant. Ordinary shares subject to
outstanding options, including options granted under the 1995 Plan, which
expire or terminate prior to exercise, will be available for future issuance
under the 1996 Plan.
Under the 1996 Plan, employees (including officers) and independent
consultants may, at the discretion of the plan administrator, be granted
options to purchase Ordinary shares at an exercise price not less than 85% of
the fair market value of such shares on the grant date (the Company does not
intend to issue options at an exercise price of less than fair market value).
Non-employee members of the Board of Directors will be eligible solely for
automatic option grants under the 1996 Plan.
The 1996 Plan is administered by the Compensation Committee of the
Board. The Compensation Committee has complete discretion to determine which
eligible individuals are to receive option grants, the number of shares
subject to each such grant, the status of any granted option as either an
incentive option or a non-statutory option under the Federal tax laws, the
vesting schedule to be in effect for each option grant and the maximum term
for which each granted option is to remain outstanding. In no event, however,
may any one participant in the 1996 Plan acquire Ordinary shares under the
1996 Plan in excess of 3,000,000 shares, exclusive of any option grants
received prior to January 1, 1996.
The exercise price for options granted under the 1996 Plan may be paid
in cash. Options may also be exercised on a cashless basis through the
same-day sale of the purchased shares. The Compensation Committee may also
permit the optionee to pay the exercise price through a promissory note
payable in installments over a period of years. The amount financed may
include any Federal or state income and employment taxes incurred by reason of
the option exercise.
The Compensation Committee has the authority to effect, from time to
time, the cancellation of outstanding options under the 1996 Plan in return
for the grant of new options for the same or a different number of option
shares with an exercise price per share based upon the fair market value of
the Ordinary shares on the new grant date.
In the event the Company is acquired by merger, consolidation or asset
sale, the Ordinary shares subject to each option outstanding at the time under
the 1996 Plan will terminate to the extent not assumed by the acquiring
entity. The Compensation Committee also has discretion to provide for the
acceleration of one or more outstanding options under the 1996 Plan and the
vesting of shares subject to outstanding options upon the occurrence of
certain hostile tender offers.
Under the automatic grant program each individual who first joins the
Board as a non-employee director on or after the effective date of the 1996
plan will receive at that time, an automatic option grant for 30,000 Ordinary
shares. In addition, at each annual shareholders meeting, beginning in 1997,
each non-employee director will automatically be granted at that meeting,
whether or not he or she is standing for reelection at that particular
meeting, a stock option to
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purchase 11,250 Ordinary shares, provided such individual has served on the
Board for at least six months prior to such meeting. Each option will have an
exercise price equal to the fair market value of the Ordinary shares on the
automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The option
will become exercisable in a series of four annual installments over the
optionee's period of Board service, beginning one year from the grant date.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan
will terminate on April 11, 2006, unless terminated sooner by the Board.
EMPLOYEE STOCK PURCHASE PLAN
On November 24, 1996, the Company adopted an Employee Stock Purchase
Plan (the "Purchase Plan") which was ratified by the Company's Shareholders. A
total of 6,000,000 Ordinary shares were authorized for issuance under the
Purchase Plan. As of May 31, 2001 a total of 714,696 Ordinary shares have been
issued under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, is implemented by
six-month offerings with purchases occurring at six-month intervals in
February and July. The Purchase Plan is administered by the Compensation
Committee of the Board. Employees of the Company's subsidiaries are eligible
to participate if they are employed for more than 20 hours per week. The
Purchase Plan permits eligible employees to purchase Ordinary shares through
payroll deductions, which may not exceed 15% of an employee's compensation,
nor more than 1,875 shares per participant on any purchase date. The price of
the Ordinary shares purchased under the Purchase Plan will be 85% of the lower
of the fair market value of the Ordinary shares at the beginning of the
six-month offering period or on the semi-annual purchase date. Employees may
end their participation in the Purchase Plan at any time during the offering
period, and participation ends automatically on termination of employment with
the Company. Each outstanding purchase right will be exercised immediately
prior to a merger or consolidation. The Board may amend or terminate the
Purchase Plan immediately after the close of any purchase date. However, the
Board may not, without shareholder approval, materially increase the number of
Ordinary shares available for issuance, alter the purchase price formula so as
to reduce the purchase price payable for Ordinary shares, or materially modify
the eligibility requirements for participation or the benefits available to
participants. The Purchase Plan will in all events terminate in July 2006.
CHANGE OF CONTROL ARRANGEMENTS
The Compensation Committee of the Board of Directors, as administrator
of the 1996 Plan, has the authority to provide for accelerated vesting of the
Ordinary shares subject to outstanding options held by the executive officers
in connection with certain changes in control of the Company or the subsequent
termination of the officer's employment following the change in control event.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information regarding ownership
of the Company's Ordinary shares as of May 31, 2001 for (i) each person who is
known by the Company to own beneficially more than five percent of the
Company's outstanding Ordinary shares, (ii) each of the Company's directors,
(iii) each of the Company's executive officers, and (iv) all current executive
officers and directors as a group.
NAME OF TEN PERCENT PERCENTAGE OF
SHAREHOLDERS, OFFICERS AND DIRECTORS AMOUNT OWNED CLASS
------------------------------------ ------------ -----
Gil Shwed........................... 27,948,996 11.63%
Marius Nacht........................ 26,501,796 11.03%
All directors & executive officers
as a group (ten persons including
Gil Shwed and Marius Nacht)....... 70,825,401 29.47%
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The Company is not directly or indirectly controlled by another corporation or
by any foreign government.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Our financial statements set forth in the accompanying index to
Consolidated Financial Statements included in this Annual Report on Form 20-F
beginning on page F-1 are hereby incorporated into this Annual Report by
reference.
LEGAL PROCEEDINGS
On July 5, 1996, Checkpoint Systems, Inc. ("CSI") a manufacturer of
theft prevention devices for retail stores, filed an action alleging trademark
infringement and unfair competition against the Company in the United States
District Court for the District of New Jersey. CSI seeks to enjoin the Company
from using the "Check Point" name in connection with the Company's products
and services. The trial court dismissed CSI's claim for damages on summary
judgment. The trial was conducted in November, 1999. The District Court issued
its opinion in Check Point's favor on July 12, 2000. CSI has filed it's
appellant's brief alleging that the District Court misapplied the governing
law. On April 5th 2001, oral argument was presented to the Appellate court.
The matter has been taken under advisement. The Company is unable to predict
the outcome of this litigation or the total expenses that the Company would
incur if CSI is granted the relief that it is seeking. In the event that CSI
is granted the full injunctive relief it is seeking and the Company is
required to cease using the "Check Point" name in connection with its products
and services, the Company may incur material expenses in launching a new name.
On June 20th 2001, the European Commission advised the Company that it
had received a complaint filed by Stonesoft Corporation alleging certain anti
competitive actions by the Company. Up till June 25th 2001, the Company had not
yet received a copy of the complaint. The Company intends to cooperate with
the European Commission and take all necessary steps to defend its interests.
ITEM 9. THE OFFER AND LISTING
The Company's Ordinary shares have traded publicly on the Nasdaq
National Market under the symbol "CHKP" since March 3, 1999. From June 28,
1996 to March 2, 1999, the Company's Ordinary shares were traded publicly on
the Nasdaq National Market under the symbol "CHKPF". The Company's Ordinary
shares trade publicly only on the Nasdaq National Market.
On December 20, 1999, the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend effective January 31, 2000. On
June 29, 2000 the Company's Board of Directors approved a two-for-one stock
split in the form of a stock dividend effective July 25, 2000. On January 18,
2001, the Company's Board of Directors approved a three-for-two stock split in
the form of a stock dividend effective February 12, 2001. All numbers below
reflect this adjustment.
The annual high and low reported sale prices for the ordinary shares
were $113.33 and $30.54, respectively for the year 2000, $34.85 and $4.46
respectively for the year 1999, $7.96 and $2.17 respectively for the year
1998, and $17.00 and $5.42 respectively for 1997.
The following table lists the high and low closing sale prices for the
Company's Ordinary shares for the periods indicated as reported by the Nasdaq
National Market:
1999 HIGH LOW
----
First Quarter................................................. 9.25 5.77
Second Quarter ............................................... 9.15 4.46
Third Quarter................................................. 15.60 9.09
Fourth Quarter................................................ 34.85 13.83
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2000
----
First Quarter.............................................................. 93.29 30.54
Second Quarter............................................................. 77.90 44.96
Third Quarter.............................................................. 106.83 70.19
Fourth Quarter............................................................. 113.33 68.42
MOST RECENT SIX MONTHS
----------------------
May 2001................................................................... 69.64 53.86
April 2001................................................................. 80.01 41.38
March 2001................................................................. 71.31 45.31
February 2001.............................................................. 104.13 64.13
January 2001............................................................... 110.58 73.67
December 2000.............................................................. 105.92 69.88
On June 18, 2001, the last reported sale price of the Company's
Ordinary shares on the Nasdaq National Market was $43.04 per share. According
to the Company's transfer agent, as of June 16, 2001, there were approximately
209 holders of record of the Company's Ordinary Shares. Approximately 94% of
the Company's Ordinary shares were held in the United States by approximately
197 holders of record.
ITEM 10. ADDITIONAL INFORMATION
ARTICLES OF ASSOCIATION
The following is a summary of the material provisions of our Articles
of Association and related provisions of Israeli corporate law. This summary
is qualified in its entirety by reference to the complete text of the Articles
of Association; see "Item 19, Exhibit 2.5".
DESCRIPTION OF SHARES
The company's authorized share capital consists of 500,000,000
Ordinary Shares, NIS 0.01 nominal value, 5,000,000 Preferred Shares, NIS 0.01
nominal value, and 10 Deferred Shares, NIS 1 nominal value. The Deferred
Shares are not entitled to any rights other than the right to receive their
nominal value upon liquidation of the Company.
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding Ordinary Shares of the Company are validly
issued, fully paid and non-assessable. The Ordinary Shares do not have
pre-emptive rights. Neither the Memorandum of Association nor Articles of
Association of the Company nor the laws of the State of Israel restrict in any
way the ownership or voting of Ordinary Shares by non-residents of Israel,
except with respect to subjects of counties which are at a state of war with
Israel.
DIVIDEND AND LIQUIDATION RIGHTS. Subject to the rights of the holders
of shares with preferential or other special rights which may be authorized in
the future, holders of Ordinary Shares are entitled to receive dividends out
of assets legally available therefore, and in the event of the winding up of
the Company to share ratably in all assets remaining after payment of
liabilities, subject to applicable law.
VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS. Holders of Ordinary
Shares have one vote for each Ordinary Share held on all matters submitted to
a vote of shareholders. Such voting rights may be affected by the grant of any
special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
An annual general meeting is to be held once every calendar year at
such time (within a period of not more than 15 months after the last preceding
annual general meeting) and at such place, either within or out of the State
of Israel, as may be determined by the Board of Directors. The quorum required
for a general meeting of shareholders consists of at least two shareholders
present in person or by proxy and holding, or representing, more than 50% of
the voting rights of the issued share capital. A meeting adjourned for lack of
quorum shall be adjourned to the same day in the next week at the same time
and place, or to such time and place as the chairman may determine with the
consent of the holders of a majority of the voting power represented at the
meeting in person or by proxy and voting on the question of adjournment. If at
such
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reconvened meeting a quorum is not present within one half hour from the time
appointed for holding the meeting, any two shareholders present in person or
by proxy will constitute a quorum, regardless of the number of shares
represented.
An ordinary resolution (such as resolution for the election of
directors and the appointment of auditors) shall be deemed adopted if approved
by the holders of a majority of the voting power represented at the meeting,
in person or by proxy, and voting thereon. A special or extraordinary
resolution (such as a resolution amending the Memorandum of Association or
Articles of Association) shall be deemed adopted if approved by the holders of
not less than 75% of the voting power represented in person or by proxy at the
meeting and voting thereon.
Israel's Companies Law requires that certain transactions, actions and
arrangements be approved by the shareholders. Such transactions, actions and
arrangements include: (i) arrangements with a director as to the term of
office or compensation; (ii) certain extraordinary transactions as defined in
the Companies Law); and (iii) any action or extraordinary transaction
involving a director or officer in which a majority of the Board or the
statutory audit committee has a personal interest. See "Item 10. Directors and
Executive Officers of the Registrant - Approval of Certain Transactions;
Obligations of Directors, Officers and Shareholders."
TRANSFER OF SHARES AND NOTICES. Fully paid Ordinary Shares are issued
in registered form and may be transferred freely. Each shareholder of record
is entitled to receive at least 21 days' prior notice of shareholder meetings.
For purposes of determining the shareholders entitled to notice and to vote at
such meeting, the Board of Directors may fix the record date which shall be
not more than 40 nor less than 4 days prior to the date of the meeting.
ELECTION OF DIRECTORS. The Ordinary Shares do not have cumulative
voting rights in the election of directors. Thus, the holders of Ordinary
Shares conferring more than 50% of the voting power have the power to elect
all the directors, to the exclusion of the remaining shareholders.
TRANSFER AGENT AND REGISTRAR. American Stock Transfer & Trust Company
is the Transfer Agent and Registrar for the Ordinary Shares.
DESCRIPTION OF PREFERRED SHARES
The Company has 5,000,000 Preferred Shares authorized. The Board of
Directors has the authority to issue the Preferred Shares in one or more
series and to fix the rights, preferences, privileges and restrictions of such
shares, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series, without further vote or action
by the shareholders. The issuance of Preferred Shares may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders. For example, the Board of Directors could
issue Preferred Shares with voting and conversion rights may adversely affect
the voting power of the holders of Ordinary shares, including the loss of
voting control to others. The Company currently has no plans to issue any
Preferred Shares.
PROVISIONS AFFECTING A POTENTIAL CHANGE OF CONTROL
The Company's Articles of Association provide that the Company may not
engage in any business combination with an interested shareholder for a period
of three years following the date that such shareholder became an interested
shareholder, unless: (a) prior to such date, the Board of Directors approved
either the business combination or the transaction that resulted in the
shareholder's becoming an interested shareholder; or (b) upon consummation of
the transaction that resulted in the shareholder's becoming an interested
shareholder, the interested shareholder owned at least 75% of the voting
shares of the Company outstanding at the time the transaction commenced. A
business combination includes: (i) any merger or consolidation involving the
Company and the interested shareholder: (ii) any sale, transfer, pledge or
other disposition of 10% or more of the assets of the Company, in a
transaction involving the interested shareholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
Company of any shares of the Company to the interested shareholder, (iv) any
transaction involving the Company that has an effect of increasing the
proportionate share of the shares of any class or series of the Company of the
Company beneficially owned by the interested shareholder, or (v) the receipt
by the interested shareholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
Company. In general, the Articles of Association define an interested
shareholder as any entity or person beneficially owning 15% or more of the
outstanding voting shares of the Company and any entity or person affiliated
with, or more of the outstanding voting shares of the Company and any entity
or person affiliated with, controlling or controlled by such entity or person.
REGISTRATION RIGHTS
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The holders of approximately 5,500,000 Ordinary Shares (the
"Registrable Securities") have certain "piggy-back" rights to register those
shares under the Securities Act.
INDEMNIFICATION
The Articles of Association of the Company allow the Company to
procure insurance for or indemnify any director or officer to the fullest
extent permitted by Israeli law. The Company has acquired directors' and
officers' liability insurance covering the officers and directors of the
Company and its subsidiaries for certain claims.
ISRAELI TAXATION, FOREIGN EXCHANGE REGULATION AND INVESTMENT PROGRAMS
The following is a summary of the material aspects of the current tax
structure applicable to the Company and its shareholders, including U.S. and
other non-Israeli shareholders. The following also contains a discussion of
certain Israeli and United States tax consequences and certain Israeli
government programs benefiting the Company. To the extent that the discussion
is based on new tax legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax authorities in
question. The discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax
considerations.
ISRAELI TAX CONSIDERATIONS
Proposed Tax Reform
On May 4, 2000, a committee chaired by the then Director General of
the Israeli Ministry of Finance, Avi Ben-Bassat, issued a report recommending
a sweeping reform in the Israeli system of taxation. The proposed reform would
significantly alter the taxation of individuals, and would also affect
corporate taxation. In particular, the proposed reform would reduce, but not
eliminate, the tax benefits available to approved enterprises such as the
Company's. The proposed reform would also impose a capital gains tax on
individuals on the sale of shares, unless the selling shareholder is entitled
to benefits under a tax treaty. The Israeli cabinet has approved the
recommendations in principle, but implementation of the reform requires
legislation by Israel's Knesset. In the interim, a new Israeli government has
been formed, and there are indications that the new government may eliminate
significant aspects of the proposed reform. The Company cannot be certain
whether the proposed reform will be adopted, when it will be adopted or what
form any reform will ultimately take.
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax at the rate
of 36% of their taxable income. However in the Company's case, the rate is
currently effectively reduced, as described below.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959
The Company's facilities have been granted Approved Enterprise status
pursuant to the Law for the Encouragement of Capital Investments, 1959 (the
"Investment Law"), which provides certain tax and financial benefits to
investment programs that have been granted such status.
The Investment Law provides that a proposed capital investment in
eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Commerce of the State of Israel, be designated as an
approved enterprise. Each certificate of approval for an approved enterprise
relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics,
e.g., the equipment to be purchased and utilized pursuant to the program. The
tax benefits derived from any such certificate of approval relate only to
taxable income attributable to the specific approved enterprise. If a company
has more than one approval or only a portion of its capital investments are
approved, its effective tax rate is the result of a weighted combination of
the applicable rates. Income derived from activity that is not integral to the
activity of the enterprise should not be divided between the different
enterprises and should not enjoy tax benefits.
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Taxable income of a company derived from an approved enterprise is
subject to company tax at the maximum rate of 25%, rather than 36%, for the
benefit period. This period is ordinarily seven years commencing with the year
in which the approved enterprise first generates taxable income, and is
limited to 12 years from completion of the investment under the approved plan
or 14 years from the date of approval, whichever is earlier. The Investment
Law also provides that a company that has an approved enterprise is entitled
to accelerated depreciation on its property and equipment that are included in
an approved investment program.
A Foreign Investors Company ("FIC") as described in the law of
encouragement of capital investment may enjoy benefits for a period of up to
10 years, or 12 years if it complies with certain export criteria stipulated
in the law. A FIC is a company of which more than 25% of its shareholders are
foreign residents.
A company owning an approved enterprise may elect to receive an
alternative package of benefits. Under the alternative package, a company's
undistributed income derived from an approved enterprise will be exempt from
company tax for a period of between two and ten years from the first year of
taxable income, depending on the geographic location of the approved
enterprise within Israel, and such company will be eligible for a reduced tax
rate for the remainder of the benefits period.
The Company has been granted "Approved Enterprise" status by the
Israeli government for four investment plans. The Approved Enterprise status
allows for a tax holiday for a period of two to four years and a reduced
corporate tax rate of 10%-25% for an additional six to eight years on the
respective investment plans' proportionate share of taxable income. The tax
benefits under these investment plans are scheduled to gradually expire from
2004 to 2008. The dividend recipient is taxed at the reduced rate applicable
to dividends from approved enterprises (15%), if the dividend is distributed
during the tax exemption period or within 12 years thereafter. Tax must be
withheld at source, regardless of whether the dividend is converted into
foreign currency. If classified as a FIC there is no limit on the period
during which a dividend may be distributed from approved enterprise profits
and will always enjoy the benefits of the law.
Subject to certain provisions concerning income under the alternative
package of benefits, all dividends are considered to be attributable to the
entire enterprise and their effective tax rate is the result of a weighted
combination of the various applicable tax rates. The Company is not obliged to
distribute exempt retained profits under the alternative package of benefits,
and may generally decide from which year's profits to declare dividends. The
Company currently intends to reinvest the amount of its tax-exempt income and
not to distribute such income as a dividend.
The Investment Center bases its decision as to whether or not to
approve an application, on the criteria set forth in the Investment Law and
regulations, the then prevailing policy of the Investment Center, and the
specific objectives and financial criteria of the applicant. Accordingly,
there can be no assurance that any such application will be approved. In
addition, the benefits available to an approved enterprise are conditional
upon the fulfillment of conditions stipulated in the Investment Law and its
regulations and the criteria set forth in the specific certificate of
approval, as described above. In the event that a company does not meet these
conditions, it would be required to refund the amount of tax benefits, with
the addition of the consumer price index linkage adjustment and interest.
The Company has derived, and expects to continue to derive, a
substantial portion of its income from its Approved Enterprise facilities.
Subject to compliance with applicable requirements, income derived from its
Approved Enterprise facility will be tax exempt for a period of two to four
years and after will be subject to a reduced company tax of up to 25%
depending on the extent of foreign shareholders holding the Company's ordinary
shares for the following three to eight years.
Grants Under the Law for the Encouragement of Industrial Research and
Development, 1984
Under the Law for the Encouragement of Industrial Research and
Development, 1984, research and development programs that meet certain
criteria and are approved by a governmental committee of the Office of the
Chief Scientist, or the OCS, are eligible for grants of up to 50% of the
project's expenditure, as determined by the research committee, in return for
the payment of royalties from the sale of the product developed in accordance
with the program and subject to other conditions. Regulations promulgated
under the Research Law generally provide for the payment of royalties to the
Chief Scientist ranging from 3% to 5%, on revenues from products developed
using such grants until 100- 150% of the dollar-linked grant is repaid.
The technology developed pursuant to the terms of these grants may not
be transferred to third parties without the prior approval of a governmental
committee under the Research Law. Such approval is not required for the export
of any products resulting from such research or development. Approval of the
transfer of technology may be granted in certain
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circumstances only if the recipient abides by all the provisions of the
Research Law and regulations promulgated thereunder, including the
restrictions on the transfer of know-how and the obligation to pay royalties
in an amount that may be increased. There can be no assurance that such
consent, if requested, will be granted.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in
the year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the expenditures are approved
by the relevant Israeli government Ministry, determined by the field of
research, the research and development is for the promotion of the enterprise
and is carried out by or on behalf of the company seeking such deduction.
Expenditures not so approved are deductible over a three-year period. However,
expenditures from proceeds made available to the Company through government
grants are not deductible, according to Israeli law.
Tax Benefits Under the Law for the Encouragement of Industry (Taxation), 1969
According to the Law for the Encouragement of Industry (Taxation),
1969, or the Industry Encouragement Law, an "Industrial Company" is a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from certain government
loans, capital gains, interest and dividends, is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined as an
enterprise whose major activity in a given tax year is industrial production
activity. The Company currently qualifies as an "Industrial Company" within
the definition of the Industry Encouragement Law. Under the Industry
Encouragement Law, Industrial Companies are entitled to certain preferred
corporate tax benefits such as:
- Deduction of public offering expenses
- Deduction of purchases of know-how and patents utilized in the
development or advancement of their enterprise, over an eight-year
period for tax purposes;
- Accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. No
assurance can be given that the Company will continue to qualify as an
"Industrial Company" or that the benefits described above will be available in
the future.
Special Provisions Relating to Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally
referred to as the "Inflationary Adjustments Law," represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is highly
complex. The material aspects to the Company can be described as follows:
There is a special tax adjustment for the preservation of equity
whereby certain corporate assets are classified broadly into fixed, inflation
resistant, assets and non-fixed (soft) assets. Where a company's equity, as
defined in law, exceeds the depreciated cost of fixed assets, a deduction from
taxable income that takes into account the effect of the applicable annual
rate of inflation on such excess is allowed, up to a ceiling of 70% of taxable
income in any single tax year, with the unused portion permitted to be carried
forward on a linked basis. If the depreciated cost of fixed assets exceeds a
company's equity, then such excess multiplied by the applicable annual rate of
inflation is added to taxable income.
Subject to certain limitations, depreciation deductions on fixed
assets and losses carried forward are adjusted for inflation based on the
increase in the Israeli consumer price index.
Gains on certain traded securities, which are normally exempt from
tax, are taxable in certain circumstances. However, dealers in securities are
subject to the regular tax rules applicable to business income in Israel. One
of the net effects of the Inflationary Adjustments Law is that our taxable
income for Israeli corporate tax purposes will be different from our dollar
income reflected in our financial statements, which are based on changes in
the shekel exchange rate with respect to the dollar.
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Capital Gains Tax on Sales of Ordinary Shares
Israeli law imposes a capital gains tax on the sale of capital assets.
The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain that is equivalent
to the increase of the relevant asset's reduced 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. The inflationary surplus
accumulated from and after December 31, 1993, is exempt from any capital gains
tax in Israel while the real gain is added to ordinary income, which is taxed
at ordinary rates of 30% to 50% for individuals and 36% for corporations.
Pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended, the sale, exchange or disposition of Ordinary shares by a person who
qualifies as a resident of the United States within the meaning of the United
States-Israel Tax Treaty and who is entitled to claim the benefits afforded to
such person by the United States- Israel Tax Treaty generally will not be
subject to the Israeli capital gains tax unless such Treaty United States
Resident holds, directly or indirectly, shares representing 10% or more of the
Company's voting power during any part of the 12- month period preceding such
sale, exchange or disposition, subject to certain conditions. A sale, exchange
or disposition of ordinary shares by a Treaty United States Resident who
holds, directly or indirectly, shares representing 10% or more of the
Company's voting power at any time during such preceding 12-month period would
be subject to such Israeli tax, to the extent applicable; however, under the
United States-Israel Tax Treaty, such Treaty United States Resident would be
permitted to claim a credit for such taxes against the United States federal
income tax imposed with respect to such sale, exchange or disposition, subject
to the limitations in United States laws applicable to foreign tax credits.
The United States-Israel Tax Treaty does not relate to United States state or
local taxes.
Taxation of Non-Resident Holders of Ordinary Shares
Non-residents of Israel are subject to Israeli income tax on income
accrued or derived from sources in Israel. Such 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, stock dividends, income tax at the rate of
25%, 12.5% for dividends not generated by an approved enterprise if the
non-resident is a United States corporation and holds 10% or more of the
Company's voting power throughout a certain period, and 15% for dividends
generated by an approved enterprise, is withheld at source, unless a different
rate is provided in a treaty between Israel and the shareholder's country of
residence. Under the United States- Israel Tax Treaty, the maximum tax on
dividends paid to a holder of ordinary shares who is a Treaty United States
Resident will be 25%, however, under the Investment Law, dividends generated
by an approved enterprise are taxed at the rate of 15%.
Under a recent amendment to the Inflationary Adjustments Law, non-Israeli
corporations might be subject to Israeli taxes on the sale of traded
securities in an Israeli company, subject to the provisions of any applicable
double taxation treaty.
Foreign Exchange Regulations
Dividends, if any, paid to the holders of the ordinary shares offered hereby,
and any amounts payable upon dissolution, liquidation or winding up, as well
as the proceeds of any sale in Israel of the ordinary shares to an Israeli
resident, may be paid in non-Israeli currency or, if paid in Israeli currency,
may be converted into freely repatriable dollars at the rate of exchange
prevailing at the time of conversion.
UNITED STATES FEDERAL INCOME TAXES
The following summary sets forth the material United States federal
income tax consequences that may be applicable to the following persons who
invest in the Ordinary shares and hold such Ordinary shares as capital assets
("U.S. Shareholders"): (i) citizens or residents (as defined for U.S. federal
income tax purposes) of the United States, (ii) corporations or other entities
created or organized in or under the laws of the United States or any state
thereof and (iii) estates or trusts the income of which is subject to United
States federal income taxation regardless of its source. This discussion is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), United States Treasury Regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as in effect as of
the date of this Prospectus. This discussion does not consider (a) all aspects
of U.S. federal income taxation that may be relevant to particular U.S.
Shareholders by reason of their particular circumstances (including potential
application of the alternative minimum tax), (b) U.S.
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Shareholders subject to special treatment under the U.S. federal income tax
laws, such as financial institutions, insurance companies, broker-dealers and
tax-exempt organizations, or foreign individuals or entities, (c) U.S.
Shareholders owning directly or by attribution 10% or more of the Company's
outstanding voting shares or (d) any aspect of state, local or non-United
States tax laws.
THE FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF AN INVESTOR'S
INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN
INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE,
LOCAL OR FOREIGN TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Dividends Paid on the Ordinary Shares
A U.S. Shareholder generally will be required to include in gross
income as ordinary dividend income the amount of any distributions paid on the
Ordinary shares (including the amount of any Israeli taxes withheld there
from) to the extent that such distributions are paid out of the Company's
current or accumulated earnings and profits as determined for U.S. federal
income tax purposes. Distributions in excess of such earnings and profits will
be applied against and will reduce the U.S. Shareholder's tax basis in the
Ordinary shares and, to the extent in excess of such tax basis, will be
treated as gain from a sale or exchange of such Ordinary shares. Such
dividends, which will be treated as foreign source income for U.S. foreign tax
credit purposes, generally will not qualify for the dividends received
deduction available to corporations. The amount of any cash distribution paid
in NIS will equal the U.S. dollar value of the distribution, calculated by
reference to the exchange rate in effect on the date of the distribution.
Credit for Israeli Taxes Withheld
Subject to certain conditions and limitations, any Israeli tax
withheld or paid with respect to dividends on the Ordinary shares generally
will be eligible for credit against a U.S. Shareholder's United States federal
income tax liability or, at such U.S. Shareholder's election, may be claimed
as a deduction. Such limitations include extensive separate computation rules
under which foreign tax credits allowable with respect to specific classes of
income cannot exceed the United States federal income taxes otherwise payable
with respect to each such class of income. Dividends with respect to the
Ordinary shares generally will be classified as "passive income" for the
purpose of computing U.S. Shareholder's foreign tax credit limitations.
Foreign tax credits may not be used to reduce liability for the United States
individual and corporate minimum taxes by more than 90%.
Disposition of the Ordinary Shares
The sale or exchange of Ordinary shares generally will result in the
recognition of gain or loss in an amount equal to the difference between the
amounts realized by the U.S. Shareholder and the U.S. Shareholder's tax basis
in the Ordinary shares sold or exchanged. Such gain or loss will be a capital
gain or loss and will be long-term if the U.S. Shareholder's holding period
for the Ordinary shares exceeds one year.
Passive Foreign Investment Company Status
Based upon its current and projected income, assets and activities,
the Company believes that it is not currently a passive foreign investment
company (a "PFIC") for U.S. federal income tax purposes and will not be a PFIC
for any subsequent year. The Company would be classified as a PFIC if, for any
taxable year, either (i) 75% or more of its gross income is passive in nature,
or (ii) on average, 50% or more of its assets (by value or, if the Company
elects, by their adjusted basis for computing earnings and profits) produce or
are held for the production of passive income. If the Company were a PFIC for
any taxable year, a U.S. Shareholder would be subject to special tax rules on
the receipt of an "excess distribution" on the Ordinary shares (generally, a
distribution which exceeds 125% of the average annual distributions in the
prior three years) and on disposition of the Ordinary shares. Under these
rules, the excess distribution or gain would be allocated ratably over the
U.S. Shareholder's holding period for the Ordinary shares, the amount
allocated to the current taxable year would be taxed as ordinary income, the
amount allocated to each of the other taxable years would be subject to tax at
the highest marginal rate in effect for the applicable class of taxpayer for
that year, and an interest charge for the deemed deferral benefit would be
imposed with respect to the resulting tax attributable to each such other
taxable year. The tax liability with respect to amounts allocated to years
prior to the year of the disposition or "excess distribution" cannot be offset
by any net operating losses.
U.S. Shareholders may avoid taxation under the rules described above
by making a "qualified electing fund" election to include such holder's share
of the Company's income on a current basis or a "deemed sale" election if the
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Company no longer is classified as a PFIC. However, a U.S. Shareholder may
make a qualified electing fund election only if the Company agrees to furnish
the U.S. Shareholder annually with certain tax information.
The Company does not presently prepare or provide such information,
and such information may not be available to U.S. Shareholders if the Company
is subsequently determined to be a PFIC.
U.S. Shareholders holding "marketable shares" (which the Company
considers the Ordinary shares to be) in a PFIC may make an election to mark
that stock to market annually, rather than be subject to the above-described
rules. Under such election the U.S. Shareholder will include in income each
year an amount equal to the excess, if any, of the fair market value of the
PFIC stock as of the close of the taxable year over the shareholder's adjusted
basis in such stock. The shareholder is allowed a deduction for the excess, if
any, of the adjusted basis of the PFIC stock over its fair market value as of
the close of the taxable year. However, deductions are allowable only to the
extent of any net mark-to-market gains with respect to the stock included in
income by the shareholder for prior taxable years. Amounts included in income
pursuant to a mark-to-market election, as well as gain on the actual sale or
other disposition of the PFIC stock, are treated as ordinary income. Ordinary
loss treatment also applies to the deductible portion of any mark-to-market
loss on PFIC stock, as well as to any loss realized on the actual sale or
disposition of PFIC stock to the extent that the amount of such loss does not
exceed the net mark-to-market gains previously included with respect to such
stock.
A U.S. Shareholder who beneficially owns shares in a PFIC must file an
annual return with the IRS on IRS Form 8621 that describes any distributions
received with respect to such shares and any gain realized on the disposition
of such shares.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no additional forms of market risk that apply to
the Company beyond currency and interest rate fluctuations
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There are no defaults, dividend arrearages or delinquencies that are
required to be disclosed.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
There are no material modifications to the rights of security
holders that are required to be disclosed. As of December 31, 2000, the net
proceeds from our initial public offering were primarily used for purchasing
fixed assets, Research and development and hiring employees. None of the net
proceeds from our initial public offering were paid, directly or indirectly,
to any of our directors, officers or general partners or any of their
associates, or to any person owning ten percent or more of any class of equity
securities, or any of our affiliates.
ITEM 15. RESERVED.
ITEM 16. RESERVED.
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PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-25 incorporated herein by reference.
ITEM 19. EXHIBITS
Exhibits:
2.1** 1996 Israel Stock Option Plan
2.2* 1996 United States Stock Option Plan
2.3* Employee Stock Purchase Plan
2.4** Form of Indemnification Agreement for officers and directors of Registrant
2.5 Articles of Association
-------------------
* Incorporated by reference to identically numbered exhibits filed with
Registrant Form F-1 Registration Statement originally filed with the
Securities and Exchange Commission on February 7, 1997 as amended May 1,
1997, May 5, 1997 and May 6, 1997.
** Incorporated by reference to exhibits filed with Registrant's Form F-1
Registration Statement originally filed with the Securities and Exchange
Commission on May 31, 1996.
42
43
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused and authorized the undersigned to
sign this annual report on its behalf.
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
By: /s/ Gil Shwed
--------------------------------
Gil Shwed
Chief Executive Officer and Chairman of the Board
By: /s/ Eyal Desheh
--------------------------------
Eyal Desheh
Chief Financial Officer
Date: June 25, 2001
43
44
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
IN U.S. DOLLARS
INDEX
PAGE
-----------
REPORT OF INDEPENDENT AUDITORS F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF INCOME F-3
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5 - F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-24
45
[ERNST & YOUNG LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of Check
Point Software Technologies Ltd. and its subsidiaries as of December 31, 1999
and 2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
Check Point Software Technologies Ltd.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Check Point Software Technologies Ltd. and its subsidiaries as of
December 31, 1999 and 2000, and the consolidated results of their operations
and cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 17, 2001 A Member of Ernst & Young International
F-1
46
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------------------------
1999 2000
-------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,835 $ 157,203
Short-term deposits 176,252 209,974
Marketable securities 40,403 71,213
Trade receivables, net 47,639 84,381
Other receivables and prepaid expenses 9,287 17,637
-------------------- -------------------
TOTAL CURRENT ASSETS 299,416 540,408
-------------------- -------------------
LONG-TERM INVESTMENTS 82,884 219,309
-------------------- -------------------
LONG-TERM PREPAID EXPENSES 1,145 765
-------------------- -------------------
PROPERTY AND EQUIPMENT, NET 9,694 11,638
-------------------- -------------------
DEFERRED INCOME TAXES 1,207 5,519
-------------------- -------------------
$ 394,346 $ 777,639
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 4,972 $ 3,644
Employees and payroll accruals 15,632 33,243
Deferred revenues 55,999 121,202
Accrued expenses and other liabilities 24,609 69,101
-------------------- -------------------
TOTAL CURRENT LIABILITIES 101,212 227,190
-------------------- -------------------
ACCRUED SEVERANCE PAY, NET 626 1,166
-------------------- -------------------
SHAREHOLDERS' EQUITY:
Share capital -
Authorized: 500,000,000 Ordinary shares of NIS 0.01 par value;
10 Deferred shares of NIS 1 par value; 5,000,000 Preferred shares of
NIS 0.01 par value as of December 31, 1999 and 2000
Issued and outstanding: 227,913,078 Ordinary shares, 1 Deferred
share and no Preferred shares as of December 31, 1999;
235,464,986 Ordinary shares, 1 Deferred share and no Preferred
shares as of December 31, 2000 234 723
Additional paid-in capital 67,230 102,303
Retained earnings 225,044 446,257
-------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 292,508 549,283
-------------------- -------------------
$ 394,346 $ 777,639
==================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
47
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000
------------------- -------------------- -------------------
Revenues:
Products sales $ 124,290 $ 172,270 $ 326,998
Services 17,651 47,297 98,285
------------------- -------------------- -------------------
141,941 219,567 425,283
------------------- -------------------- -------------------
Cost of revenues:
Product sales 4,883 7,613 10,881
Services 8,740 14,810 24,384
------------------- -------------------- -------------------
13,623 22,423 35,265
------------------- -------------------- -------------------
Gross profit 128,318 197,144 390,018
------------------- -------------------- -------------------
Operating expenses:
Research and development, net 10,629 18,923 30,309
Sales and marketing 39,966 68,229 110,003
General and administrative 10,886 13,069 20,409
------------------- -------------------- -------------------
Total operating expenses 61,481 100,221 160,721
------------------- -------------------- -------------------
Operating income 66,837 96,923 229,297
Financial income, net 4,406 12,770 29,147
Capital gain 2,581 192 -
------------------- -------------------- -------------------
Income before taxes on income 73,824 109,885 258,444
Taxes on income 3,947 14,104 37,231
------------------- -------------------- -------------------
Net income $ 69,877 $ 95,781 $ 221,213
=================== ==================== ===================
Basic net earnings per share $ 0.33 $ 0.43 $ 0.95
=================== ==================== ===================
Diluted net earnings per share $ 0.30 $ 0.39 $ 0.84
=================== ==================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
48
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER
SHARE PAID-IN COMPREHENSIVE
CAPITAL CAPITAL INCOME (LOSS)
------------- ---------------- --------------------
Balance as of January 1, 1998 $ 110 $ 40,529 $ -
Tax benefit related to exercise of stock options - 801 -
Issuance of shares upon exercise of options, net (8,823,654 shares) 4 5,446 -
Comprehensive income -
Unrealized holding losses on available-for-sale marketable
securities - - (446)
Net income - - -
------------- ---------------- --------------------
Total comprehensive income
Balance as of December 31, 1998 114 46,776 (446)
Tax benefit related to exercise of stock options - 4,909 -
Stock split effected as a stock dividend (100%) 116 (116) -
Issuance of shares upon exercise of options, net
(10,243,356 shares) 4 15,661 -
Comprehensive income -
Unrealized holding gains on available-for-sale marketable
securities - - 446
Net income - - -
------------- ---------------- --------------------
Total comprehensive income
Balance as of December 31, 1999 234 67,230 -
Tax benefit related to exercise of stock options - 9,730 -
Stock split effected as a stock dividend (100%) 236 (236) -
Issuance of shares upon exercise of options, net (7,551,908 shares) 12 25,820 -
Stock split effected as a stock dividend (50%) 241 (241) -
Comprehensive income -
Net income - - -
------------- ---------------- --------------------
Total comprehensive income
Balance as of December 31, 2000 $ 723 $ 102,303 $ -
============= ================ ====================
TOTAL TOTAL
RETAINED COMPREHENSIVE SHAREHOLDERS'
EARNINGS INCOME EQUITY
--------------- ------------------ --------------
Balance as of January 1, 1998 $ 59,386 $ 100,025
Tax benefit related to exercise of stock options - 801
Issuance of shares upon exercise of options, net (8,823,654 shares) - 5,450
Comprehensive income -
Unrealized holding losses on available-for-sale marketable
securities - $ (446) (446)
Net income 69,877 69,877 69,877
--------------- ------------------ --------------
Total comprehensive income $ 69,341
==================
Balance as of December 31, 1998 129,263 175,707
Tax benefit related to exercise of stock options 4,909
Stock split effected as a stock dividend (100%) - -
Issuance of shares upon exercise of options, net
(10,243,356 shares) - 15,665
Comprehensive income -
Unrealized holding gains on available-for-sale marketable
securities - $ 446 446
Net income 95,781 95,781 95,781
--------------- ------------------ --------------
Total comprehensive income $ 96,227
==================
Balance as of December 31, 1999 225,044 292,508
Tax benefit related to exercise of stock options - 9,730
Stock split effected as a stock dividend (100%) - -
Issuance of shares upon exercise of options, net (7,551,908 shares) - 25,832
Stock split effected as a stock dividend (50%) - -
Comprehensive income -
Net income 221,213 $ 221,213 221,213
--------------- ------------------ --------------
Total comprehensive income $ 221,213
==================
Balance as of December 31, 2000 $ 446,257 $ 549,283
=============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
49
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
Cash flows from operating activities:
-------------------------------------
Net income $ 69,877 $ 95,781 $ 221,213
Adjustments to reconcile net income to net cash
provided by operating activities:
Capital gain (2,581) (192) -
Depreciation and amortization 4,528 3,603 7,107
Deferred income taxes, net (74) (1,103) (4,312)
Increase in trade receivables, net (11,602) (20,893) (36,742)
Increase in other receivables and prepaid expenses (2,271) (3,507) (7,970)
Increase (decrease) in trade payables (570) 1,917 (1,328)
Increase (decrease) in employees and payroll accruals (1,031) 8,068 17,611
Increase in accrued expenses and other liabilities 6,323 11,555 44,492
Increase in deferred revenues 6,726 44,201 65,203
Increase in tax benefit related to exercise of stock
options 801 4,909 9,730
Increase in accrued severance pay, net 129 273 540
Other 39 (264) 117
------------------- ------------------- -------------------
Net cash provided by operating activities 70,294 144,348 315,661
------------------- ------------------- -------------------
Cash flows from investing activities:
-------------------------------------
Proceeds from short-term deposits 46,439 50,308 160,035
Investment in short-term deposits (35,563) (108,743) (144,414)
Proceeds from sale of investment in Memco Software Ltd. 1,040 1,694 -
Proceeds from held-to-maturity marketable securities 26,777 20,854 40,523
Investment in held-to-maturity marketable securities (28,351) (45,030) (249,073)
Investment in long-term deposits (71,450) (60,328) (7,000)
Investment in privately held companies (225) (377) (1,145)
Purchase of property and equipment (6,103) (6,083) (9,051)
------------------- ------------------- -------------------
Net cash used in investing activities (67,436) (147,705) (210,125)
------------------- ------------------- -------------------
Cash flows from financing activities:
------------------------------------
Proceeds from issuance of shares upon
exercise of options, net 5,450 15,665 25,832
Short-term bank credit, net (215) - -
------------------- ------------------- -------------------
Net cash provided by financing activities 5,235 15,665 25,832
------------------- ------------------- -------------------
Increase in cash and cash equivalents 8,093 12,308 131,368
Cash and cash equivalents at the beginning of the year 5,434 13,527 25,835
------------------- ------------------- -------------------
Cash and cash equivalents at the end of the year $ 13,527 $ 25,835 $ 157,203
=================== =================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
50
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000
------------------- -------------------- -------------------
Supplemental disclosure of cash flow activities:
------------------------------------------------
Cash paid during the year for income taxes $ 320 $ 7,327 $ 14,472
=================== ==================== ===================
Non-cash investing and financing activities:
--------------------------------------------
Proceeds in shares from realization of investment in Memco $ 1,541 $ - $ -
=================== ==================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
51
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
Check Point Software Technologies Ltd. ("Check Point Ltd."), an Israeli
corporation, and its subsidiaries (collectively, "the Company" or "Check
Point"), are engaged in securing the Internet. The Company's Secure Virtual
Network (SVN) software architecture provides the infrastructure that enables
secure and reliable inter communications. SVN secures business-to-business
(B2B) communications between networks, systems, applications and users across
the Internet, intranets and extranets. Check Point's Open Platform for Security
(OPSEC) provides the framework for integration and interoperability solutions.
The Company's revenues are derived from the sales of network security policy
based solutions (Firewall-1 and VPN families), traffic control (Flood Gate-1 and
Connect Control), IP address management (Meta IP) and related software
subscription, support and training program agreements. The Company sells its
software products worldwide through distributors, resellers, system integrators,
Original Equipment Manufacturers ("OEMs"), and managed security service
providers
No customer exceeded 10% of the Company's revenues in 1998 and in 2000. During
1999, approximately 12% of the revenues were derived from a single customer.
On April 13, 1998, the Company merged with MetaInfo, a Washington corporation,
by issuing 683,200 Ordinary Shares, in exchange for all of the outstanding
shares of MetaInfo. The merger was accounted for as a pooling of interests. The
consolidated financial statements prior to the pooling have been restated to
include the operating results of MetaInfo.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared according to United States
generally accepted accounting principles (US GAAP)
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in United States dollars:
Most of the Company's revenues are denominated in United States
dollars ("dollars"). In addition, a substantial portion of the
Company's costs are incurred in dollars. The Company's
management believes that the dollar is the primary currency of
the economic environment in which Check Point Ltd. and each of
its subsidiaries operate. Thus, the dollar is their functional
and reporting currency. Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured
into U.S. dollars in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 52 "Foreign Currency
Translation" All transaction gains and losses of the
re-measurement of
F-7
52
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
monetary balance sheet items are reflected in the statement of
income as financial income or expenses, as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its subsidiaries all of which are wholly-owned.
Intercompany transactions and balances have been eliminated upon
consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of
three months or less.
e. Short and long-term deposits:
Bank deposits with maturities of more than three months but less
than one year are included in short-term deposits. Bank deposits
with maturities of more than one year are included in long-term
investments. Deposits are presented at cost while related
accrued interest is included in other receivables.
f. Investments in marketable securities:
The Company accounts for investments in debt and equity
securities in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of its
investments in marketable debt and equity securities at the time
of purchase and reevaluates such determinations at each balance
sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity and are stated at amortized cost. The
amortized cost of held-to-maturity securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortizations, interest and declines in value adjusted to
be other than temporary are included in interest income, net.
Debt securities for which the Company does not have the intent
or the ability to hold to maturity are classified as
available-for-sale. Securities available for sale are carried at
fair value, with the unrealized gains and losses, net of income
taxes, reported as a separate component of shareholders' equity,
accumulated other comprehensive income. Realized gains and
losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statement
of income.
g. Investments in privately held companies:
Investments in non-marketable, privately held companies are
recorded at the lower of cost or estimated fair value since the
Company does not have the ability to exercise significant
influence over operating and financial policies of the investee.
F-8
53
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
h. Property and equipment:
Property and equipment are stated at cost less accumulated
depreciation and depreciated using the straight-line method over
the estimated useful lives of the assets, ranging from two to
ten years. Leasehold improvements are amortized by the
straight-line method over the term of the lease.
The Company periodically assesses the recoverability of the
carrying amount of property and equipment, providing for any
possible impairment losses, based on the difference between the
carrying amount and fair value of such assets in accordance with
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". As of December
2000, no impairment losses have been identified.
i. Research and development costs:
Research and development costs, net of grants received, are
charged to the statement of income as incurred. SFAS No. 86
"Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process,
technological feasibility is established upon completion of a
working model. Costs incurred by the Company between completion
of the working models and the point at which the products are
ready for general release have been insignificant. Therefore,
all research and development costs have been expensed.
j. Government grants:
Non-royalty-bearing grants from the Government of Israel, for
funding certain approved research and development activities,
are recognized as they are earned and included as a deduction of
research and development costs. Such grants amounted to $ 450,
$60 and $392 in 1998, 1999 and 2000, respectively.
k. Revenue recognition:
The Company derives its revenues from license fees for its
products, software subscription, specified upgrades, support and
training programs. The Company sells its products primarily
through distributors, resellers, OEM's, system integrators, and
managed security service providers, all of which are considered
end-users.
The Company accounts for software sales in accordance with
Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition," as amended. SOP 97-2, generally requires revenues
earned on software arrangements involving multiple elements to
be allocated
F-9
54
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
to each element based on the relative fair value of the element.
The Company has adopted SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions", for all multiple element transactions entered
into after January 1, 2000. SOP 98-9 requires that revenue be
recognized under the "residual method" when vendor specific
objective evidence ("VSOE") of fair value exists for all
undelivered elements and VSOE does not exist for the delivered
elements.
Revenue from license fees is recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred,
the fee is fixed or determinable, and collectability is
probable. The Company maintains certain provisions for product
returns and rebates in accordance with SFAS No. 48 "Revenue
Recognition when Right of Return Exists" and based on its
experience. Such provisions amounted to, $ 7,133 and $ 10,050 as
of December 31, 1999 and 2000, respectively. The Company from
time to time considers arrangements regarding certain customers
with payment terms extending beyond customary payment terms not
to be fixed or determinable. If the fee is not fixed or
determinable, revenue is deferred and recognized when payments
become due from the customer providing that all other revenue
recognition criteria have been met.
Software subscription, support, consulting service, and training
program revenue included in multiple-element arrangements is
deferred and recognized on a straight-line basis over the term
of the software subscription and support agreement. The VSOE of
fair value of the undelivered elements (software subscription,
specified upgrades, support, consulting services and training)
is generally determined based on the price charged for the
undelivered element when sold separately. Deferred revenues also
include amounts received from customers for which services have
not been provided.
l. Severance pay:
The Company's liability for severance pay is calculated pursuant
to Israeli severance pay law based on the most recent salary of
the employees multiplied by the number of years of employment as
of the balance sheet date. The Company records as expenses the
net increase in its funded or unfunded severance liability.
Employees are entitled to one month salary for each year of
employment, or a portion thereof. The Company's liability is
fully provided by monthly deposits with severance pay funds,
insurance policies and by an accrual. This liability is
presented as accrued severance pay, net.
The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these
policies, and includes immaterial profits.
The amount of deposited funds as of December 31, 1999 and 2000
was $ 1,094 and $ 1,937 respectively.
F-10
55
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
Severance expenses for the years ended December 31, 1998, 1999
and 2000, were approximately $ 707, $ 1,152 and $ 1,549,
respectively.
m. Warranty costs:
The Company provides a product warranty for up to 90 days at no
extra charge. A provision is recorded for probable costs in
connection with warranties based on the Company's experience.
n. Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". This Statement prescribes the use
of the liability method whereby deferred tax asset and liability
account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The
Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
o. Advertising expenses:
Advertising costs are expensed as incurred. Advertising expenses
for the years ended 1998, 1999 and 2000 were $ 6,834, $ 9,570
and $ 14,431, respectively.
p. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term deposits, marketable securities,
trade receivables and long-term deposits. The majority of the
Company's cash and cash equivalents, short-term deposits and the
long-term deposits are invested in dollar and dollar linked
investments and are deposited in major banks worldwide. Such
deposits in the United States may be in excess of insured limits
and are not insured in other jurisdictions. Management believes
that the financial institutions that hold the Company's
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
The Company's trade receivables are geographically diversified
and derived from sales to customers mainly in the United States,
Europe and Asia. The Company performs ongoing credit evaluations
of its customers and, to date, has not experienced any material
losses. The allowance for doubtful accounts is determined with
respect to specific debts that are doubtful of collection
amounting to $ 1,425 and $ 2,972 as of December 31, 1999 and
2000, respectively.
The Company's marketable securities include investments in
debentures of the Israeli Government and of U.S. corporations
which are considered by management to be
F-11
56
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
financially sound. The Company's investments in debts are
diversified among high-credit quality securities, in accordance
with the Company's investment policy.
The Company enters into foreign exchange forward contracts to
minimize the short-term impact of foreign currency fluctuations
on assets denominated in Japanese Yen. These contracts are
highly inversely correlated to the hedge items and are
designated as, and considered effective as, hedges of the
underlying assets.
Gains and losses on the contracts are included in net financial
income, and offset foreign exchange gains and losses from the
revaluation of intercompany balances or other current assets and
liabilities denominated in currencies other than the functional
currency of the reporting entity.
Company's management is of the opinion that, due to the fact
that the above transactions are carried out with well
established institutions, liabilities owing to the Company will
be fulfilled as of December 31, 2000. Total outstanding
transactions to sell/purchase U.S. dollars in exchange for the
Japanese yen, were in the amount of $ 6,669. The above
transactions were for a period of 1.5 months. Gain and losses,
which are included in the financial statements for the year
ended December 31, 2000, were insignificant.
As of December 31, 2000, the exchange rate of the U.S. dollar in
relation to the Yen was $ 1 = Yen 114.9.
q. Basic and diluted earnings per share:
Basic earnings per share is computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted earnings per share is computed based on the weighted
average number of Ordinary shares outstanding during each year,
plus dilutive potential Ordinary shares considered outstanding
during the year, in accordance with FASB Statement No. 128,
"Earnings Per Share".
The total weighted average number of shares related to the
outstanding options excluded from the calculations of diluted
net income, since they would have an anti-dilutive effect, were
502,380, 1,503,050 and 694,128 for 1998, 1999 and 2000,
respectively.
r. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25") and Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") in
accounting for its employee stock option plans. Under APB 25,
when the exercise price of the Company's share options is less
than the market price of the underlying shares
F-12
57
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
on the date of grant, compensation expense is recognized. The
pro forma disclosures required by SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), are provided in Note 9d.
s. Fair value of financial instruments:
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
1. The carrying amount of cash and cash equivalents,
short-term deposits, trade receivable and trade payable
approximate their fair values due to the short-term
maturities of these instruments.
2. The fair value of marketable securities is based on
quoted market prices, and do not differ materially from
the carrying amount.
3. The carrying amount of the Company's long-term deposits
are estimated by discounting the future cash flows using
the current interest rates for deposits of similar terms
and maturities. The carrying amount of the long-term
deposits approximates their fair value.
4. The fair value of foreign currency transactions (used
for hedging purposes) is estimated by obtaining current
quotes from investment bankers.
t. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, which is required to be adopted
in years beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
NOTE 3:- MARKETABLE SECURITIES
GROSS UNREALIZED
AMORTIZED COST GAINS (LOSSES) ESTIMATED FAIR VALUE
------------------------------- -------------------------------- --------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------- --------------------------------
1999 2000 1999 2000 1999 2000
------------- --------------- --------------- --------------- --------------- ---------------
U.S. corporate debts $ 25,851 $ 55,519 $ (127) $ 108 $ 25,724 $ 55,627
============= =============== =============== =============== =============== ===============
Israeli Government
debts $ 14,552 $ 15,694 $ (83) $ 255 $ 14,469 $ 15,949
============= =============== =============== =============== =============== ===============
F-13
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 4:- LONG -TERM INVESTMENTS
As of December 31, 1999 and 2000 all of the Company's securities
are classified as held-to-maturity. Prior to December 31, 1999
certain of the Company's marketable securities sold in 1999 were
classified as available-for-sale.
Long-term investments composed of Israeli Government debts, U.S.
corporate debts, long-term deposits and investments in privately
held companies are as follows:
DECEMBER 31,
-------------------------------------------
1999 2000
------------------- -------------------
U.S. corporate debts (a) $ 18,281 $ 180,110
Israeli Government debts and deposits (a) 3,148 18,942
Deposits 60,853 18,510
Investments in privately held companies 602 1,747
------------------- -------------------
$ 82,884 $ 219,309
=================== ===================
(a) Composed as follows:
GROSS UNREALIZED (GAIN)
AMORTIZED COST LOSSES ESTIMATED FAIR VALUE
----------------------------- ----------------------------- -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------- -----------------------------
1999 2000 1999 2000 1999 2000
-------------- ------------- -------------- ------------- -------------- -------------
U.S. corporate debts $ 18,281 $ 180,110 $ (132) $ (2,650) $ 18,149 $ 177,460
Israeli Government
debts 3,148 18,942 6 638 3,154 19,580
-------------- ------------- -------------- ------------- -------------- -------------
$ 21,429 $ 199,052 $ (126)) $ (2,012) $ 21,303 $ 197,040
============== ============= ============== ============= ============== =============
The amortized cost and the market value of,
held-to-maturity securities, which are due after one
through five years as of December 31, 2000, are $199,052
and $197,040 respectively.
F-14
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 5:- PROPERTY AND EQUIPMENT
DECEMBER 31,
--------------------------------------------
1999 2000
-------------------- --------------------
Cost:
Computers and peripheral equipment $ 13,154 $ 19,624
Office furniture and equipment 2,830 3,855
Other 1,034 2,590
-------------------- --------------------
17,018 26,069
Accumulated depreciation 7,324 14,431
-------------------- --------------------
Depreciated cost $ 9,694 $ 11,638
==================== ====================
Depreciation expenses amounted to approximately $ 2,189, $ 3,570 and $ 7,107 for
1998, 1999 and 2000, respectively.
NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31,
--------------------------------------------
1999 2000
-------------------- --------------------
Income taxes payable $ 8,655 $ 25,109
Marketing expenses payable 4,844 18,862
Other 11,110 25,130
-------------------- --------------------
$ 24,609 $ 69,101
==================== ====================
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The facilities of the Company and its subsidiaries are rented
under operating leases for periods ending in 2005.
Future minimum lease commitments under non-cancelable operating
leases for the years ended December 31, are as follows:
2001 $ 5,324
2002 4,512
2003 906
2004 174
2005 157
----------------------
$ 11,073
======================
F-15
60
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
Rent expenses for the years ended December 31, 1998, 1999 and
2000, were approximately $ 2,771, $ 4,275 and $ 6,125,
respectively.
b. Litigation:
On July 5, 1996, Checkpoint Systems, Inc. ("CSI") a manufacturer
of theft prevention devices for retail stores, filed an action
alleging trademark infringement and unfair competition against
the Company in the United States District Court for the District
of New Jersey. CSI seeks to enjoin the Company from using the
"Check Point" name in connection with the Company's products and
services. The trial court dismissed CSI's claim for damages on
summary judgment. The trial was conducted in November 1999. The
District Court issued its opinion in Check Point's favor on July
12, 2000. CSI has filed its appellant's brief alleging that the
District Court misapplied the governing law.
According to the estimation of the Company's management an
adequate provision was recorded in the balance sheets as of
December 31, 1999 and 2000, in order to reflect the potential
loss in respect of the litigation.
NOTE 8:- TAXES ON INCOME
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in
NIS after certain adjustments for increases in the Israeli
Consumer Price Index ("Israeli CPI"). As explained in Note 2b,
the financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and in
the NIS/dollar exchange rate causes a further difference between
taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of SFAS
No. 109, Check Point Ltd. has not provided deferred income taxes
on the difference between the functional currency and the tax
bases of assets and liabilities.
b. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (the "Law"):
Check Point Ltd. production facilities have been granted the
status of "Approved Enterprise", under the Law, for four
separate capital investment plans:
1. Income derived from the first program was tax-exempt for
the four-year period ended December 31, 1998 and is
eligible for a reduced tax rate of 20% for the six-year
period ending December 31, 2004
2. Income derived from the second program was tax-exempt
for a two-year period ended December 31, 1999, and is
eligible for a reduced tax rate of 20% for the
eight-year period ending December 31, 2007
F-16
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
3. Income derived from the third program is tax-exempt for
a two year period ending December 31, 2000, and will be
eligible for a reduced tax rate of 20% for the
eight-year period ending December 31, 2008
4. Check Point Ltd.'s fourth program was approved in 2000.
Capital investments under the plan have already
commenced. Upon completion, income derived from the
fourth program will entitle Check Point Ltd. to benefits
similar to those of the previous programs.
The period of tax benefits, as detailed above, is subject to
limitations of the earlier of 12 years from commencement of
production, or 14 years from receipt of approval.
Tax-exempt income attributable to the "Approved Enterprise" can
be distributed to shareholders without subjecting Check Point
Ltd. to taxes only upon the complete liquidation of the Company.
Check Point Ltd.'s Board of Directors has determined that such
tax-exempt income will not be distributed as dividends.
Accordingly, no deferred income taxes have been provided on
income attributable to Check Point Ltd.'s "Approved Enterprise".
If the retained tax-exempt income (approximately $320,000 as of
December 31, 2000) is distributed in a manner other than in the
complete liquidation of the Company, it would be taxed at the
corporate tax rate (currently - 20%) applicable to such profits
as if Check Point Ltd. had not chosen the alternative tax
benefits and an income tax liability would be incurred of
approximately $ 80,000 as of December 31, 2000.
Should Check Point Ltd. fail to meet such requirements in the
future, it could be subject to the regular Israeli corporate tax
rate of 36%, and could be required to refund tax benefits
already received.
Income from sources other than the "Approved Enterprise" are
subject to tax at regular Israeli corporate tax rate of 36%.
c. Tax benefits under the Law for the Encouragement of Industry
(Taxes), 1969:
Check Point Ltd. is an "industrial company" under the above law
and as such is entitled to certain tax benefits, including
accelerated rates of depreciation and the deduction of public
offering expenses.
d. Deferred tax assets reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. As of December 31, 1999 and 2000,
the Company's deferred taxes calculated on reserves and
allowances are comprised as follows:
F-17
62
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
--------------------------------------------
1999 2000
-------------------- --------------------
U.S. carry forward tax deductions $ 61,629 $ 151,273
Accrued vacation, severance pay and fixed assets 1,207 5,519
-------------------- --------------------
Net deferred tax assets before valuation allowance 62,836 156,792
Valuation allowance (61,629) (151,273)
-------------------- --------------------
Net deferred tax assets $ 1,207 $ 5,519
==================== ====================
Domestic $ 199 $ 356
Foreign 1,008 5,163
-------------------- --------------------
$ 1,207 $ 5,519
==================== ====================
The subsidiary in the U.S. has provided valuation allowances in
respect of deferred tax assets resulting from tax benefits
related to employee stock option exercises, which will be
credited to additional paid-in capital when realized. Management
currently believes that it is more likely than not that those
deferred tax deductions will not be realized in the foreseeable
future.
Through December 31, 2000, Check Point Inc. had a U.S. federal
loss carry forward of approximately $ 400 million that can be
carried forward and offset against taxable income for 15 to 20
years.
e. Income before taxes on income is comprised as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000
--------------------- -------------------- --------------------
Domestic $ 74,927 $ 110,635 $ 243,843
Foreign (1,103) (750) 14,601
--------------------- -------------------- --------------------
$ 73,824 $ 109,885 $ 258,444
===================== ==================== ====================
f. Provisions for income tax expense are comprised as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000
--------------------- -------------------- --------------------
Current $ 4,021 $ 15,207 $ 41,543
Deferred (74) (1,103) (4,312)
--------------------- -------------------- --------------------
$ 3,947 $ 14,104 $ 37,231
===================== ==================== ====================
F-18
63
CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
Domestic $ 2,725 $ 10,796 $ 31,224
Foreign 1,222 3,308 6,007
--------------------- -------------------- --------------------
$ 3,947 $ 14,104 $ 37,231
===================== ==================== ====================
g. Reconciliation of the theoretical tax expenses:
A reconciliation between the theoretical tax expenses, assuming
all income is taxed at the statutory rate applicable to income
of the Company and the actual income tax as reported in the
statements of income, is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000
--------------------- -------------------- --------------------
Income before taxes as reported
in the statements of income $ 73,824 $ 109,885 $ 258,444
===================== ==================== ====================
Statutory tax rate in Israel 36% 36% 36%
===================== ==================== ====================
Theoretical tax expenses $ 26,577 $ 39,559 $ 93,040
Increase (decrease) in taxes resulting
from:
"Approved Enterprise" benefit (*) (23,272) (29,326) (67,002)
Items for which deferred taxes were
not provided 759 829 10,433
Tax adjustment in respect of inflation
in Israel (1,154) (547) (9)
Non-deductible expenses 17 11 18
Differences between tax rate in Israel
and in the rest of the world 1,020 3,578 751
--------------------- -------------------- --------------------
Income taxes as reported in the
statements of income $ 3,947 $ 14,104 $ 37,231
===================== ==================== ====================
(*) Basic net earnings per share
amounts of the benefit resulting
from the exemption $ 0.11 $ 0.13 $ 0.29
===================== ==================== ====================
(*) Diluted net earnings per share
amounts of the benefit resulting
from the exemption $ 0.10 $ 0.12 $ 0.26
===================== ==================== ====================
NOTE 9:- SHARE CAPITAL
The Ordinary shares of the Company are traded on NASDAQ National Market. The
Ordinary shares confer upon their holders the right to receive notice to
participate and vote in general meetings of the Company, and the right to
receive dividends, if declared.
a. General:
On December 20, 1999, the Company's Board of Directors approved
a two-for-one stock split in the form of a stock dividend
effective January 31, 2000. On June 29,
F-19
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
2000 the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend effective July 25,
2000. On January 18, 2001, the Company's Board of Directors
approved a three-for-two stock split in the form of a stock
dividend effective February 12, 2001
Shareholders who otherwise would be entitled to receive
fractional shares as they hold a number of old Ordinary shares
that are not evenly divisible by the split number will be
entitled to a cash payment in lieu thereof.
All shares, options and earnings per share amounts have been
retroactively adjusted for all periods presented to reflect the
stock splits effected as a stock dividend.
b. Deferred share:
The Deferred share is not entitled to any rights other than the
right to receive its nominal value upon liquidation of the
Company.
c. Employee Stock Purchase Plan ("ESPP"):
The Company reserved a total of 6,000,000 shares for issuance
under the ESPP. Eligible employees use up to 15% of their
salaries to purchase Ordinary shares. The purchase plan will be
implemented by effecting an offering every six months. The price
of an Ordinary share purchased under the purchase plan is equal
to 85% of the lower of the fair market value of the Ordinary
share on the commencement date of each offering period, or on
the semi-annual purchase date.
d. Stock options:
Under the Company's Stock Option Plan ("the Plan"), options are
granted to employees at an exercise price equal to the fair
market value at the date of grant and are granted for periods
not to exceed 7 years. Options granted under the Plan, generally
vest over a period of four to five years.
The Company's 1996 Incentive Employee Stock Option Plan
authorized the grant of options to employees for up to
56,760,000 Ordinary shares under the Israeli Plan and 78,240,000
Ordinary shares under the U.S. Plan.
As of December 31, 2000, an aggregate of 66,421,500 Ordinary
shares of the Company are available for future grant.
A summary of the Company's stock option activity, and related
information for the years ended December 31, is as follows:
F-20
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
OPTIONS (IN THOUSANDS) WEIGHTED AVERAGE EXERCISE PRICE
------------------------------------------- ----------------------------------------------
1998 1999 2000 1998 1999 2000
------------- ------------- ------------- -------------- ------------- --------------
Outstanding at beginning
of year 30,576 35,723 38,748 $ 1.69 $ 2.3 $ 5.91
Granted 21,840 19,230 3,305 3.19 9.38 57.73
Exercised (8,823) (10,243) (7,552) 0.54 1.43 3.25
Forfeited or cancelled (7,870) (5,962) (1,073) 4.37 3.17 7.91
------------- ------------- ------------- -------------- ------------- --------------
Outstanding at end of year 35,723 38,748 33,428 $ 2.3 $ 5.91 $ 11.57
============= ============= ============= ============== ============= ==============
Exercisable at end of year 5,376 5,139 8,258 $ 1.35 $ 2.31 $ 6.56
============= ============= ============= ============== ============= ==============
The options outstanding as of December 31, 2000, have been
separated into ranges of exercise price, as follows:
WEIGHTED WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS AVERAGE
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT EXERCISE PRICE
DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE DECEMBER 31, 2000 OF EXERCISABLE
EXERCISE PRICE (IN THOUSANDS) (YEARS) PRICE (IN THOUSANDS) OPTIONS
------------------- ------------------- ----------------- -------------- -------------------- ----------------
$ 0.002- 0.89 1,093 1.8 $ 0.32 1,024 $ 0.31
1.56-3.19 10,796 4.5 2.80 2,992 2.77
3.78-5.92 6,392 4.9 4.49 1,125 4.41
6.93-9.38 1,014 5.5 8.29 79 7.91
9.83-11.66 7,190 5.7 9.90 2,670 9.85
12.58-17 3,188 5.5 15.55 170 15.03
20.36-23.6 435 5.9 21.79 53 22.8
27.22-30.54 537 6 29.79 29 29.68
31.75-36.74 296 6 34.56 1 32.09
42.33-51.21 934 6.3 46.73 - -
65.58 29 6.4 65.58 - -
68.42-70.02 576 6.8 68.91 - -
70.2-75.08 243 6.5 71.40 - -
79.8-86.54 705 7.1 85.36 116 79.85
------------------- ------------------- ----------------- -------------- -------------------- ----------------
$0.002-$86.54 33,428 5.1 $ 11.57 8,258 $ 6.56
=================== =================== ================= ============== ==================== ================
The weighted average fair values at grant date of options
granted for the years ended December 31, 1998, 1999 and 2000
were $ 5.78, $ 19.68 and $ 61.29, respectively.
Under SFAS 123, pro forma information regarding net income and
earnings per share is required (for grants issued after December
1994), and has been determined as if the Company had accounted
for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated
at the date of grant using a Black - Scholes Option Valuation
Model with the following weighted-average assumptions for 1998,
1999 and 2000: risk-free interest rates of 6% for 1998, 1999 and
2000; dividend yields of 0% for 1998, 1999 and 2000; volatility
factors of the expected market price of the Company's Ordinary
shares of 0.89 for 1998, 1.04 for 1999 and 1.09 for 2000; and an
expected life of the option of 6 months after the option is
vested for 1998, 1999 and 2000.
Pro forma information under SFAS 123:
F-21
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
---------------------------------------------------------------------
1998 1999 2000
--------------------- -------------------- --------------------
Net income as reported $ 69,877 $ 95,781 $ 221,213
===================== ==================== ====================
Pro forma net income $ 61,697 $ 71,412 $ 156,472
===================== ==================== ====================
Pro forma basic earnings per share $ 0.87 $ 0.32 $ 0.67
===================== ==================== ====================
Pro forma diluted earnings per share $ 0.80 $ 0.29 $ 0.60
===================== ==================== ====================
e. Dividends:
Dividends declared on the Ordinary shares will be paid in NIS.
Dividends paid to shareholders outside Israel will be converted
into dollars, on the basis of the exchange rate prevailing at
the date of payment.
NOTE 10:- EARNINGS PER SHARE
The following table sets forth the computation of historical basic and diluted
net earnings per share:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
Numerator:
Net income $ 69,877 $ 95,781 $ 221,213
================= ================= =================
Numerator for basic net earnings per net -
income available to Ordinary shareholders $ 69,877 $ 95,781 $ 221,213
================= ================= =================
Numerator for diluted net earnings per share - net
income available to Ordinary shareholders after
assumed conversions $ 69,877 $ 95,781 $ 221,213
================= ================= =================
Denominator:
Weighted average Ordinary shares outstanding 212,610 222,930 232,611
================= ================= =================
Denominator for basic net earnings per
share - weighted - average shares 212,610 222,930 232,611
================= ================= =================
Effect of dilutive securities:
Employee stock options 19,560 23,526 29,940
================= ================= =================
Denominator for diluted net earnings per share 232,170 246,456 262,515
================= ================= =================
NOTE 11:- GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA
F-22
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CHECK POINT SOFTWARE TECHNOLOGIES LTD.AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
a. Summary information about geographical areas:
The Company operates in one operating segment, the development,
selling and marketing of performance software products. The
Company follows the requirements of SFAS No. 131 "Disclosures
About Segments of an Enterprise and Relation Information".
1. Revenues based on the end customers' location:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000
--------------- ------------------------ --------------
Israel $ 1,435 $ 3,211 $ 4,742
Americas 81,010 117,276 204,374
Great Britain 12,823 20,156 35,175
Europe (excluding Great Britain) 24,464 42,928 111,330
Japan 10,617 24,154 37,561
Other 11,592 11,842 32,101
--------------- ------------------------ --------------
$ 141,941 $ 219,567 $ 425,283
=============== ======================== ==============
2. Long-lived assets:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000
--------------- ------------------------ --------------
Israel $ 2,126 $ 4,721 $ 6,952
Americas 4,682 4,351 3,277
Great Britain 101 149 268
Europe (excluding Great Britain) 113 303 366
Japan 61 100 251
Other 98 70 524
--------------- ------------------------ --------------
$ 7,181 $ 9,694 $ 11,638
=============== ======================== ==============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
b. Financial income, net:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Financial income:
Interest income $ 9,351 $ 12,954 $ 29,554
Foreign currency translation adjustments - 129 377
---------------- ---------------- ----------------
9,351 13,083 $ 29,931
---------------- ---------------- ----------------
Financial expenses:
Foreign currency translation adjustments (4,619) - -
Interest expenses (326) (313) (784)
---------------- ---------------- ----------------
(4,945) (313) (784)
---------------- ---------------- ----------------
Financial income, net $ 4,406 $ 12,770 $ 29,147
================ ================ ================
F-24