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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
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, NIS 0.01 nominal value
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Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report: 242,824,021 ordinary shares, NIS 0.01 nominal value.
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.....................................................3
Item 2. Offer Statistics and Expected Timetable...................................................................3
Item 3. Key Information...........................................................................................3
Item 4. Information on the Company...............................................................................10
Item 5. Operating and Financial Review and Prospects.............................................................18
Item 6. Directors, Senior Management and Employees...............................................................24
Item 7. Major Shareholders and Related Party Transactions........................................................29
Item 8. Financial Information....................................................................................29
Item 9. The Offer and Listing....................................................................................30
Item 10. Additional Information...................................................................................30
Item 11. Quantitative and Qualitative Disclosures About Market Risk...............................................39
Item 12. Description of Securities Other than Equity Securities...................................................41
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies..........................................................41
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.............................41
Item 15. Reserved.................................................................................................41
Item 16. Reserved.................................................................................................41
PART III
Item 17. Financial Statements.....................................................................................41
Item 18. Financial Statements.....................................................................................41
Item 19. Exhibits.................................................................................................41
Signatures.............................................................................................................42
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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, 1999, 2000 and 2001, and the selected consolidated
balance sheet data as of December 31, 2000 and 2001 have been derived from the
audited consolidated financial statements of Check Point Software Technologies
Ltd. (together with its subsidiaries, the "Company" or "Check Point") 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
("U.S. GAAP"). The selected consolidated statement of income data for the years
ended December 31, 1997 and 1998 and the selected consolidated balance sheet
data as of December 31, 1997, 1998 and 1999 have been derived from the Company's
audited consolidated financial statements not included in this Form 20-F and
have also been prepared in accordance with U.S. GAAP. The selected consolidated
financial statements set forth below should be read in conjunction with and are
qualified by reference to the Company's 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.
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 23, 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 14, 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 1, 2001. All
share and per share numbers herein reflect adjustments resulting from these
stock splits.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997(*) 1998(*) 1999 2000 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues ............................................. $ 86,352 $141,941 $219,567 $425,283 $527,643
Cost of revenues ..................................... 6,839 13,623 22,423 35,265 26,571
-------- -------- -------- -------- --------
Gross profit ......................................... 79,513 128,318 197,144 390,018 501,072
Operating expenses:
Research and development, net ....................... 7,105 10,629 18,923 30,309 33,221
Sales and marketing ................................. 26,611 39,966 68,229 110,003 109,086
General and administrative .......................... 7,766 10,886 13,069 20,409 22,002
-------- -------- -------- -------- --------
Total operating expenses ............................. 41,482 61,481 100,221 160,721 164,309
-------- -------- -------- -------- --------
Operating income ..................................... 38,031 66,837 96,923 229,297 336,763
Financial income, net ............................... 4,556 4,406 12,962 29,147 44,760
Capital gain ......................................... -- 2,581 -- -- --
-------- -------- -------- -------- --------
Income before taxes on income ........................ 42,587 73,824 109,885 258,444 381,523
Taxes on income ...................................... 2,309 3,947 14,104 37,231 59,603
-------- -------- -------- -------- --------
40,278 69,877 95,781 221,213 321,920
Equity in losses of an affiliate ..................... 760 -- -- -- --
======== ======== ======== ======== ========
Net Income ........................................... $ 39,518 $ 69,877 $ 95,781 $221,213 $321,920
======== ======== ======== ======== ========
Basic net earnings per share (1) ..................... $ 0.19 $ 0.33 $ 0.43 $ 0.95 $ 1.34
Shares used in computing basic net earnings per
Share (1) .......................................... 203,622 212,610 222,930 232,611 240,008
Diluted net earnings per share (1) ................... $ 0.17 $ 0.30 $ 0.39 $ 0.84 $ 1.25
Shares used in computing diluted net earnings per
share (1) .......................................... 228,312 232,170 246,456 262,515 258,075
3
DECEMBER 31,
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1997(*) 1998(*) 1999 2000 2001
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ......... $ 60,817 $ 80,872 $ 198,204 $ 313,218 $ 364,193
Total Assets ............ 124,964 212,235 394,346 777,639 1,142,908
Shareholder's equity .... 100,025 175,707 292,508 549,283 915,728
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(1) See Note 2q of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net earnings per
share.
(*) Reported financial results reflect the acquisition in April 1998 of MetaInfo
Inc., which was accounted for as a pooling-of-interest transaction, and all
amounts for periods prior to the date of such acquisition 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 and any assumptions underlying any of the foregoing. Forward-looking
statements include statements in (i) " Item 4 - Information on the Company"
regarding the Company's belief as to 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 relationship with technology partners 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, among other things, future sources of
revenue, ongoing relationships with current and future end-user customers and
resellers, future costs and expenses, and adequacy of capital resources.
Forward-looking statements involve risks and uncertainties, as well as
assumptions, that, if they never materialize or prove incorrect, could cause the
Company's actual results to differ materially from such results discussed in
these statements. Many of these risks and uncertainties are described in the
risk factors set forth below in this section and elsewhere 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 and virtual private networking (VPN)
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
Lucent Technologies, Microsoft Corp., NetScreen Technologies 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 technology 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.
Some 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 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. Increased competition may result in
4
price reductions, reduced gross margins and loss of market share, any of which
will 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 will be materially and adversely affected. See "Item 4 - Information
on the Company."
RAPID TECHNOLOGICAL CHANGE
The enterprise security and VPN 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 end-users
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 will 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. The 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 Asia and the Pacific Rim (including Japan), in
millions, were $36, $70, and $92 in 1999, 2000 and 2001, respectively,
representing 16% of the Company's revenues for 1999 and 2000, and 17% for 2001.
The economy in this region is still unstable and therefore the Company cannot
predict if similar levels of sales in the region are sustainable.
Since late 2000 there has been a global recession and a resulting
decline in economic conditions. If general economic and industry conditions fail
to improve or continue to deteriorate, demand for the Company's products could
be adversely affected, as could the financial health of the Company's suppliers
and resellers. In addition, the September 11, 2001 terrorist attacks on the
United States and the subsequent military response by the United States in
Afghanistan have had, and the Company expects that they could continue for some
time to have, a negative effect on the global economy and the business of the
Company and its customers. Any similar acts of violence or war may further
negatively affect the Company's industry, revenue and profitability and could
also result in a disruption of the Company's business or the businesses of the
Company's customers.
5
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.
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. If the Company's
operating results are below the expectations of public market analysts and
investors, 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 services organization. The Company also expects that
it will experience increasing competition and pricing pressure, which may result
in lower operating margins. In 2002, the Company intends to continue to make
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 will 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, 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, including
related software subscriptions, support and technical services and training
programs. During the first quarter of 2001, the Company announced the Check
Point Next Generation release of VPN-1/FireWall-1, which the Company began
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 will be
materially adversely affected. See "Item 5 - "Operating and Financial Review and
Prospects" and "Item 4 - Information on the Company."
6
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 will be materially adversely affected. See "Item 4 - Information on
the Company."
RISK OF LITIGATION
The Company has been a party to various lawsuits and other legal
proceedings in the normal course of its business. In particular, the Company is
the subject of a complaint submitted by a competitor to the Directorate-General
for Competition of the European Commission, alleging anti-competitive behavior
on the part of the Company and abuse by the Company of its dominant position.
There can be no assurance that other similar complaints may not arise in the
future, either from European or other anti-trust authorities and an adverse
outcome in such proceedings could have a material adverse effect on the Company.
Moreover, the results of complex legal proceedings are difficult to predict and
an unfavorable resolution of a lawsuit or proceeding could have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Legal Proceedings" in "Item 8 - Financial Information."
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 most 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 will 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
7
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."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
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." The Company has certain patent applications pending and there
can be no assurance that the Company's patent applications will be issued either
at all or within the scope of the claims sought by the Company. 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.
APPROVED ENTERPRISE STATUS
The Company receives significant 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. Although the Company believes that it will be
able to meet such conditions in the future, if the Company fails to meet such
conditions 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 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 "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 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.
8
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:
o There is a limitation on acquisition of any level of control of the
company; or
o 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. 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.
These laws may have the effect of delaying or deterring a change in
control of the Company, thereby limiting the opportunity for shareholders to
receive a premium for their shares and possibly affecting the price that some
investors are willing to pay for the Company's securities.
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. These provisions may have the effect of delaying or deterring a change in
control of the Company, thereby limiting the opportunity for shareholders to
receive a premium for their shares and possibly affecting the price that some
investors are willing to pay for the Company's securities.
CONCENTRATION OF SHARE OWNERSHIP
As of February 28, 2002, the directors, executive officers and
principal shareholders of the Company and their affiliates beneficially owned
approximately 27% 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 has agreements with its directors and senior officers which
provide, subject to Israeli law, for the Company to indemnify these 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 a director or
officer of the Company, and (b) reasonable litigation expenses, including legal
fees, incurred by such a director or officer 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 a director or officer of the Company.
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
9
(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 securities of Israeli
companies or the proceeds from the sale of Israeli securities; however,
legislation remains in effect pursuant to which currency controls can be imposed
by administrative action at any time.
Neither the Memorandum and Articles of Association of the Company nor
the laws 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 in a state of war with Israel.
ITEM 4. INFORMATION ON THE COMPANY
GENERAL
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 Internet Protocol ("IP")
networks--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.
Check Point was incorporated in 1993 and its address is 3A Jabotinsky
Street, Ramat-Gan 52520, Israel. Its telephone number is 972-3-753-4555. Copies
of this Annual Report on Form 20-F and other documents incorporated herein by
reference can be obtained upon request from the Company's investor relations
department, Three Lagoon Drive, Redwood City, California 94065 (telephone no.
650-628-2000) or through the Company's website, www.checkpoint.com.
INDUSTRY BACKGROUND
Information, and the ability to access and distribute it, is a key
strategic asset in today's competitive business environment. This need to
effectively use and communicate information as well as work more collaboratively
has led to the extensive deployment of network-based communications systems
(connectivity). Increased connectivity is in turn increasing the need for
technology to safeguard and manage the access to information available over
these increasingly global networks.
Increase in Connectivity
The network computing market has undergone two major transitions over
the past decade, which have contributed to the 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 (local
area networks) to enterprise-wide networks spanning multiple LANs and WANs (wide
area networks). 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 need for and challenges in providing secure access to
information and applications.
At the same time, these two major transitions and the need for secure,
managed communications, have 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 at low costs. 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.
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The Need for Network Security
Although the increase in of connectivity and information exchange
provides tremendous benefits, it also exposes an organization's sensitive
information and 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 sensitive data to
unauthorized interception. These risks create a critical need for enterprises to
protect their information and information systems from unauthorized access and
use.
Earlier 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
must be open and extendible 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
Using Check Point's Secure Virtual Network (SVN) architecture, 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 earlier network 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 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
increases. 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 the advantage of 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. 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 300
vendors have joined the OPSEC Alliance. 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.
11
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), Linux,
Hewlett-Packard (HP-UX) and IBM Corporation (AIX). 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-1 and 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 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. Other
Company products include Provider-1 and Site Manager-1 for service providers and
large enterprises. During 2001 the Company started shipping the Next Generation
(NG) version of all of its products, delivering advances in Internet security
making it open, scalable, centrally manageable and easy to deploy, while
enabling reduced communication costs
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 servers and
several industry appliance 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. All FireWall-1 products are
compatible and FireWall-1 Internet Gateway products can be upgraded while
retaining the same management and user interface capabilities.
12
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 an add on module to VPN-1/FireWall-1 that provides
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.
Provider-1
Check Point Provider-1anhances VPN-1/FireWall-1 with multi customer and
multi domain powerful policy management capabilities, developed for Managed
Service Providers (MSPs) and large enterprise networks. Provider-1 enables the
central creation and management of a single hardware server, while maintaining
complete and secure isolation between individual customer databases. Provider-1
is designed to reduce the hardware and personnel costs associated with managing
multiple security policies in MSP and enterprise network environments.
SiteManager-1
SiteManager-1 is a comprehensive, centralized management system,
capable of scaling to manage thousands of customers at the provider network
operations center. It enables service providers and Telcos to address the
high-growth market for delivering managed Internet security and VPN services to
small and medium-sized businesses.
Safe@Home, Safe@Office and S-box
SofaWare Technologies Ltd. ("SofaWare"), an affiliate of the Company,
develops and markets products designed to provide the home, home office and very
small office market with firewall and VPN Internet security solutions enabling
safe and productive high-speed broadband access.
SofaWare's Safe@Home and Safe@Office products protect small networks
with local, web-based security management capabilities. Safe@Home and
Safe@Office also enable service providers to offer managed security solutions
including content filtering and other value-added services to their subscribers.
S-box is the latest SofaWare product offering, a relatively inexpensive
appliance that integrates the SofaWare software into a convenient, user-friendly
package. Check Point has licensed certain of its technology to SofaWare and
SofaWare has appointed Check Point as the exclusive worldwide reseller of
SofaWare products. See "Organizational Structure" below in this Item 4.
TECHNOLOGY
VPN-1/FireWall-1 Technology and SVN Architecture
Check Point's VPN-1/FireWall-1 technology provides a powerful, easy-to-use
solution for the implementation of an integrated network security solution. A
high level of security and security management is achieved through the company's
Secure Virtual Network (SVN) architecture. Three key elements of the SVN
architecture include:
Management Technologies and Architecture (SMART - Security Management
Architecture)
Check Point's Security Management Architecture (SMART) is based on a
three-tier framework that includes a powerful graphical user interface (GUI) for
the system and security administrator that enables the flexible definition,
review, audit and
13
maintenance of the security policy. An object-oriented architecture allows for
the efficient storage and specification of security policy elements (such as
computers, users, networks and network devices, network services and security
rules). Powerful management tools, such as object managers, audit and network
activity logging and monitoring tools and policy editors are based on this
unifying architecture. VPN-1/FireWall-1 SMART management servers can manage
multiple security enforcement points regardless of their size and physical
location.
Security and Network Traffic Enforcement Technologies (based on Stateful
Inspection)
Check Point VPN-1/FireWall-1 enforcement points are installed at the
network border (as security gateways), deployed on critical servers, and
installed on client platforms (with VPN-1 SecureClient). These enforcement
points implement the company's patented Stateful Inspection technology using the
Inspect engine. The Inspect engine scans all incoming and outgoing IP traffic
and is based on the company's patented Stateful Inspection technology, which
matches all traffic against the security policy. This powerful technology can be
enhanced by the company, its partners and users by using the company's INSPECT
programming language.
Based on fine grained matching, traffic can be dropped (indicating a
violation of the security policy), forwarded, encrypted and forwarded (secured
VPN traffic), prioritized (FloodGate-1 QoS - IQ Engine Technology) or sent for
further analysis through additional enforcement modules. These include functions
like checking the credentials and authentication of the requesting user and
inspecting the traffic through screening technology such as URL filtering or an
Anti-Virus system. Many of these additional security technologies are provided
by 3rd party vendors and are integrated through the OPSEC architecture. In
addition, technologies like SecureXL further accelerate the performance of
security and network operations using system extensions or 3rd party ASIC-based
accelerators and platforms.
Integration with additional systems (OPSEC - Open Platform for Security)
The OPSEC architecture 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 the 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. OPSEC also supports industry-standard
protocols such as RADIUS, IPSec, 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
Network security is implemented in both the management module and the firewall
enforcement module. The management module defines the security policy through a
set of rules established by the system administrator. These rules are then
enforced by any number of firewall modules. The cornerstone of Check Point's
VPN-1/FireWall-1 technology include sthe Company's patented Stateful Inspection
technology, the Secured Virtual Network (SVN) architecture, SMART (Security
Management Architecture), SecureXL for industry-leading VPN performance,
One-Click VPN technology for easy VPN deployment, and the OPSEC architecture.
Stateful Inspection enables highly efficient, transparent screening of all
communications attempting to pass through a network gateway. Check Point's SVN
provides manageable and scalable security solutions which are easy to use, fast,
open and secure. The SVN architecture includes new technologies such as SMART-
Check Point's new Security Management Architecture which provides comprehensive
management and policy tools for service providers, enterprises, branch offices,
small businesses and the home user.
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 (channel partners): distributors, Value Added
Resellers (VARs), Original Equipment Manufacture (OEMs), system integrators, and
Managed Service Providers (MSPs). The Company 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. No channel
partner accounted for more than 10% of the Company's revenues in 2000 or 2001.
During 1999, approximately 12% of revenues were derived from a single channel
partner. The Company's agreements with its OEM partners and resellers are
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.
14
The company allows channel partners to provide prospective customers
with 30-day evaluation copies of the Company's software products. If the
customer elects to purchase the Company's product, it places its order through
its reseller, which in turn places the order with the Company. The Company
issues an invoice to the reseller, and sends a software key to the reseller to
provide to the customer which enables full use of the products purchased by the
customer. 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.
The Company has bundling relationships with server and workstation
vendors and appliance manufacturers, such as Nokia and Intrusion.com, and other
suppliers of enterprise network hardware products. The Company believes that
strategic relationships can significantly contribute to the achievement of its
sales and marketing goals by integrating complementary technologies.
Additionally, these hardware partners provide primary support and training to
their customers enabling Check Point to concentrate its support efforts on
high-level technical assistance for its partners.
The Company has derived substantially all of its revenues, and expects
to continue to derive the vast majority of its revenues in the foreseeable
future, from sales of its VPN-1 and FireWall-1 product family, including related
software subscriptions, support and technical services and training programs.
Revenues from the sales in the Americas, Europe, Japan and the rest of the world
were 53%, 29%, 11% and 7% in 1999, 48%, 34%, 9% and 9% in 2000, and 45%, 37%,
10% and 8% in 2001 respectively, of total revenues.
The Company's OPSEC (Open Platform for Security) Alliance program is
focused on delivering integration and interoperability with complimentary
products and developing marketing relationships with partners to promote
"best-of-breed" solutions. With over 300 partners, OPSEC is the industry's
leading open multi-vendor security framework. OPSEC provides customers with a
broad choice of "best-of-breed" integrated applications and deployment platforms
that support Check Point's Secure Virtual Network (SVN) Architecture. Products
that carry the "OPSEC Certified" and "Secured by Check Point" seals have been
tested to enable integration and interoperability. System integrators with which
the Company maintains informal cooperative relationships include Accenture,
Computer Sciences Corporation, Electronic Data Systems, PriceWaterhouse Coopers,
and IBM Global Services. 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 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.
See "Risk Factors" in "Item 3 - Key Information."
CUSTOMER SERVICE AND SUPPORT
The Company operates a Worldwide Technical Services (WTS) organization,
based primarily in Dallas, Texas, providing a wide range of educational and
professional services. This enables the Company to partner with resellers in
implementing secure, reliable service solutions. Substantially all of the
Company's revenues from customer service and support are derived from the
Company's U.S. subsidiary.
The Company's channel partners 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 which 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, 7-day call center, based
primarily 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 research and
development group in Ramat Gan, Israel 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.
15
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 Expert (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.
The Company also has a professional services organization. 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.
Customers are encouraged to purchase a software subscription, which is
a component of the services program that provides product updates and version
upgrades for Check Point's products on a "when and if available" basis. 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.
RESEARCH AND 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. 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.
Net research and development expenses for 1999, 2000 and 2001 were
$18.9 million, $30.3 million and $33.2 million, respectively. At December 31,
2001, the Company had 326 employees dedicated to research and development
activities, and quality assurance. The Company is a member of the International
Computer Security Association (ICSA) and the Secure Wide Area Networking Task
Force.
COMPETITION
See "Risk Factors - Competition" in "Item 3 - Key Information."
PROPRIETARY RIGHTS
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 generally
enters into confidentiality agreements with employees, consultants, customers
and potential customers and limit access to, and distribution of its proprietary
information.
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 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
and currently pending. A patent issued from the European Patent Office (the
"EPO") 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 affect 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 either at all or within the
16
scope of the claims sought by the Company. 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.
ORGANIZATIONAL STRUCTURE
The Company is organized under the laws of the State of Israel and wholly owns
the subsidiaries specified below:
NAME OF SUBSIDIARY COUNTRY OF INCORPORATION
------------------ ------------------------
Check Point Software Technologies, Inc. (*) United States of America (Delaware)
MetaInfo Inc. (*) United States of America (Delaware)
Check Point Software Technologies (Canada) Inc. United States of America (Delaware)
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 (Netherlands) B.V. Netherlands
Check Point Software Technologies SARL France
Israel Check Point Software Technologies Ltd. China China
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. Netherlands
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 (Luxembourg) S.A. (**) Luxembourg
Check Point (Hungary) Group Financing Ltd. (**) Hungary
(*) Check Point Software Technologies, Inc. wholly owns MetaInfo Inc.,
(**) Check Point Software Technologies (Luxembourg) S.A. owns 96.6%, and Check
Point Software Technologies (Netherlands) B.V. owns 3.4%, of Check Point
(Hungary) Group Financing Ltd.,
17
NAME OF AFFILIATED COMPANY COUNTRY OF INCORPORATION
-------------------------- ------------------------
Sofaware Technologies Ltd. Israel
Check Point has provided a convertible loan to SofaWare and has the right to
convert this loan into 60% of the equity of SofaWare on a fully diluted basis.
Check Point also holds warrants that allow it to further increase its holdings
in SofaWare to approximately two-thirds of the equity of SofaWare on a fully
diluted basis.
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 113,000 square feet of office space. These facilities are leased
under leases that expire between 2003 and 2011, including renewal options. The
Company also leases approximately a total of 97,000 square feet of office space
in the United States. Of that, approximately 42,000 square feet of office space
are leased for the sales and marketing headquarters in Redwood City, California,
and approximately 31,000 square feet of office space for its support center in
Dallas, Texas. These facilities are leased under leases for periods of up to
five years. In addition, the Company leases regional office space in the United
States in Texas, California, Colorado, Michigan, Illinois, Massachusetts,
Washington, Georgia, New York, Arizona, Florida, New Jersey, Alabama, Minnesota
and Virginia. Other leased offices are located in Canada, England, France,
Singapore, Germany, Japan, Holland, Italy, Australia, Sweden, Norway, Spain,
Switzerland and China.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis is based on and should be
read in conjunction with the Company's consolidated financial statements,
including the related notes, contained in " Item 18 - "Financial Statements."
OVERVIEW
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 Internet Protocol networks
including the Internet, intranets and extranets.
The Company's business is subject to the effects of general global
economic conditions and in particular, market conditions in the enterprise
security and VPN industry. Recently, these economic and market conditions have
reduced the high growth that the industry had experienced over the past several
years. As a result, the market value, financial results and capital spending
levels of many of the Company's customers have been materially adversely
affected. The Company believes that the impact of the current general economic
downturn in the industry may result in slower revenue growth rates for the
Company than have been achieved in recent years.
The Company has derived substantially all of its revenues, and expects
to continue to derive the vast majority of its revenues in the foreseeable
future, from sales of its FireWall-1 and VPN-1 product family, including related
software subscriptions, support, technical services and training programs.
No customer accounted for more than 10% of the Company's revenues in
2000 or 2001. During 1999 approximately 12% of the revenues were derived from a
single customer.
During each of 1999, 2000 and 2001, 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.
18
YEAR ENDED DECEMBER 31,
------------------------------------------
REGION 1999 2000 2001
------ ---------- ---------- ----------
Americas 53% 48% 45%
Europe (excluding Great Britain) 20% 26% 27%
Great Britain 9% 8% 10%
Japan 11% 9% 10%
Other - mostly Asia Pacific 7% 9% 8%
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 2002, the Company intends to continue to
make 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. 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.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to arrangements with extended payment
terms, product returns, bad debts, income tax provisions and legal
contingencies. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual
results may differ from these estimates.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition
The Company periodically considers arrangements regarding certain
channel partners with payment terms extending beyond the Company's 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 channel partners, providing that all other revenue recognition criteria have
been met. The Company also records estimated reductions to revenue for product
returns. If the Company's channel partners return more products than estimated
by the Company, additional reductions to revenue may be required. See note 2K in
Financial Statements.
Bad Debt and Allowance for Doubtful accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its channel partners to make required
payments. If the financial condition of the Company's channel partners were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Income taxes
The Company operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. These audits can involve complex
issues, which may require an extended period of time to resolve. In management's
opinion, adequate provisions for income taxes have been made for all years.
Legal Contingencies
As discussed in "Legal Proceedings" in "Item 8 - Financial
Information," the Company is involved in a legal proceeding with the European
Commission and, as of December 31, 2001, management has accrued its estimate of
the probable costs for the resolution of this claim. This estimate has been
developed in consultation with outside counsel handling the Company's defense in
this matter and is based upon an analysis of potential outcomes. Management does
not believe this proceeding will have a material adverse effect on the Company's
consolidated financial position. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in the Company's assumptions and estimates related to this
proceeding or the outcome of this proceeding.
19
RESULTS OF OPERATIONS:
The following table presents, for the periods indicated, information
concerning the Company's results of operations (in thousands of US$).
1999 2000 2001
---------- ---------- ----------
Revenues:
Products and licenses $ 172,270 $ 326,998 $ 374,026
Software subscriptions 33,771 65,273 110,236
---------- ---------- ----------
Total products 206,041 392,271 484,262
---------- ---------- ----------
Support, training and consulting 13,526 33,012 43,381
---------- ---------- ----------
Total revenues 219,567 425,283 527,643
Cost of revenues 22,423 35,265 26,571
---------- ---------- ----------
Gross profit 197,144 390,018 501,072
---------- ---------- ----------
Operating expenses:
Research and development, net 18,923 30,309 33,221
Sales and marketing 68,229 110,003 109,086
General and administrative 13,069 20,409 22,002
---------- ---------- ----------
Total operating expenses 100,221 160,721 164,309
---------- ---------- ----------
Operating income 96,923 229,297 336,763
Financial income, net 12,962 29,147 44,760
---------- ---------- ----------
Income before taxes on income 109,885 258,444 381,523
Taxes on income 14,104 37,231 59,603
---------- ---------- ----------
Net income $ 95,781 $ 221,213 $ 321,920
========== ========== ==========
The following table presents, for the periods indicated, information concerning
the Company's results of operations as a percentage of the Company's revenues.
1999 2000 2001
---------- ---------- ----------
Revenues:
Products and licenses 78% 77% 71%
Software subscriptions 15 15 21
Total products 93 92 92
---------- ---------- ----------
Support, training and consulting 7 8 8
---------- ---------- ----------
Total revenues 100 100 100
Cost of revenues 10 8 5
---------- ---------- ----------
Gross profit 90 92 95
---------- ---------- ----------
Operating expenses:
Research and development, net 9 7 6
Sales and marketing 31 26 21
General and administrative 6 5 4
---------- ---------- ----------
Total operating expenses 46 38 31
---------- ---------- ----------
Operating income 44 54 64
Financial income, net 6 7 8
---------- ---------- ----------
Income before taxes on income 50 61 72
Taxes on income 6 9 11
---------- ---------- ----------
Net income 44% 52% 61%
========== ========== ==========
20
Revenues. The Company's revenues are derived from the sale of software
products and related software subscriptions, support contracts, training and
consulting. The Company's revenues were $219.6 million, $425.3 million and
$527.6 million in 1999, 2000 and 2001, respectively. The year-to-year 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 resellers and the introduction of new versions of VPN-1, FireWall-1, and
Provider-1. Revenues from sales to resellers and OEMs in the Americas
represented 53%, 48% and 45% of revenues in 1999, 2000 and 2001, respectively.
Cost of revenues. The Company's cost of revenues is comprised of the
cost of freight, media, software production, manuals and packaging, post-sale
customer support, training, consulting and license fees. Cost of revenues was
$22.4 million, $35.3 million and $26.6 million for 1999, 2000 and 2001,
respectively. Gross margins were 90%, 92% and 95% of the Company's revenues for
1999, 2000 and 2001, respectively. The decrease in cost of revenues was mainly
attributable to a decrease in third party sales (mainly Nokia and ISS) and
increases in the Company's operational efficiency in general production costs
during 2001.
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 $18.9 million,
$30.3 million and $33.2 million in 1999, 2000 and 2001, respectively,
representing 9%, 7% and 6% of revenues, respectively. The increase in absolute
dollars was mainly attributable to recruiting skilled development personnel, and
facility costs. 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 $68.2 million, $110.0 million and
$109.1 million in 1999, 2000 and 2001, respectively, representing 31%, 26% and
21% of revenues, respectively. The level of expenses in 2001 was slightly lower
than in 2000, however the Company succeeded in increasing its sales force while
reducing non-headcount related expenses. Sales and marketing expenses decreased
substantially as a percentage of revenues in 2001 and 2000 as compared with
1999, primarily due to the significant increase in revenues. The Company
anticipates that 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 salaries, outside professional fees and other related expenses.
General and administrative expenses were $13.1 million, $20.4 million and $22.0
million in 1999, 2000 and 2001, respectively, representing 6%, 5% and 4% 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 relative to general and administrative expense levels. 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.
Financial income, net. Financial income, net consists primarily of
interest earned on cash and cash equivalents, short and long term deposits and
marketable securities. Financial income, net was $13.0 million, $29.1 million,
and $44.8 million in 1999, 2000 and 2001, respectively. The increase in these
periods was primarily attributable to the increase in the Company's cash and
cash equivalents, short and long-term deposits and marketable securities, all of
which grew as a result of the Company's cash flow from its operations. Interest
income is heavily dependent on prevailing U.S. interest rates.
QUARTERLY RESULTS OF OPERATIONS.
The following table sets forth certain unaudited consolidated
statements of income data for each of the quarters in 2000 and 2001, as well as
the percentage of the Company's revenues represented by each item. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained herein and include all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of such information when read in
conjunction with the Company's consolidated financial statements and notes
thereto appearing elsewhere in this annual report. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
21
US$ in thousands, except per share data:
2000 2001
-------------------------------------------- --------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
Revenues $ 78,166 $ 90,668 $116,014 $140,435 $145,010 $142,071 $118,032 $122,530
Cost of revenues 7,644 8,006 9,407 10,208 10,078 6,464 5,368 4,661
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 70,522 82,662 106,607 130,227 134,932 135,607 112,664 117,869
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development, net 6,175 6,659 8,344 9,131 9,320 9,049 7,511 7,341
Sales and marketing 24,218 27,733 28,467 29,585 30,382 28,714 23,500 26,490
General and administrative 5,199 4,502 5,094 5,614 6,538 6,145 4,877 4,442
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 35,592 38,894 41,905 44,330 46,240 43,908 35,888 38,273
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 34,930 43,768 64,702 85,897 88,692 91,699 76,776 79,596
Financial income, net 5,494 6,411 7,800 9,442 10,101 11,574 11,440 11,645
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes on income 40,424 50,179 72,502 95,339 98,793 103,273 88,216 91,241
Taxes on income 5,545 6,508 10,858 14,320 15,115 16,472 13,911 14,105
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 34,879 $ 43,671 $ 61,644 $ 81,019 $ 83,678 $ 86,801 $ 74,305 $ 77,136
Basic net earnings per share $ 0.15 $ 0.19 $ 0.26 $ 0.34 $ 0.35 $ 0.36 $ 0.31 $ 0.32
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in computing basic net
earnings per share 230,256 231,663 233,418 235,362 236,945 239,555 241,342 242,353
-------- -------- -------- -------- -------- -------- -------- --------
Diluted net earnings per share $ 0.13 $ 0.17 $ 0.23 $ 0.31 $ 0.32 $ 0.33 $ 0.29 $ 0.30
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in computing diluted net
earnings per share 262,941 263,637 264,281 263,982 262,367 260,792 259,194 258,893
-------- -------- -------- -------- -------- -------- -------- --------
AS A PERCENTAGE OF REVENUES
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 10 9 8 7 7 5 5 4
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 90 91 92 93 93 95 95 96
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development, net 8 7 7 7 6 6 6 6
Sales and marketing 31 31 25 21 21 20 20 21
General and administrative 7 5 5 4 5 5 4 4
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 46 43 37 32 32 31 30 31
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 44 48 55 61 61 64 65 65
Financial income, net 7 7 7 7 7 9 10 9
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes on income 52 55 62 68 68 73 75 74
Taxes on income 7 7 9 10 10 12 12 11
-------- -------- -------- -------- -------- -------- -------- --------
Net income 45% 48% 53% 58% 58% 61% 63% 63%
-------- -------- -------- -------- -------- -------- -------- --------
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 products are 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
22
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 financed its operations through cash generated from
operations. Cash and cash equivalents and short term investments were $487.0
million, and long term interest bearing investments were $541.4 million,
totaling $1,028.4 million as of December 31, 2001, as compared with cash and
cash equivalents and short term investments of $438.4 million and long term
interest bearing investments of $217.6 million totaling $656.0 million as of
December 31, 2000. The Company generated net cash from operations of $144.3
million, $315.7 million and $347.2 million in 1999, 2000 and 2001, respectively.
Net cash from operations for 2001 consisted primarily of net income less
decreases in deferred revenues, employees and payroll accruals and offset by
decreases in trade receivables and increases in depreciation and amortization.
Net cash from operations for 1999 and 2000 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, $9.1 million, and $9.7 million in 1999, 2000 and 2001, respectively.
Currently, the Company's capital expenditures consist primarily of computer
equipment and software for the Company's research and development and technical
service organization efforts as well as increasing infrastructure to enable
operation expansion. The Company does not anticipate any change to this policy
in the foreseeable future. As of December 31, 2001, the Company had no material
commitments for capital expenditures.
Net cash provided by financing activities (mainly net proceeds from
issuance of shares upon exercise of options) was approximately $15.7 million,
$25.8 million and $36.3 million in 1999, 2000 and 2001, 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's principal sources of liquidity consist of its current
assets and long-term investments (which aggregated $1,142,908 as of December 31,
2001), its cash flow from operations and its financial income, net. The Company
believes that these sources of liquidity will be sufficient to satisfy the
Company's capital requirements for the foreseeable future.
EFFECTIVE CORPORATE TAX RATE
The Company's effective tax rate was 12.8%, 14.4% and 15.6% in 1999,
2000 and 2001, respectively. These low tax rates were mainly achieved as a
result of the Company's "approved enterprise" status under Israeli law of its
production facilities in Israel. The Company's production facilities have been
granted the status of "approved enterprise," for its capital investment plans.
According to the provisions of Israeli law, the Company has chosen to
enjoy "alternative plan benefits" relating to these facilities, which involves a
tax exemption or reduction. Accordingly, the Company's income from its "approved
enterprise" is tax exempt for a period of two to four years and is subject to a
reduced corporate tax rate of 10% - 25% (based on percentage of foreign
ownership) for an additional period of six to eight years. (The tax benefits
under these investment plans are scheduled to gradually expire starting from
2005 through 2013).
The period of tax benefits, for each program, is limited to the earlier
of 12 years from commencement of production, or 14 years from receipt of
approval.
Tax-exempt income attributable to the "approved enterprises" cannot be
distributed to shareholders without subjecting the Company to taxes except upon
complete liquidation of the Company. The Company'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 the Company's "approved enterprises. "
If the retained tax-exempt income (approximately $ 370 million as of
December 31, 2001) is distributed in a manner other than upon the complete
liquidation of the Company, it would be taxed at the reduced corporate tax rate
applicable to such profits (between 10%-25%) and an income tax liability would
be incurred of up to approximately $ 90 million as of December 31, 2001.
If the Company fails to meet the requirements of being an "approved
enterprise" in the future, the Company could be subject to the regular Israeli
corporate tax rate of 36% and could be required to refund tax benefits already
received.
23
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The directors and executive officers of the Company as at December 31,
2001 were as follows:
NAME POSITION
---- --------
Gil Shwed (1)...................................... Chief Executive Officer and Chairman of the Board
Marius Nacht....................................... Senior Vice President and Vice Chairman of the
Board
Jerry Ungerman..................................... President
Eyal Desheh........................................ Chief Financial Officer
Shlomo Kramer...................................... Director
Irwin Federman (1)(2)(3)........................... Director
David Rubner (2).................................. 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; see " Outside and Independent Directors" below in this
Item 6.
Gil Shwed, a co-founder of the Company, is Chairman of the Board of the
Company, a position he has held since July 1998, and is also the Company's Chief
executive officer and a Director of the Company, both of which positions he has
held since the Company 's inception in July 1993. Mr. Shwed also served as
President of the Company from its inception until 2001.
Marius Nacht, a co-founder of the Company, has served as the Company's
Senior Vice President and Vice Chairman of the Board since the beginning of
2001. Mr. Nacht served as the Company's Senior Vice President from January 1999
until the beginning of 2001. 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.
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 was appointed President of the Company in 2001 and has
global responsibility for sales, marketing, business development and technical
services. He served as Senior Vice President from 1998 until 2000. 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 a director of Serena Software.
Eyal Desheh has been Chief Financial Officer of the Company since May
2000. He was Chief Financial Officer for Scitex Corporation Ltd., a company
engaged in digital imaging 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 as
Vice President for business development and strategy at Bezeq, The Israeli
Telecommunications Corp. Ltd., Deputy Chief Financial Officer of Teva
Pharmaceuticals Ltd., Chief Executive Officer of H.L. Financial Services Ltd.
and numerous positions in 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.
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.,
24
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 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 and Chief Executive Officer of Rubner Technology Ventures
Ltd., a venture capital firm, and is a general partner in Hyperion Israel
Advisors Ltd., a venture capital firm. Prior to starting this company, Mr.
Rubner served as President and Chief Executive Officer of ECI Telecommunications
Ltd. 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 of ECI Telecommunications Ltd. 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, was a recipient of the
Industry Prize in 1995 and serves on the boards of directors of a number of
companies.
Alex Serge Vieux is Chairman, CEO and founder of DASAR Brothers, Inc.,
which he founded in 1990 and the owner of ETRE, the European Technology
Roundtable Exhibition. He is a member of the board of several public and private
technology companies including BVRP software, Cibox, Commerce One, Kyriba,
madge, Thrunet and White Pajama. Mr. Vieux has served as a senior advisor to
both government and industry and was lately named, for the second year in a row,
one of the most influential people in the European technology community. 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 Fulbright Scholar.
Dr. Tal Shavit has served as a director of the Company since 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-up
companies, 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 management.
Except for Messrs. Shwed, Nacht and Kramer, as of February 28, 2002,
none of the directors or executive officers of the Company owned more than one
percent of the outstanding ordinary shares. For information as to the share
ownership of Messrs. Shwed, Nacht and Kramer, see "Item 7 - Major Shareholders
and Related Party Transactions."
BOARD COMPOSITION
The Company's Articles of Association provide for a Board consisting of
not less than six nor 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 all of his business time to the affairs of the Company.
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.
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.
25
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 that companies listed thereon
must have at least three independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise.
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 responsibilities of the audit committee under the NASDAQ rules include
evaluating the independence of a company's outside auditors. The Company's Audit
Committee satisfies both the Israeli law and the NASDAQ National Market
requirements.
COMPENSATION COMMITTEE
The Company's Compensation Committee reviews and, as required, approves
policies under which compensation is awarded to the Company's executive officers
and key managers and oversees the administration of the Company's executive
compensation programs, including the Company's stock option plans
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate direct compensation of all 10 persons as a group who
served in the capacity of director or executive officer during the year ended
December 31, 2001 was $2,638,637. In addition, the Company set aside $116,478
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. Except for severance
payments mandated by Israeli law for all employees employed in Israel, the
Company does not have any agreements with those directors who are also officers
of the Company providing for benefits upon termination of employment. The
Company's directors who are officers will not receive compensation for serving
as directors in 2002; the Company's directors who are not officers will receive
compensation for serving as directors in 2002. From time to time, the Company
grants options under its stock option plans (described below) to its officers
and directors. As of February 28, 2002, the Company's officers and directors
held options to purchase an aggregate of 9,681,000 shares under the Company's
stock option plans.
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 1996 Israel Plan
authorizes the issuance of up to 61,616,480 ordinary shares. As of February 28,
2002, 9,896,368 ordinary shares have been issued under the 1996 Israel Plan,
options to purchase 18,641,087 ordinary shares were outstanding (including
options incorporated from previous grants to employees in Israel prior to the
adoption of the 1996 Israel Plan) and 33,079,025 shares remained available for
future grant. The exercise prices range between $0.002 and $86.54. The 1996
Israel Plan is administered by the Board of Directors, which has broad
discretion, subject to certain
26
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 U.S.
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 1996 U.S. Plan authorizes the issuance of up to
85,524,721 ordinary shares. As of February 28, 2002, 33,103,553 ordinary shares
have been issued under the 1996 U.S. Plan, options to purchase 8,990,038
ordinary shares were outstanding (including options incorporated from the 1995
Plan) and options to purchase 43,431,130 ordinary 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 U.S. Plan.
Under the 1996 U.S. 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 U.S. Plan.
The 1996 U.S. 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 U.S. 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 U.S. Plan acquire ordinary shares under the 1996 U.S.
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 U.S. 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 U.S.
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 U.S. 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 U.S. Plan and the
vesting of shares subject to outstanding options upon the occurrence of certain
hostile tender offers.
Under the automatic grant program contained in the 1996 U.S. Plan, each
individual joining the Board as a non-employee director receives at that time,
an automatic option grant for 30,000 ordinary shares. In addition, at each
annual shareholders meeting, each non-employee director who is to continue to
serve as a non-employee director after such annual meeting is automatically
granted a fully vested option to purchase up to an additional 11,250 ordinary
shares, provided that the director has served as a non-employee director for at
least six months prior to the date of such annual meeting. The exact number of
ordinary shares covered by the options to be granted to each non-employee
director is determined by the other directors in office immediately prior to the
date of his or her election or appointment, or the date of the annual meeting,
as the case may be. Each option has an exercise price not less than the fair
market value of the ordinary shares on the automatic grant date and a maximum
term of 10 years, subject to earlier termination following the optionee's
cessation of Board service. The option becomes exercisable in four equal annual
installments over the optionee's period of Board service,
27
beginning one year after the grant date. The Board may amend or modify the 1996
U.S. Plan at any time. The 1996 U.S. 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.
Under the Purchase Plan, 6,000,000 ordinary shares were authorized for issuance.
As of February 28, 2002, 824,794 ordinary shares have been issued under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423
of the United States Internal Revenue Code, is implemented by six-month
offerings with purchases occurring at six-month intervals in February and July.
The Compensation Committee of the Board administers the Purchase Plan. Employees
of the Company's United States subsidiary 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 terminate 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
of the Company. 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 terminates by its terms 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.
EMPLOYEES
As of February 28, 2002, the Company had 1,178 employees, of whom 326
were engaged in research, development, and quality assurance, 512 were engaged
in marketing and sales, 210 were engaged in customer support and operations, and
130 were engaged in MIS, administration and finance. The Company believes that
its relations with its employees are satisfactory.
Substantially all of the Company's employees are located in Israel and
the United States. With respect to its employees in Israel, 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 and restrictions on discrimination. The Company
is subject to the labor laws and regulations of other jurisdictions in the world
where it has employees.
28
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 February 28, 2002 for each person who is
known by the Company to own beneficially more than five percent of the Company's
outstanding ordinary shares.
NAME OF TEN PERCENT AMOUNT BENEFICIALLY PERCENTAGE OF
SHAREHOLDERS, OFFICERS AND DIRECTORS OWNED CLASS
------------------------------------ ------------------- -------------
Gil Shwed.................................. 27,048,996 11.0%
Marius Nacht............................... 25,371,796 10.4%
Shlomo Kramer.............................. 13,780,650 5.7%
The Company is not directly or indirectly controlled by another corporation or
by any foreign government. The Company's major shareholders do not have
different voting rights with respect to their shares.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS AND DIVIDEND POLICY
The Company's 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.
The Company anticipates that it will retain any future earnings to
support operations and to finance the growth and development of its business. In
addition, tax-exempt income attributable to the Company's status as an "approved
enterprise" under Israeli tax law can be distributed to shareholders without
subjecting the Company to taxes only upon the complete liquidation of the
Company. The Company's Board of Directors has determined that such tax-exempt
income will not be distributed as dividends. Therefore, the Company does not
expect to pay cash dividends for the foreseeable future.
LEGAL PROCEEDINGS
(a) On June 20, 2001, the Company, through its subsidiary in France
received a formal request for information from the Directorate-General for
Competition of the European Commission (the "Commission") regarding a complaint
submitted by Stonesoft Corporation, a Finnish company alleging anti-competitive
behavior, and in particular, alleging abuse of a dominant position held by the
Company, and requesting that the Commission investigate the allegations and
order injunctive relief. The Company responded to the Commission in a timely
manner both to this and a subsequent request for information received on
November 6, 2001, and has contested the existence of a dominant position or of
infringing behavior on its part. The Company's legal counsel has advised that,
where the Commission determines at the conclusion of a formal proceeding that a
company has violated European competition rules, fines may be imposed up to a
maximum of 10% of the Company's consolidated annual revenues as of the date of
the last violation. Since responding to the Commission's second request for
information, the Company has been engaging in discussions with the Commission
with a view to resolving the matter in a manner acceptable to all sides and on
the basis of which the complaint against it would be withdrawn and the
investigation terminated. These discussions are ongoing. To date, the Commission
has not initiated formal proceedings against the Company. Based on the opinion
of the Company's management and its legal counsel, a provision was recorded in
the financial statements as of December 31, 2001 in respect of probable costs
arising from this matter.
(b) 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 sought to enjoin the Company
from using the "Check Point" name in connection with the Company's products and
services. The District Court issued its opinion in the Company's favor on July
12, 2000, and the District Court's decision was affirmed on appeal during 2001.
The judgment is now final and no longer appealable.
29
ITEM 9. THE OFFER AND LISTING
The Company's ordinary shares are traded publicly on the NASDAQ
National Market under the symbol "CHKP."
The following table lists the high and low closing sale prices for the ordinary
shares for the periods indicated as reported by the NASDAQ National Market:
HIGH LOW
1997 .................................................. $ 17.00 $ 5.42
1998 .................................................. 7.96 2.17
1999 .................................................. 34.85 4.46
2000 .................................................. 113.33 30.54
2001 .................................................. 110.58 20.70
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
2001
First Quarter ......................................... 110.58 45.31
Second Quarter ........................................ 80.01 41.38
Third Quarter ......................................... 50.95 20.70
Fourth Quarter ........................................ 44.37 20.80
MOST RECENT SIX MONTHS
September 2001 ........................................ 32.99 20.70
October 2001 .......................................... 33.33 20.80
November 2001 ......................................... 42.48 30.31
December 2001 ......................................... 44.37 37.31
January 2002 .......................................... 47.20 32.88
February 2002 ......................................... 36.50 27.48
On March 20 2002, the last reported sale price of the Company's
Ordinary shares on the NASDAQ National Market was $30.18 per share. According to
the Company's transfer agent, as of March 7 2002, there were approximately 268
holders of record of the Company's ordinary Shares. Approximately 250 holders of
record held approximately 73% of the Company's ordinary shares in the United
States.
ITEM 10. ADDITIONAL INFORMATION
The objectives and purposes of the Company are to engage in any lawful
activity everywhere in the world. In connection therewith, Check Point develops,
markets and supports Internet security solutions for enterprise networks, and
service providers (Telcos, ISPs, ASPs and MSPs), including Virtual Private
Networks, firewalls, intranet and extranet security. The Company delivers
solutions that enable secure, reliable and manageable business-to-business
communications over Internet Protocol networks including the Internet, intranets
and extranets.
The following is a summary of the material provisions of the Company's
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 4 - Information on the Company - General" and
"Item 19 - Exhibits."
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.
30
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding ordinary shares are validly issued, fully
paid and non-assessable. The ordinary shares do not have pre-emptive rights.
Neither the Memorandum of Association, Articles of Association of the Company
nor the laws 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 in 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 outside 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 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 "Approval of Certain Transactions;
Obligations of Directors, Officers and Shareholders" below in this Item 10.
TRANSFER OF SHARES AND NOTICES. Fully paid ordinary shares are issued
in registered form and, subject to applicable securities laws, 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
four 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.
31
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.
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 at
the beginning of "Item 6 - Directors, Senior Management and Employees" is an
office holder of the Company.
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
with 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 of directors' 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 of
directors 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.
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. Shareholder
32
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:
o any amendment to the Articles of Association;
o an increase of the company's authorized share capital;
o a merger; or
o 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. The
Company has entered into indemnification, insurance and exculpation agreements
with its directors and senior officers, following shareholder approval of these
agreements. The Company has directors' and officers' liability insurance
covering the officers and directors of the Company and its subsidiaries for
certain claims.
BORROWING POWER: AMENDMENT OF RIGHTS OF ORDINARY SHARES
The Company's Articles of Association grant broad powers to the Board
of Directors to authorize the Company to borrow funds, repay borrowings, make
guarantees and grant security interests in borrowings. The Company's Articles of
Association provide that the rights and provisions of the ordinary shares may be
cancelled, added to, restricted, amended or otherwise altered with a vote of the
holders of at least 75 percent of the outstanding ordinary shares voting at a
duly convened shareholders' meeting.
ISRAELI TAXATION, FOREIGN EXCHANGE REGULATION AND INVESTMENT PROGRAMS
The following is a summary of the material Israeli and United States
tax consequences, Israeli foreign exchange regulations and certain Israeli
government programs affecting the Company. To the extent that the discussion is
based on new tax or other 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 or other 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.
33
ISRAELI TAX CONSIDERATIONS
Proposed Tax Changes
On May 4, 2000, a committee chaired by the then Director General of the
Israeli Ministry of Finance, issued a report recommending significant changes in
the Israeli system of taxation. The proposed changes would have significantly
altered the taxation of individuals, and would also have affected corporate
taxation. In particular, the proposed changes would have reduced, but not
eliminated, the tax benefits available to "approved enterprises" such as the
Company's. The proposed changes would also have imposed a capital gains tax on
individuals on the sale of shares, unless the selling shareholder is entitled to
benefits under a tax treaty. In the interim there have been significant
political and economic changes. On February 26, 2002 the Minister of Finance
appointed a new committee to recommend tax reforms, and this committee is
expected to submit a report within 90 days. The Company cannot be certain
whether the proposed changes will be adopted, when it will be adopted or what
form any changes 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.
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 Investment
Law, may enjoy benefits for a period of up to 10 years, or 12 years if it
complies with certain export criteria stipulated in the Investment 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 10 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 the Company's capital 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 2013. Dividends from approved enterprises are taxable at the reduced
rate of 15% if distributed during the tax exemption period or within 12 years
thereafter (this time limit does not apply to an FIC). Tax must be withheld at
source, regardless of whether the dividend is converted into foreign currency.
34
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 of the Ministry of Industry and Commerce 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.
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.
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:
o Deduction of public offering expenses;
o 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; and
o 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
35
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 (CPI).
Under Law, results for tax purposes are measured in real terms, in
accordance with the changes in the Israeli CPI, or in the exchange rate of the
dollar for a "foreign investors' company." The Company elected to measure its
results for tax purposes on the basis of the changes in the Israeli CPI.
Beginning January 1, 2002, the basis will be changes in the exchange rate of the
U.S. dollar.
In November 2001, an amendment to the Inflationary Adjustments Law
(Amendment No. 41), 2001 was passed by the Israeli Knesset, pursuant to which
until February 28 2002, the Minister of Finance, with the approval of the
finance committee of the Knesset, is entitled to determine by an order that the
provisions of the Inflationary Adjustments Law, in whole or in part, will not
apply with respect to a tax year if the CPI in that year did not exceed 3%. On
February 28 2002, the finance committee of the Knesset determined that the
Inflationary Adjustments Law will apply to all entities in 2001, although the
Israeli CPI did not exceed 3% in 2001.
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 the Company's taxable income
for Israeli corporate tax purposes will be different from the Company's dollar
income reflected in our financial statements, which are based on changes in the
shekel exchange rate with respect to the dollar.
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 "United States- Israel Tax Treaty"), 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 (a "Treaty United States Resident") 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, including passive income such as
dividends, royalties and interest. On distributions of dividends, other than
bonus shares and 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 the 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%.
36
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, 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 applicable to the following persons who purchase, hold
or dispose of the ordinary shares ("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 taxable as corporations created or
organized in or under the laws of the United States or any state thereof; (iii)
estates, the income of which is subject to United States federal income taxation
regardless of its source; and (iv) trusts, if (a) a U.S. court is able to
exercise primary supervision over its administration and (b) one or more U.S.
persons have the authority to control all of its substantial decisions. 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 Annual Report on Form 20-F. This discussion generally considers
only U.S. Shareholders that will hold the ordinary shares as capital assets and
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),
(shareholders subject to special treatment under the U.S. federal income tax
laws, such as financial institutions, insurance companies, broker-dealers ,
tax-exempt organizations and foreign individuals or entities, (c) U.S.
Shareholders owning directly or by attribution 10% or more of the Company's
outstanding voting shares, (d) U.S. Shareholders who hold the ordinary shares as
part of a hedging, straddle or conversion transaction, (e) U.S. Shareholders who
acquire their ordinary shares in a compensatory transaction, (f) U.S.
Shareholders whose functional currency is not the dollar, or (g) any aspect of
state, local or non-United States tax law.
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 in
respect of the ordinary shares (including the amount of any Israeli taxes
withheld therefrom) 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 treated first as non-taxable return of capital reducing the U.S.
Shareholder's tax basis in the ordinary shares to the extent of the
distributions, and then as capital gain from a sale or exchange of such ordinary
shares. Such dividends, 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 spot 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 at such U.S. Shareholder's election. The Code provides limitations
on the amount of foreign tax credits that a U.S. Shareholder may claim,
including extensive separate computation rules under which foreign tax credits
allowable with respect to specific categories of income cannot exceed the United
States federal income taxes otherwise payable with respect to each such category
of income. U.S. Shareholders that do not elect to claim a foreign tax credit may
instead claim a deduction for Israeli income tax withheld or paid, but only for
a year in which these U.S. Shareholders elect to do so for all foreign income
taxes. Dividends with respect to the ordinary shares generally will be
classified as foreign source "passive income" for the purpose of computing a
U.S. Shareholder's foreign tax credit limitations for U.S. foreign tax credit
purposes. The rules relating to foreign tax credits are complex, and you should
consult your tax advisor to determine whether and if you would be entitled to
this credit.
37
Disposition of the Ordinary Shares
The sale or exchange of ordinary shares generally will result in the
recognition of capital gain or loss in an amount equal to the difference between
the amount realized on the sale or exchange and the U.S. Shareholder's tax basis
in the ordinary shares. Such gain or loss generally will be long-term capital
gain or loss if the U.S. Shareholder's holding period of the ordinary shares
exceeds one year at the time of the disposition. Gain or loss recognized by a
U.S. Shareholder on a sale or exchange of ordinary shares generally will be
treated as U.S. source income or loss for U.S. foreign tax credit purposes.
Under the tax treaty between the United States and Israel, gain derived from the
sale, exchange or other disposition of ordinary shares by a holder who is a
resident of the United States for purposes of the treaty and who sells the
ordinary shares within Israel may be treated as foreign source income for U.S.
foreign tax credit purposes.
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 in the taxable year is passive
income, or (ii) 50% or more of the average value of its gross assets in the
taxable year, calculated quarterly by value produce or are held for the
production of passive income. For this purpose passive income includes
dividends, interest, royalties, rents, annuities and the excess of gain over
losses from the disposition of assets which produce passive income. If the
Company were a PFIC for any taxable year during a U.S. Shareholder's holding
period, and the U.S. Shareholder does not timely elect to treat the Company as a
"qualified electing fund" under Section 1295 of the Code or elect to mark the
ordinary shares to market, 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 to the extent that it exceeds 125% of the average
annual distributions in the prior three years) and on gain from the disposition
of the ordinary shares. Under these rules, the excess distribution and any 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 and any
taxable year prior to the first taxable year in which the Company is a PFIC
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 on the resulting tax allocated to such
other taxable years. 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. Additionally, if the Company is deemed to be
a PFIC, a U.S. Shareholder who acquires ordinary shares in the Company from a
decedent will be denied the normally available step-up in tax basis to fair
market value for the ordinary shares at the date of the death and instead will
have a tax basis equal to the decedent's tax basis if lower than fair market
value.
U.S. Shareholders may avoid taxation under the rules described above by
making (i) a "qualified electing fund" election for the first taxable year in
which the Company is a PFIC to include such holder's share of the Company's
ordinary earnings and net capital gain on a current basis or (ii) a "deemed
sale" election in a subsequent year along with a qualified electing fund
election if the Company is still 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-to-market" the ordinary shares annually, rather than be subject to the
above-described rules. Under such election, the U.S. Shareholder will include in
income each year any excess of the fair market value of the PFIC stock at the
close of each taxable year over the U.S. Shareholder's adjusted basis in such
stock. The U.S. Shareholder generally will be allowed an ordinary 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, or the amount of any net
mark-to-market gains recognized for prior taxable years, whichever is less. A
U.S. Shareholder's adjusted tax basis in the ordinary shares generally will be
adjusted to reflect the amounts included or deducted under the mark-to-market
election. Additionally, any 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 any loss recognized 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. An election
to mark-to-market generally will apply to the taxable year in which the election
is made and all subsequent taxable years.
If a U.S. Shareholder makes one of these two elections, distributions
and gain will not be recognized ratably over the U.S. Shareholder's holding
period or be subject to an interest charge as described above. Further, the
denial of basis step-up at death described above will not apply. A U.S.
Shareholder making one of these two elections may experience current income
recognition, even if no cash is distributed by the Company.
38
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.
A number of specific rules and requirements apply to both of these
elections and a U.S. Shareholder is urged to consult his or her tax advisor
concerning these elections.
Information Reporting and Back up Withholding.
Dividend payments and proceeds from the sale or disposal of ordinary
shares may be subject to information reporting to the Internal Revenue Service
and possible U.S. federal backup withholding at the rate of 30%. Backup
withholding will not apply, however, to a holder who furnishes a correct
taxpayer identification number or certificate of foreign status and makes any
other required certification or who is otherwise exempt from backup withholding
(for example, a corporation). Any U.S. Shareholder who is required to establish
exempt status generally must file IRS Form W-9 ("Request for Taxpayer
Identification Number and Certification"). Finalized Treasury Regulations, which
are applicable to payments made after December 31, 2000, have generally expanded
the circumstances under which information reporting and backup withholding may
apply. Amounts withheld as backup withholding may be credited against a U.S.
Shareholder's federal income tax liability. A U.S. Shareholder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the Internal Revenue Service and
furnishing any required information.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 or in interest rates. Other than
forward exchange currency contracts and forward rate agreements described below
which are used for hedging cash flow in transactions not denominated in U.S.
dollars, the Company does not use derivative financial instruments in its
investment portfolio.
The table below presents principal amounts and related weighted average rates by
date of maturity for the Company's investments in cash and cash equivalents,
deposits and marketable securities held as of December 31, 2001
(In thousands, except percentages)
FAIR VALUE
TOTAL BOOK AT DEC. 31,
MATURITY VALUE 2001
------------------------------ ------------------------------------------------------------------ ------------- ----------
2002 2003 2004 2005 2006
------------------------------ ----------- ----------- ---------- ----------- ----------- ------------- ----------
Government
and corporate
securities -
Floating interest Book
rate** Value $ 40,794 $ 18,993 $ 5,699 $ 3,393 $ 41,699 $ 110,578 $ 112,855
---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
WAIR* 2.19% 3.15% 2.85% 3.66% 5.54% 3.70%
------------------ ---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
Government and
corporate
securities -
Fixed interest Book
rate Value $ 114,842 $ 82,441 $ 90,852 $ 158,959 $ 127,689 $ 574,783 $ 583,581
---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
WAIR* 4.81% 5.94% 5.98% 6.89% 5.36% 5.49%
------------------ ---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
Money market Book
fund Value $ 219,068 -- -- -- -- $ 219,068 $ 219,068
---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
WAIR* 1.97% -- -- -- -- 1.97%
------------------ ---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
Book
Deposits Value $ 112,253 $ 8,635 -- $ 3,000 -- $ 123,888 $ 123,306
---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
WAIR* 3.74% 3.40% -- 7.00% -- 3.80%
------------------ ---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
Book
Total Value $ 486,957 $ 110,069 $ 96,551 $ 165,352 $ 169,388 $ 1,028,317 $1,038,810
---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
WAIR* 3.06% 5.25% 5.79% 6.82% 5.41% 4.55%
------------------ ---------- ----------- ----------- ---------- ----------- ----------- ------------- ----------
* Weighted Average Interest Rate
** Based upon LIBOR as of December 31, 2001
39
FOREIGN CURRENCY RISK
Most of the Company's sales are denominated in U.S. dollars. In
addition, a substantial portion of the Company's costs is 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 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 balance sheet items are reflected in the
statement of income as financial income or expenses, as appropriate.
The Company hedges the exposure of assets and anticipated revenues
denominated in the Japanese yen with forward and option contracts. The Company
monitors its foreign currency exposures daily to maximize the overall
effectiveness of its foreign currency hedge positions. If these derivatives meet
the definition of a hedge and is so designated, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value is recognized in earnings.
In order to hedge portions of its risk of overall changes in cash flows
resulting from forecasted export sales over the next year, the Company has
instituted a foreign currency cash flow hedging program with zero cost-collar
contracts. As of December 31, 2001, the Company expects to reclassify $2,909
thousands of unrealized gains on hedging derivative instruments, from
accumulated other comprehensive income to earnings during the next 12 months, in
line with actual export sales. Also, the Company enters into forward exchange
contracts designated to hedge the fair value of certain foreign currency
denominated customers' balances.
As of December 31, 2001, the Company's management believes that because
the above transactions are carried out with well-established institutions,
liabilities owing to the Company will be fulfilled. Total outstanding
transactions to sell/purchase U.S. dollars in exchange for the Japanese yen were
in the amount of $ 9.1 million. The above transactions were for a period of
three months. As of December 31, December 2001, the Company accumulated other
comprehensive income of $2.9 million with zero cost-collar contracts.
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 are comprised of U.S. and European government
and corporate debt instruments. The fair value of the Company's long and
short-term securities is based upon their market values as of December 31, 2001.
The Company has entered into forward rate agreements ("FRA",)
designated as a cash flow hedge that effectively convert a portion of its
floating rate investments to a fixed rate basis for a 12 month period beginning
one year after the date of the agreement, thus reducing the impact of the
interest rate changes on future interest income. As of December 31, 2001,
approximately $125 million of the Company's outstanding short term debt had its
interest income designated as hedged forecasted transactions with no material
effect on the Company's financial position or operating results.
40
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, or qualifications of, the
rights of security holders that are required to be disclosed. As of December 31,
2001, the net proceeds from the Company's initial public offering had been used
to pay for fixed assets, research and development costs, hiring employees and
general working capital. None of the net proceeds from the Company's initial
public offering were paid, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person owning ten percent or more
of any class of equity securities, or any of the Company's affiliates.
ITEM 15. RESERVED.
ITEM 16. RESERVED.
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
1 Articles of Association (incorporated by reference to
Exhibit 2.5 to the Company's annual report on Form
20-F for the year ended December 31, 2000)
99.4.1 Form of Indemnification Agreement between the Company
and its officers and directors
8 List of subsidiaries (incorporated by reference to
"Item 4 - Information on the Company - Organizational
Structure" in this Annual Report on Form 20 F)
99.10 Consent of Kost Forer & Gabbay, a member of Ernst &
Young International
41
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it 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: March 21, 2002
42
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
IN U.S. DOLLARS
INDEX
PAGE
----------
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF INCOME F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-25
---------
[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, 2000
and 2001, 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, 2001. 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,
2000 and 2001, and the consolidated results of their operations and cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 14, 2002 A Member of Ernst & Young International
F-2
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
2000 2001
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 157,203 $ 219,068
Short-term bank deposits 209,974 112,253
Marketable securities 71,213 155,636
Trade receivables, net 84,381 74,294
Other accounts receivables 17,637 19,165
---------- ----------
TOTAL CURRENT ASSETS 540,408 580,416
---------- ----------
LONG-TERM INVESTMENTS 219,309 542,276
---------- ----------
PROPERTY AND EQUIPMENT, NET 11,638 13,248
---------- ----------
OTHER ASSETS 6,284 6,968
---------- ----------
$ 777,639 $1,142,908
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 3,644 $ 4,945
Employees and payroll accruals 33,243 26,153
Deferred revenues 121,202 95,703
Accrued expenses and other liabilities 69,101 98,583
---------- ----------
TOTAL CURRENT LIABILITIES 227,190 225,384
---------- ----------
ACCRUED SEVERANCE PAY, NET 1,166 1,796
---------- ----------
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, 2000 and 2001
Issued and outstanding: 235,464,986 ordinary shares, 1 deferred
share and no preferred shares as of December 31, 2000;
242,824,021 ordinary shares, 1 deferred share and no preferred
shares as of December 31, 2001 723 735
Additional paid-in capital 102,303 143,907
Accumulated other comprehensive income -- 2,909
Retained earnings 446,257 768,177
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 549,283 915,728
---------- ----------
$ 777,639 $1,142,908
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
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,
----------------------------------------
1999 2000 2001
---------- ---------- ----------
REVENUES:
Products sales $ 172,270 $ 326,998 $ 374,026
Services 47,297 98,285 153,617
---------- ---------- ----------
219,567 425,283 527,643
---------- ---------- ----------
COST OF REVENUES:
Product sales 7,613 10,881 5,760
Services 14,810 24,384 20,811
---------- ---------- ----------
22,423 35,265 26,571
---------- ---------- ----------
GROSS PROFIT 197,144 390,018 501,072
---------- ---------- ----------
OPERATING EXPENSES:
Research and development, net 18,923 30,309 33,221
Sales and marketing 68,229 110,003 109,086
General and administrative 13,069 20,409 22,002
---------- ---------- ----------
TOTAL OPERATING EXPENSES 100,221 160,721 164,309
---------- ---------- ----------
OPERATING INCOME 96,923 229,297 336,763
FINANCIAL INCOME, NET 12,962 29,147 44,760
---------- ---------- ----------
INCOME BEFORE TAXES ON INCOME 109,885 258,444 381,523
TAXES ON INCOME 14,104 37,231 59,603
---------- ---------- ----------
NET INCOME $ 95,781 $ 221,213 $ 321,920
========== ========== ==========
BASIC NET EARNINGS PER SHARE $ 0.43 $ 0.95 $ 1.34
========== ========== ==========
DILUTED NET EARNINGS PER SHARE $ 0.39 $ 0.84 $ 1.25
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
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 TOTAL TOTAL
SHARE PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE SHAREHOLDERS'
CAPITAL CAPITAL INCOME (LOSS) EARNINGS INCOME EQUITY
--------- ---------- ------------- --------- -------------- -------------
Balance as of January 1, 1999 $ 114 $ 46,776 $ (446) $ 129,263 $ 175,707
Tax benefit related to exercise of stock options -- 4,909 -- -- 4,909
Stock split effected as a stock dividend (100%) 116 (116) -- -- --
Issuance of shares upon exercise of options
(10,243,356 shares) 4 15,661 -- -- 15,665
Comprehensive income:
Unrealized holding gains on available-for-sale
marketable securities -- -- 446 -- $ 446 446
Net income -- -- -- 95,781 95,781 95,781
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 96,227
=========
Balance as of December 31, 1999 234 67,230 -- 225,044 292,508
Tax benefit related to exercise of stock options -- 9,730 -- -- 9,730
Stock split effected as a stock dividend (100%) 236 (236) -- -- --
Issuance of shares upon exercise of options
(7,551,908 shares) 12 25,820 -- -- 25,832
Stock split effected as a stock dividend (50%) 241 (241) -- -- --
Comprehensive income:
Net income -- -- -- 221,213 $ 221,213 221,213
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 221,213
=========
Balance as of December 31, 2000 723 102,303 -- 446,257 549,283
Tax benefit related to exercise of stock options -- 5,345 -- -- -- 5,345
Issuance of shares upon exercise of options
(7,314,402 shares) 12 37,724 -- -- -- 37,736
Purchase of stock dividend
for fractional shares -- (1,465) (1,465)
Comprehensive income:
Unrealized gains on hedging derivative
instruments -- -- 2,909 -- $ 2,909 2,909
Net income -- -- -- 321,920 321,920 321,920
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 324,829
=========
Balance as of December 31, 2001 $ 735 $ 143,907 $ 2,909 $ 768,177 $ 915,728
========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 95,781 $ 221,213 $ 321,920
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,603 7,107 10,354
Deferred income taxes, net (1,103) (4,312) (240)
Decrease (increase) in trade receivables, net (20,893) (36,742) 10,087
Decrease (increase) in other receivables and prepaid
expenses (3,507) (7,970) 939
Increase (decrease) in trade payables 1,917 (1,328) 1,301
Increase (decrease) in employees and payroll
accruals 8,068 17,611 (7,090)
Increase in accrued expenses and other liabilities 11,555 44,492 29,482
Increase (decrease) in deferred revenues 44,201 65,203 (25,499)
Increase in tax benefit related to exercise of stock
options 4,909 9,730 5,345
Increase in accrued severance pay, net 273 540 630
Other (456) 117 (54)
---------- ---------- ----------
Net cash provided by operating activities 144,348 315,661 347,175
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from short-term bank deposits 50,308 160,035 216,980
Investment in short-term bank deposits (108,743) (144,414) (103,749)
Proceeds from held-to-maturity marketable securities 20,854 40,523 186,620
Investment in held-to-maturity marketable securities (45,030) (249,073) (603,119)
Proceeds from sale of investment 1,694 -- --
Investment in long-term bank deposits (60,328) (7,000) (8,635)
Investment in privately held companies (377) (1,145) --
Purchase of property and equipment (6,083) (9,051) (9,678)
---------- ---------- ----------
Net cash used in investing activities (147,705) (210,125) (321,581)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of shares upon exercise of
options 15,665 25,832 37,736
Purchase of stock dividend
fractional shares -- -- (1,465)
---------- ---------- ----------
Net cash provided by financing activities 15,665 25,832 36,271
---------- ---------- ----------
Increase in cash and cash equivalents 12,308 131,368 61,865
Cash and cash equivalents at the beginning of the year 13,527 25,835 157,203
---------- ---------- ----------
Cash and cash equivalents at the end of the year $ 25,835 $ 157,203 $ 219,068
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
---------- ---------- ----------
Supplemental disclosure of cash flow activities:
Cash paid during the year for income taxes $ 7,327 $ 14,472 $ 20,770
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 1:- GENERAL
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 Internet Protocol ("IP") networks--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.
The Company's revenues are derived from the sales of Internet security
and virtual private networking solutions (FireWall-1 and VPN-1 product
families), Quality of Service (Flood Gate-1), IP address management
(Meta IP) and related software subscription, support and training
program offerings. The Company sells its software products worldwide
through channel partners: distributors, Value Added Resellers (VAR's),
system integrators, Original Equipment Manufacturers ("OEMs") and
Managed Service Providers (MSP's).
No customer accounted for more than 10% of the Company's revenues in
2000 or 2001. During 1999, approximately 12% of revenues were derived
from a single customer.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared according to United
States generally accepted accounting principles ("U.S. 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 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 monetary balance sheet items are reflected
in the statements of income as financial income or expenses,
as appropriate.
F-8
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Principles of consolidation:
The consolidated financial statements include the accounts of
Check Point Ltd. and its subsidiaries. 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 considered to be other than
temporary, are included in financial income, net.
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.
h. Comprehensive income:
The Company accounts for comprehensive income under the
provisions of SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying
comprehensive income and its components. Comprehensive income
represents the change in shareholders' equity during a period
from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity except
those resulting from investments by, and distributions to,
owners.
F-9
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i. Property and equipment:
Property and equipment are stated at cost less accumulated
depreciation and are 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 31, 2001, no impairment losses have been
identified.
j. 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.
k. Revenue recognition:
The Company derives its revenues from license fees for its
products, software subscriptions, specified upgrades, support,
consulting services and training programs. The Company sells
its products primarily through channel partners, which are all
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 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, and when all other
revenue recognition criteria are met.
F-10
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Revenue from license fees is recognized when persuasive
evidence of an arrangement 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 $ 10,050 and $
1,377 as of December 31, 2000 and 2001, respectively. The
Company periodically considers arrangements regarding certain
customers with payment terms extending beyond the company's
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 revenues included in multiple
element arrangements are deferred and either recognized on a
straight-line basis over the term of the software subscription
and support agreement or when services are performed. 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.
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's
salary for each year of employment, or portion thereof. The
Company's liability is fully provided by monthly payments
deposited with insurers and by an accrual established by the
Company to cover the portion of this liability not covered by
the Company's deposits. 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 surrender value of these
policies, and includes immaterial profits. The amount of
deposited funds as of December 31, 2000 and 2001 was $ 1,937
and $ 2,757, respectively.
Severance expenses for the years ended December 31, 1999, 2000
and 2001, were $ 1,152, $ 1,549 and $ 1,997, respectively.
F-11
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
m. Income taxes:
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting For Income Taxes." SFAS No. 109
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.
n. Advertising expenses:
Advertising costs are expensed as incurred. Advertising
expenses for the years ended December 31,1999, 2000 and 2001,
were $ 9,570, $ 14,431 and $ 15,516, respectively.
o. 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 bank deposits, marketable
securities, trade receivables and long-term deposits. The
majority of the Company's cash and cash equivalents,
short-term deposits and long-term deposits are invested in
dollar and dollar linked investments and are deposited in
major banks mainly in the U.S. and Europe. 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. The allowance for doubtful
accounts is determined with respect to specific debts that are
doubtful of collection amounting to $ 2,972 and $ 7,000 as of
December 31, 2000 and 2001, respectively.
The Company's marketable securities include investments which
are considered by management to be financially sound, in
debentures of U.S. corporations and the Israeli Government. .
The Company's investments in debts are diversified among
high-quality credit securities, in accordance with the
Company's investment policy.
F-12
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Derivatives and hedging:
The Company accounts for derivatives and hedging based on SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. If the
derivative meets the definition of a hedge and is so
designated, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in
fair value is recognized in earnings. The adoption of SFAS No.
133 had no cumulative effect on income and on accumulated
other comprehensive income.
The Company hedges the exposure of anticipated revenues and
assets denominated in foreign currencies with forward and
option contracts. In order to hedge portions of its risk
of overall changes in cash flows resulting from forecasted
export sales over the next year, the Company has instituted
a foreign currency cash flow hedging program with zero
cost-collar contracts. As of December 31, 2001, the Company
expects to reclassify $2,909 of the unrealized gains on these
hedging derivative instruments, from accumulated other
comprehensive income to earnings during the next twelve
months, in line with actual export sales. In addition, the
Company enters into forward exchange contracts designated to
hedge the fair value of certain foreign currency denominated
customers' balances.
The Company has also entered into forward rate agreements
("FRA",) designated as a cash flow hedge that effectively
convert a portion of its floating rate investments to a fixed
rate basis for a 12 month period beginning one year after the
date of the agreement, thus reducing the impact of the
interest rate changes on future interest income. As of
December 31, 2001, approximately $125 million of the Company's
outstanding short term debt had its interest income designated
as hedged forecasted transactions with no material effect on
the Company's financial position or operating results.
As of December 31, 2001, the Company's management believes
that because the above transactions are carried out with well
established institutions, liabilities owing to the Company
will be fulfilled.
q. Basic and diluted earnings per share:
Basic net earnings per share are computed based on the
weighted average number of ordinary shares outstanding during
each year. Diluted net earnings per share are 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 1,503,050, 694,128 and 2,658,141 for 1999, 2000 and 2001,
respectively.
F-13
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," and Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" in accounting for
its employee stock option plans. Under APB Opinion No. 25,
when the exercise price of the Company's share options is less
than the market price of the underlying shares on the date of
grant, compensation expense is recognized. The pro forma
disclosures required by SFAS No. 123, "Accounting for
Stock-Based Compensation," 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 bank deposits, trade receivables and trade
payables 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 (see Notes 3 and 4).
3. The carrying amount of the Company's long-term
deposits is estimated by discounting the future cash
flows using the current interest rates for deposits
of similar terms and maturities (see Note 4).
4. The fair value of derivative instruments (used for
hedging purposes) is estimated by obtaining current
quotes from investment bankers.
t. Impact of recently issued accounting standards:
In June 2001, the Financial Accounting Standards Board issued
SFAS No. 141, "Business Combinations," and SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No.141 requires
that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141
also includes guidance on the initial recognition and
measurement of goodwill and intangible assets arising from
business combinations completed after June 30, 2001. SFAS 142
prohibits the amortization of goodwill and intangible assets
with indefinite useful lives and requires that these assets be
reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their
estimated useful lives. Additionally, SFAS 142 requires that
goodwill included in the carrying value of equity method
investments no longer be amortized. The provision of SFAS 141
and SFAS 142 will not have any effect on the Company's
financial position or operating results.
F-14
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
In August 2001, the Financial Accounting Standards Board
issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed Of," and
the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144, is effective for fiscal years
beginning after December 15, 2001, with earlier application
encouraged. The Company expects to adopt FAS 144 as of January
1, 2002 and it does not expect that such adoption will have
any impact on the Company's financial position or results of
operations.
u. Reclassification:
Certain prior year amounts have been reclassified to conform
with their current period presentation.
NOTE 3:- MARKETABLE SECURITIES
GROSS UNREALIZED
AMORTIZED COST GAINS ESTIMATED FAIR VALUE
------------------- ------------------- --------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- ------------------- --------------------
2000 2001 2000 2001 2000 2001
-------- -------- -------- -------- -------- --------
U.S. corporate debt $ 55,519 $155,241 $ 108 $ 4591 $ 55,627 $159,832
======== ======== ======== ======== ======== ========
Israeli Government
Debt $ 15,694 $ 395 $ 255 $ 4 $ 15,949 $ 399
======== ======== ======== ======== ======== ========
NOTE 4:- LONG-TERM INVESTMENTS
As of December 31, 2000 and 2001, all of the Company's securities
are classified as held-to-maturity.
Long-term investments which are due from one through five years
are composed as follows:
DECEMBER 31,
-------------------
2000 2001
-------- --------
U.S. corporate debt (a) $180,110 $529,725
Israeli Government debt and deposits (a) 18,942 --
Deposits 18,510 11,635
Investments in privately held companies 1,747 916
-------- --------
$219,309 $542,276
======== ========
F-15
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
(a) Composed as follows:
GROSS UNREALIZED GAIN
AMORTIZED COST (LOSSES) ESTIMATED FAIR VALUE
--------------------- ---------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ---------------------- ---------------------
2000 2001 2000 2001 2000 2001
--------- --------- --------- --------- --------- ---------
U.S. corporate debt $ 180,110 $ 529,725 $ (2,650) $ 6,480 $ 177,460 $ 536,205
Israeli Government
debt 18,942 -- 638 -- 19,580 --
Deposits 18,510 11,635 -- (582) 18,510 11,053
--------- --------- --------- --------- --------- ---------
$ 217,562 $ 541,360 $ (2,012) $ 5,898 $ 215,550 547,258
========= ========= ========= ========= ========= =========
NOTE 5:- PROPERTY AND EQUIPMENT
DECEMBER 31,
-----------------
2000 2001
------- -------
Cost:
Computers and peripheral equipment $19,624 $25,272
Office furniture and equipment 3,855 4,866
Other 2,590 2,966
------- -------
26,069 33,104
Accumulated depreciation 14,431 19,856
------- -------
Depreciated cost $11,638 $13,248
======= =======
Depreciation expenses amounted to $ 3,570, $ 7,107 and $ 8,068 for
1999, 2000 and 2001, respectively.
NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES
Income taxes payable $25,109 $56,299
Marketing expenses payable 18,862 18,676
Other 25,130 23,608
------- -------
$69,101 $98,583
======= =======
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The facilities of the Company are rented under operating
leases for periods ending through 2006.
Future minimum lease commitments under non-cancelable
operating leases for the years ended December 31, are as
follows:
F-16
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
2002 $ 6,786
2003 2,901
2004 2,305
2005 2,252
2006 1,678
-------
$15,922
=======
Rent expenses for the years ended December 31, 1999, 2000
and 2001, were $ 4,275, $ 6,125 and $ 6,842, respectively.
b. Litigation:
(i) On June 20, 2001, the Company, through its subsidiary in
France received a formal request for information from the Directorate-General
for Competition of the European Commission (the "Commission") regarding a
complaint submitted by Stonesoft Corporation, a Finnish company, alleging
anti-competitive behavior, and in particular, alleging abuse of a dominant
position held by the Company, and requesting that the Commission investigate
the allegations and order injunctive relief. The Company responded to the
Commission in a timely manner both to this and a subsequent request for
information received on November 6, 2001, and has contested the existence of a
dominant position or of infringing behavior on its part. The Company's legal
counsel has advised that, where the Commission determines at the conclusion of
a formal proceeding that a company has violated European competition rules,
fines may be imposed up to a maximum of 10% of the Company's consolidated
annual revenues as of the date of the last violation. Since responding to the
Commission's second request for information the Company has been engaging in
discussions with the Commission with a view to resolving the matter in a
manner acceptable to all sides and on the basis of which the complaint against
it would be withdrawn and the investigation terminated. These discussions are
ongoing. To date, the Commission has not initiated formal proceedings against
the Company. Based on the opinion of the Company's management and its legal
counsel, provision was recorded in the financial statements as of December 31,
2001 in respect of probable costs arising from this matter.
(ii) 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 sought to
enjoin the Company from using the "Check Point" name in connection with the
Company's products and services. The District Court issued its opinion in the
Company's favor on July 12, 2000, and the District Court's decision was
affirmed on appeal during 2001. The judgment is now final and no longer
appealable.
NOTE 8:- TAXES ON INCOME
a. Measurement of taxable income under the Israeli Income Tax
(Inflationary Adjustments) Law, 1985:
Results for Israeli tax purposes are measured in terms of
earnings in NIS after certain adjustments for increases in
the Israeli Consumer Price Index (the "Israeli CPI"). As
explained in Note 2b, the financial statements are measured
in 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.
F-17
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
has not provided for deferred income taxes on the
difference between the functional currency and the tax
bases of assets and liabilities.
In November 2001, an amendment to the Inflationary
Adjustments Law (Amendment No. 41), 2001 was passed by the
Israeli Knesset, pursuant to which until February 28 2002,
the Minister of Finance, with the approval of the finance
committee of the Knesset, is entitled to determine by an
order that the provisions of the Inflationary Adjustments
Law, in whole or in part, will not apply with respect to a
tax year if the Israeli CPI in that year did not exceed
3%. On February 28 2002, the finance committee of the
Knesset determined that the Inflationary Adjustments Law
will apply to all entities in 2001, although the Israeli
CPI did not exceed 3% in 2001.
b. Tax benefits under the Israeli Law for the Encouragement
of Capital Investments, 1959 (the "Law"):
Check Point Ltd.'s production facilities have been granted
the status of an "Approved Enterprise," under the Law, for
capital investment plans.
In accordance with the Law, Check Point Ltd. has chosen to
enjoy "alternative plan benefits," under which Check Point
Ltd. waived its right to Israeli government grants in
return for certain tax exemptions. Accordingly, Check Point
Ltd.'s income from an "approved enterprise" is exempt from
Israeli income taxes for a period of two to four years and
is subject to a reduced corporate tax rate of 10% to 25%
(based on the percentage of foreign ownership of Check
Point Ltd.) for an additional period of six to eight years,
respectively. The tax benefits under these capital
investment plans are scheduled to gradually expire from
2005 through 2011.
The duration of tax benefits for each of the programs is
subject to limitations of the earlier of 12 years from
commencement of production, or 14 years from receipt of
approval as an "Approved Enterprise " under the law.
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
Check Point Ltd. 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 $ 370,000
as of December 31, 2001) is distributed in a manner other
than in the complete liquidation of Check Point Ltd., it
would
be taxed at the reduced corporate tax rate applicable to
such profits (between 10% to 25%) and an income tax
liability would be incurred of up to approximately $ 90,000
as of December 31, 2001.
Should Check Point Ltd. fail to meet such requirements in
the future, income attributable to its "Approved
Enterprise" programs could be subject to the regular
Israeli corporate tax rate of 36% and Check Point Ltd.
could be required to refund tax benefits already received
with respect to such programs.
F-18
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
NOTE 8:- TAXES ON INCOME (CONT.)
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 Israeli 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:
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, 2000 and 2001, the Company's deferred taxes calculated
on reserves and allowances are comprised as follows:
DECEMBER 31,
----------------------
2000 2001
--------- ---------
U.S. carryforward tax deductions $ 151,273 $ 222,000
Accrued vacation, severance pay and fixed assets 5,519 5,759
--------- ---------
Net deferred tax assets before valuation allowance 156,792 227,759
Valuation allowance (151,273) (222,000)
--------- ---------
Net deferred tax assets $ 5,519 $ 5,759
========= =========
Domestic $ 356 $ 593
Foreign 5,163 5,166
--------- ---------
$ 5,519 $ 5,759
========= =========
The Company's 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, 2001, Check Point Inc. had a U.S.
federal loss carryforward of approximately $ 600,000
resulting from tax benefits related to employee's stock
option exercises that can be carried forward and offset
against taxable income for periods ranging from 15 to 20
years.
F-19
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
NOTE 8:- TAXES ON INCOME (CONT.)
e. Income before taxes on income is comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
--------- -------- --------
Domestic $ 110,635 $243,843 $366,237
Foreign (750) 14,601 15,286
--------- -------- --------
$ 109,885 $258,444 $381,523
========= ======== ========
f. Provisions for income tax expense are comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- -------- --------
Current $ 15,207 $ 41,543 $ 59,843
Deferred (1,103) (4,312) (240)
-------- -------- --------
$ 14,104 $ 37,231 $ 59,603
======== ======== ========
Domestic $ 10,796 $ 31,224 $ 52,884
Foreign 3,308 6,007 6,719
-------- -------- --------
$ 14,104 $ 37,231 $ 59,603
======== ======== ========
g. Income tax rate:
A reconciliation between the statutory tax rate in Israel,
assuming all income is taxed at the statutory rate
applicable to income of the Company, and the effective
income tax rate, as reported in the statements of income,
is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 2000 2001
--------- --------- ---------
Income before taxes as reported
in the statements of income $ 109,885 $ 258,444 $ 381,523
========= ========= =========
Statutory tax rate in Israel 36% 36% 36%
========= ========= =========
Increase (decrease) in taxes resulting from:
Effect if "Approved Enterprise" status (*) (27)% (25)% (17)%
Other, net 4% 3% (3%)
--------- --------- ---------
Effective income tax rate 13% 14% 16%
========= ========= =========
(*) Basic net earnings per share amounts of
the benefit resulting from the exemption $ 0.13 $ 0.28 $ 0.23
========= ========= =========
(*) Diluted net earnings per share amounts of
the benefit resulting from the exemption $ 0.12 $ 0.25 $ 0.22
========= ========= =========
F-20
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 9:- SHARE CAPITAL
a. General:
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.
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 23, 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 14, 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 1, 2001. This stock split has
been reflected in the Consolidated Statements of Changes in
Shareholder's Equity.
Shareholders otherwise entitled to receive fractional
shares because they held a number of old ordinary shares
that were not evenly divisible by the split number were
paid by cash.
All shares, options and earnings per share amounts have
been retroactively adjusted for all periods presented to
reflect the stock splits effected as stock dividends.
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 has reserved a total of 6,000,000 shares for
issuance under the ESPP. Eligible employees may use up to
15% of their salaries to purchase ordinary shares. The ESPP
will be implemented by effecting an offering every six
months. The price of an ordinary share purchased under the
ESPP is equal to 85% of the lower of the fair market value
of the ordinary share on the subscriptions date of each
offering period, or on the purchase date.
d. Stock options:
Under the Company's Stock Option Plan (the "Plan"), options
are granted to employees, officers and directors at an
exercise price equal to at least the fair market value at
the date of grant and are granted for periods not to exceed
seven 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
authorizes the grant of options to purchase up to
61,616,480 ordinary shares under the Israeli plan and up to
85,524,721 ordinary shares under the U.S. plan.
F-21
CHECKPOINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS(EXCEPT PER SHARE DATA)
NOTE 9:- SHARE CAPITAL (CONT.)
As of December 31, 2001, an aggregate of 78,270,926
ordinary shares are available for future grant.
A summary of the Company's stock option activity, and
related information for the three years ended December 31,
is as follows:
OPTIONS (IN THOUSANDS) WEIGHTED AVERAGE EXERCISE PRICE
------------------------------ ---------------------------------
1999 2000 2001 1999 2000 2001
------- ------- ------- ------ -------- --------
Outstanding at beginning
of year 35,723 38,748 33,428 $ 2.3 $ 5.91 $ 11.57
Granted 19,230 3,305 2,607 9.38 57.73 41.65
Exercised (10,243) (7,552) (7,314) 1.43 3.25 4.75
Forfeited or cancelled (5,962) (1,073) (2,244) 3.17 7.91 14.84
------- ------- ------- ------ -------- --------
Outstanding at end of year 38,748 33,428 26,477 $ 5.91 $ 11.57 $ 16.14
======= ======= ======= ====== ======== ========
Exercisable at end of year 5,139 8,258 9,611 $ 2.31 $ 6.56 $ 10.74
======= ======= ======= ====== ======== ========
The options outstanding as of December 31, 2001, have been
separated into ranges of exercise price, as follows:
OPTIONS WEIGHTED OPTIONS WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE
2001 CONTRACTUAL EXERCISE 2001 OF EXERCISABLE
EXERCISE PRICE (IN THOUSANDS) LIFE (YEARS) PRICE (IN THOUSANDS) OPTIONS
-------------- -------------- ------------ -------- -------------- --------------
$ 0.02 - 0.67 149 1.4 $ 0.43 149 $ 0.43
1.6 - 3.19 7,051 3.5 2.80 2,874 2.79
3.77 - 5.92 3,461 3.8 4.44 1,136 4.42
6.93 - 9.38 803 4.5 8.22 156 8.15
9.83 - 11.66 6,807 4.7 10.52 3,950 10.50
12.58 - 17.00 2,530 4.8 15.11 452 14.94
20.36 - 23.60 249 4.9 21.00 52 21.10
27.22 - 30.54 577 6.0 29.51 115 29.97
31.75 - 36.72 278 5.4 34.68 121 34.63
40.09 - 51.21 3,128 6.1 43.34 363 46.44
57.59 - 65.58 29 5.7 62.92 4 65.58
68.42 - 70.02 529 5.9 68.62 86 68.76
70.19 - 75.08 204 5.5 71.56 29 71.55
79.80 - 86.54 682 5.7 86.28 124 86.11
-------------- ------- ----- ------ ------ ------
$0.24 - $86.54 26,477 4.5 $16.14 9,611 $10.74
============== ======= ===== ====== ====== ======
F-22
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
NOTE 9:- SHARE CAPITAL (CONT.)
The weighted average fair values at grant date of options
granted for the years ended December 31, 1999, 2000 and
2001, were $ 19.68, $ 40.86 and $ 28.29, respectively. All
options were granted with an exercise price equal to the
market value at the date of grant
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 SFAS 123. The fair value for these options
was amortized over their vesting period and estimated at
the date of grant using a Black - Scholes Option Valuation
Model with the following weighted-average assumptions for
1999, 2000 and 2001: risk-free interest rates of 6% for
1999 and 2000 and 3.7% 2001; dividend yields of 0% for
1999, 2000 and 2001; volatility factors of the expected
market price of the Company's Ordinary shares of 1.04 for
1999, 1.09 for 2000 and 1.00 for 2001; and an expected life
of the option of 6 months after the option is vested for
1999, 2000 and 2001.
Pro forma information under SFAS 123:
DECEMBER 31,
---------------------------------------
1999 2000 2001
----------- ----------- -----------
Net income as reported $ 95,781 $ 221,213 $ 321,920
=========== =========== ===========
Pro forma net income $ 71,412 $ 156,472 243,408
=========== =========== ===========
Pro forma basic earnings per share $ 0.32 $ 0.67 $ 1.01
=========== =========== ===========
Pro forma diluted earnings per share $ 0.29 $ 0.60 $ 0.94
=========== =========== ===========
e. Dividends:
Dividends, if any, 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.
F-23
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
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,
------------------------------
1999 2000 2001
-------- -------- --------
Numerator:
Net income $ 95,781 $221,213 $321,920
======== ======== ========
Numerator for basic net earnings per share - net
income available to ordinary shareholders $ 95,781 $221,213 $321,920
======== ======== ========
Numerator for diluted net earnings per share - net
income available to ordinary shareholders after
assumed conversions $ 95,781 $221,213 $321,920
======== ======== ========
Denominator:
Weighted average ordinary shares outstanding (in
thousands) 222,930 232,611 240,008
======== ======== ========
Denominator for basic net earnings per
share - weighted - average shares (in thousands) 222,930 232,611 240,008
======== ======== ========
Effect of dilutive securities:
Employee stock options (in thousands) 23,526 29,940 18,067
======== ======== ========
Denominator for diluted net earnings per share (in
thousands) 246,456 262,515 258,075
======== ======== ========
NOTE 11:- GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA
a. Summary information about geographical areas:
The Company operates in one reportable 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 Related Information."
F-24
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 11:- GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA
(CONT.)
1. Revenues based on the end customers' location:
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Americas $117,276 $204,374 $235,360
Europe (excluding Great Britain) 42,928 111,330 140,359
Great Britain 20,156 35,175 52,636
Japan 24,154 37,561 52,815
Other 15,053 36,843 46,473
-------- -------- --------
$219,567 $425,283 $527,643
======== ======== ========
2. Long-lived assets:
Israel $ 4,721 $ 6,952 $ 7,772
Americas 4,351 3,277 4,072
Other 622 1,409 1,404
------- ------- -------
$ 9,694 $11,638 $13,248
======= ======= =======
b. Financial income, net:
Financial income:
Interest income $ 13,146 $ 29,554 $ 41,389
Other 129 377 3,671
-------- -------- --------
13,275 29,931 45,060
-------- -------- --------
Financial expenses:
Other (313) (784) (300)
-------- -------- --------
(313) (784) (300)
-------- -------- --------
Financial income, net $ 12,962 $ 29,147 $ 44,760
======== ======== ========
---------
F-25