Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2015. 174,901,523 Ordinary
Shares, nominal value NIS 0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act: Yes
x
No
¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934: Yes
¨
No
x
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
¨
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Indicate by check mark which basis of accounting the registrant has used
to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to follow. Item 17
¨
Item 18
¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes
¨
No
x
In this Annual Report on Form 20-F, references to U.S. or United States are to the United States of America, its
territories and possessions; and references to Israel are to the State of Israel. References to $, dollar or U.S. dollar are to the legal currency of the United States of America; references to
NIS or Israeli shekel are to the legal currency of Israel; references to Euro are to the legal currency of the European Union; and references to Swedish Krona are to the legal currency of the Kingdom
of Sweden. Our financial statements are presented in U.S. dollars and are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP.
All references to we, us, our or Check Point shall mean Check Point Software Technologies
Ltd., and, unless specifically indicated otherwise or the context indicates otherwise, our consolidated subsidiaries.
Some of the statements contained in this Annual Report on Form 20-F are forward-looking statements that involve risks and uncertainties. The
statements contained in this Annual Report on Form 20-F that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including, without limitation, statements regarding: our expectations for our business, trends related to our business and the markets in which we operate and into which we sell products; future amounts and sources of our
revenue; our future costs and expenses; the adequacy of our capital resources; our expectations with respect to share repurchases by us and dividend payments by us; our ongoing relationships with our current and future customers and channel
partners; and our other expectations, beliefs, intentions and strategies. In some cases, you can identify forward-looking statements by terminology, such as may, will, could, should,
expects, plans, anticipates, believes, intends, estimates, predicts, potential, or continue or the negative of these terms or other
comparable terminology. These statements are subject to known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Many of these risks,
uncertainties and assumptions are described in the risk factors set forth in Item 3 Key Information Risk Factors and elsewhere in this Annual Report on Form 20-F. All forward-looking statements included in this Annual
Report on Form 20-F, are based on information available to us on the date of the filing. We undertake no obligation to update or revise any of the forward-looking statements after the date of the filing, except as required by applicable law.
PART I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
Selected Financial Data
We prepare our historical consolidated financial statements in accordance with U.S. GAAP. The selected financial data, set forth in the table
below, have been derived from our audited historical financial statements for each of the years from 2011 to 2015. The selected consolidated statement of income data for the years 2013, 2014 and 2015, and the selected consolidated balance sheet data
at December 31, 2014 and 2015, have been derived from our audited consolidated financial statements set forth in Item 18 Financial Statements. The selected consolidated statement of income data for the years 2011 and 2012,
and the selected consolidated balance sheet data at December 31, 2011, 2012, and 2013, have been derived from our previously published audited consolidated financial statements, which are not included in this Annual Report on Form 20-F. These
selected financial data should be read in conjunction with our consolidated financial statements, as set forth in Item 18, and are qualified entirely by reference to such consolidated financial statements.
4
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|
|
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|
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Year ended December 31,
|
|
|
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2015
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|
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2014
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|
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2013
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|
|
2012
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|
|
2011
|
|
|
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(in thousands)
|
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Consolidated Statements of Income Data:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Revenues
|
|
$
|
1,629,838
|
|
|
$
|
1,495,816
|
|
|
$
|
1,394,105
|
|
|
$
|
1,342,695
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|
|
$
|
1,246,986
|
|
Operating expenses (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
189,057
|
|
|
|
176,541
|
|
|
|
162,634
|
|
|
|
159,161
|
|
|
|
175,683
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|
Research and development
|
|
|
149,279
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|
|
|
133,300
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|
|
|
121,764
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|
|
|
111,911
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|
|
|
110,147
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|
Selling and marketing
|
|
|
359,804
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|
|
|
306,363
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|
|
|
276,067
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|
|
|
255,345
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|
|
|
253,800
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|
General and administrative
|
|
|
91,981
|
|
|
|
78,558
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|
|
|
72,735
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|
|
|
69,743
|
|
|
|
65,182
|
|
Restructuring and other acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
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|
|
790,121
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|
|
|
694,762
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|
|
|
633,200
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|
|
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596,160
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|
|
|
604,812
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Operating income
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|
|
839,717
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|
|
|
801,054
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|
|
|
760,905
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|
|
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746,535
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|
|
|
642,174
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Financial income, net
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|
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34,073
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|
|
|
28,762
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|
|
|
34,931
|
|
|
|
40,332
|
|
|
|
41,040
|
|
Income before taxes on income
|
|
|
873,790
|
|
|
|
829,816
|
|
|
|
795,836
|
|
|
|
786,867
|
|
|
|
683,214
|
|
Taxes on income
|
|
|
187,924
|
|
|
|
170,245
|
|
|
|
143,036
|
|
|
|
166,867
|
|
|
|
139,248
|
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Net income
|
|
$
|
685,866
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|
|
$
|
659,571
|
|
|
$
|
652,800
|
|
|
$
|
620,000
|
|
|
$
|
543,966
|
|
Basic earnings per ordinary share
|
|
$
|
3.83
|
|
|
$
|
3.50
|
|
|
$
|
3.34
|
|
|
$
|
3.04
|
|
|
$
|
2.63
|
|
Shares used in computing basic earnings per ordinary share
|
|
|
179,218
|
|
|
|
188,487
|
|
|
|
195,647
|
|
|
|
203,918
|
|
|
|
206,917
|
|
Diluted earnings per ordinary share
|
|
$
|
3.74
|
|
|
$
|
3.43
|
|
|
$
|
3.27
|
|
|
$
|
2.96
|
|
|
$
|
2.54
|
|
Shares used in computing diluted earnings per ordinary share
|
|
|
183,619
|
|
|
|
192,300
|
|
|
|
199,487
|
|
|
|
209,170
|
|
|
|
213,922
|
|
(*)
|
Including pre-tax charges for stock based compensation, amortization of intangible assets and acquisition related expenses in the following items:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amortization of intangible assets and acquisition related expenses
|
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Cost of revenues
|
|
$
|
1,808
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|
|
$
|
240
|
|
|
$
|
612
|
|
|
$
|
3,982
|
|
|
$
|
31,171
|
|
Research and development
|
|
|
6,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
3,267
|
|
|
|
1,866
|
|
|
|
2,408
|
|
|
|
3,046
|
|
|
|
12,754
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
1,585
|
|
|
$
|
1,090
|
|
|
$
|
1,048
|
|
|
$
|
829
|
|
|
$
|
967
|
|
Research and development
|
|
|
11,544
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|
|
|
9,284
|
|
|
|
9,001
|
|
|
|
8,594
|
|
|
|
7,471
|
|
Selling and marketing
|
|
|
16,351
|
|
|
|
13,339
|
|
|
|
11,193
|
|
|
|
9,677
|
|
|
|
7,888
|
|
General and administrative
|
|
|
46,822
|
|
|
|
39,456
|
|
|
|
29,870
|
|
|
|
26,187
|
|
|
|
23,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
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(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Working capital
|
|
$
|
678,981
|
|
|
$
|
780,825
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|
|
$
|
617,520
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|
|
$
|
1,061,143
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|
|
$
|
1,007,533
|
|
Total assets
|
|
|
5,069,880
|
|
|
|
4,948,818
|
|
|
|
4,886,437
|
|
|
|
4,544,885
|
|
|
|
4,128,063
|
|
Shareholders equity
|
|
|
3,531,866
|
|
|
|
3,637,559
|
|
|
|
3,602,097
|
|
|
|
3,346,309
|
|
|
|
3,073,091
|
|
Capital stock
|
|
|
988,105
|
|
|
|
859,898
|
|
|
|
775,691
|
|
|
|
693,986
|
|
|
|
631,282
|
|
5
Risk Factors
An investment in our ordinary shares involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition, results of operations and
prospects could be materially harmed. In that event, the market price of our ordinary shares could decline and you could lose part or all of your investment.
Risks Related to Our Business and Our Market
If the
market for information and network security solutions does not continue to grow, our business will be adversely affected
The market
for information and network security solutions may not continue to grow. Continued growth of this market will depend, in large part, upon:
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the continued expansion of Internet usage and the number of organizations adopting or expanding intranets;
|
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|
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the continued adoption of cloud infrastructure by organizations;
|
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|
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the ability of the infrastructures implemented by organizations to support an increasing number of users and services;
|
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|
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the continued development of new and improved services for implementation across the Internet and between the Internet and intranets;
|
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|
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the adoption of data security measures as it pertains to data encryption and data loss prevention technologies;
|
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|
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government regulation of the Internet and governmental and non-governmental requirements and standards with respect to data security and privacy; and
|
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|
|
general economic conditions in the markets in which we, our customers and our suppliers operate.
|
In 2015, global and regional economies around the world and financial markets, remained volatile as a result of a multitude of factors,
including adverse credit conditions, changes in economic activity, concerns about inflation and deflation, fluctuating energy costs, decreased consumer confidence, reduced capital spending, adverse business conditions and liquidity concerns and
other factors. During this period, many organizations limited their expenditures and a significant portion of such organizations have remained reluctant to increase expenditures. If challenging economic conditions continue or worsen, it may cause
our customers to reduce or postpone their technology spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.
Further, if the necessary infrastructure or complementary products and services are not developed in a timely manner and, consequently, the
enterprise security, data security, Internet or intranet markets fail to grow or grow more slowly than we currently anticipate, our business, operating results and financial condition may be materially adversely affected. Additional details are
provided in Item 4 Information on Check Point.
We may not be able to successfully compete, which could adversely affect our
business and results of operations
The market for information and network security solutions is intensely competitive and we expect
that competition will continue to increase in the future. Our competitors include Cisco Systems, Inc., Juniper Networks, Inc., Fortinet Inc., SonicWall Inc. (owned by Dell Inc.), Palo Alto Networks, Inc., WatchGuard Technologies, Inc., McAfee, Inc.
(owned by Intel Corporation), Sourcefire, Inc. (owned by Cisco Systems Inc.), and other companies in the network security space. We also compete with several other companies, including Microsoft Corporation, Symantec Corporation, International
Business Machines Corporation, Hewlett-Packard, FireEye, Inc. and Websense Inc. with respect to specific products that we offer. There are hundreds of small and large companies that offer security products and services that we may compete with from
time to time.
Some of our current and potential competitors have various advantages over us, including longer operating histories; access
to larger customer bases; significantly greater financial, technical and marketing resources; a broader portfolio of products, applications and services; and larger patent and intellectual property portfolios. As a result, they may be able to adapt
better than we can to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products. Furthermore, some of our competitors with more diversified product portfolios and
larger customer bases may be better able to withstand a reduction in spending on information and network security solutions, as well as a general slowdown or recession in economic conditions in the markets in which they operate. In addition, some of
our competitors have greater financial resources than we do, and they have offered, and in the future may offer, their products at lower prices than we do, or may bundle security products with their other offerings, which may cause us to lose sales
or to reduce our prices in response to competition.
6
In addition, consolidation in the markets in which we compete may affect our competitive
position. This is particularly true in circumstances where customers are seeking to obtain a broader set of products and services than we are able to provide.
The markets in which we compete also include many niche competitors, generally smaller companies at a relatively early stage of operations,
which are focused on specific Internet and data security needs. These companies specialized focus may enable them to adapt better than we can to new or emerging technologies and changes in customer requirements in their specific areas of
focus. In addition, some of these companies can invest relatively large resources on very specific technologies or customer segments. The effect of these companies activities in the market may result in price reductions, reduced gross margins
and loss of market share, any of which will materially adversely affect our business, operating results and financial condition.
Further,
vendors of operating system software, networking hardware or central processing units, or CPUs, may enhance their products to include functionality that is currently provided by our products. The widespread inclusion of similar functionality to that
which is offered by our solutions, as standard features of operating system software and networking hardware could significantly reduce the demand for our products, particularly if the quality of such functionality were comparable to that of our
products. Furthermore, even if the network or application security functionality provided as standard features by operating systems software and networking hardware is more limited than that of our solutions, a significant number of customers may
elect to accept more limited functionality in lieu of purchasing additional products.
We may not be able to continue competing
successfully against our current and future competitors, and increased competition may result in price reductions, reduced gross margins and operating margins, reduced net income, and loss of market share, any of which will materially adversely
affect our business, operating results and financial condition. For additional information, see Item 4 Information on Check Point.
If we fail to enhance our existing products, develop or acquire new and more technologically advanced products, or fail to successfully commercialize these
products, our business and results of operations will suffer
The information and network security industry is characterized by rapid
technological advances, changes in customer requirements, frequent new product introductions and enhancements, and evolving industry standards in computer hardware and software technology. In particular, the markets for data security, Internet and
intranet applications are rapidly evolving. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, programming
tools, and computer language technology. We must also continually change our products in response to changes in network infrastructure requirements, including the expanding use of cloud computing. Further, we must continuously improve our products
to protect our customers data and networks from evolving security threats.
Our future operating results will depend upon our
ability to enhance our current products and to develop and introduce new products on a timely basis; to address the increasingly sophisticated needs of our customers; and to keep pace with technological developments, new competitive product
offerings, and emerging industry standards. Our competitors introduction of products embodying new technologies and the emergence of new industry standards may render our existing products obsolete or unmarketable. While we have historically
been successful in developing, acquiring, and marketing new products and product enhancements that respond to technological change and evolving industry standards, we may not be able to continue to do so. In addition, we may experience difficulties
that could delay or prevent the successful development, introduction, and marketing of these products, as well as the integration of acquired products. Furthermore, our new products or product enhancements may not adequately meet the requirements of
the marketplace or achieve market acceptance. In some cases, a new product or product enhancements may negatively affect sales of our existing products. If we do 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, our business, operating results and financial condition may be materially adversely affected. For additional information, see
Item 4 Information on Check Point and under the caption We may not be able to successfully compete, which could adversely affect our business and results of operations in this Item 3 Key Information
Risk Factors.
If our products fail to protect against attacks and our customers experience security breaches, our reputation and business could
be harmed
Hackers and other malevolent actors are increasingly sophisticated, often affiliated with organized crime and operate large
scale and complex attacks. In addition, their techniques change frequently and generally are not recognized until launched against a target. If we fail to identify and respond to new and increasingly complex methods of attack and to update our
products to detect or prevent such threats in time to protect our customers high-value business data, our business and reputation will suffer.
7
In addition, an actual or perceived security breach or theft of the sensitive data of one of our
customers, regardless of whether the breach is attributable to the failure of our products, could adversely affect the markets perception of our security products. Despite our best efforts, there is no guarantee that our products will be free
of flaws or vulnerabilities, and even if we discover these weaknesses we may not be able to correct them promptly, if at all. Our customers may also misuse our products, which could result in a breach or theft of business data.
Product defects may increase our costs and impair the market acceptance of our products and technology
Our products are complex and must meet stringent quality requirements. They may contain undetected hardware or software errors or defects,
especially when new or acquired products are 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. We may need to divert the attention of our engineering personnel from our research and development efforts to address instances of errors or defects.
Our products are used to deploy and manage Internet security and protect information, which may be critical to organizations. As a result, the
sale and support of our products entails the risk of product liability and related claims. We do not know whether, in the future, we will be subject to liability claims or litigation for damages related to product errors, or will experience delays
as a result of these errors. Our sales agreements and product licenses typically contain provisions designed to limit our exposure to potential product liability or related claims. In selling our products, we rely primarily on shrink
wrap licenses that are not signed by the end user, and for this and other reasons, these licenses may be unenforceable under the laws of some jurisdictions. As a result, the limitation of liability provisions contained in these licenses may
not be effective. Although we maintain product liability insurance for most of our products, the coverage limits of these policies may not provide sufficient protection against an asserted claim. If litigation were to arise, it could, regardless of
its outcome, result in substantial expense to us, significantly divert the efforts of our technical and management personnel, and disrupt or otherwise severely impact our relationships with current and potential customers. In addition, if any of our
products fail to meet specifications or have reliability, quality or compatibility problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in revenues, a loss of
existing customers, and difficulty attracting new customers.
We are subject to risks relating to acquisitions
We have made
acquisitions in the past and we may make additional acquisitions in the future. The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable
acquisitions, whether or not they are consummated.
Competition within our industry for acquisitions of businesses, technologies, assets
and product lines has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or
because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:
|
|
|
issue equity securities which would dilute current shareholders percentage ownership;
|
|
|
|
incur substantial debt;
|
|
|
|
assume contingent liabilities; or
|
|
|
|
expend significant cash.
|
These financing activities or expenditures could harm our business,
operating results and financial condition or the price of our ordinary shares. Alternatively, due to difficulties in the capital and credit markets, we may be unable to secure capital on acceptable terms, or at all, to complete acquisitions.
In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, and technologies
successfully or effectively manage the combined business following the completion of the acquisition. We may also not achieve the anticipated benefits from the acquired business due to a number of factors, including:
|
|
|
unanticipated costs or liabilities associated with the acquisition;
|
|
|
|
incurrence of acquisition-related costs;
|
|
|
|
diversion of managements attention from other business concerns;
|
|
|
|
harm to our existing business relationships with manufacturers, distributors and customers as a result of the acquisition;
|
|
|
|
the potential loss of key employees;
|
|
|
|
use of resources that are needed in other parts of our business;
|
8
|
|
|
use of substantial portions of our available cash to consummate the acquisition; or
|
|
|
|
unrealistic goals or projections for the acquisition.
|
Moreover, even if we do obtain benefits
from acquisitions in the form of increased sales and earnings, there may be a delay between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits.
We are dependent on a small number of distributors
We derive our sales primarily through indirect channels. During 2015, 2014 and 2013, we derived approximately 53%, 54% and 57%, respectively,
of our sales from our ten largest distributors. In 2015, 2014 and 2013, our two largest distributors accounted for approximately 38%, 37% and 30% of our sales. We expect that a small number of distributors will continue to generate a significant
portion of our sales. Furthermore, there has been an industry trend toward consolidation among distributors, and we expect this trend to continue in the near future which could further increase our reliance on a small number of distributors for a
significant portion of our sales. If these distributors reduce the amount of their purchases from us for any reason, including because they choose to focus their efforts on the sales of the products of our competitors, our business, operating
results and financial condition could be materially adversely affected.
Our future success is highly dependent upon our ability to
establish and maintain successful relationships with our distributors. In addition, we rely on these entities to provide many of the training and support services for our products and equipment. Accordingly, our success depends in large part on the
effective performance of these distributors. Recruiting and retaining qualified distributors and training them in our technology and products requires significant time and resources. Further, we have no minimum purchase commitments with any of our
distributors, and our contracts with these distributors do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential distributors to favor their
products or to prevent or reduce sales of our products. Our distributors may choose not to offer our products exclusively or at all. Our failure to establish and maintain successful relationships with distributors would likely materially adversely
affect our business, operating results and financial condition.
We purchase several key components and finished products from limited sources, and we
are increasingly dependent on contract manufacturers for our hardware products.
Many components, subassemblies and modules necessary
for the manufacture or integration of our hardware products are obtained from a limited group of suppliers. Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on subcontractors involves several risks,
including a potential inability to obtain an adequate supply of required components, subassemblies or modules and limited control over pricing, quality and timely delivery of components, subassemblies or modules. Although we have been successful in
the past, replacing suppliers may be difficult and it is possible it could result in an inability or delay in producing designated hardware products. Substantial delays could have a material adverse impact on our business.
Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during
time periods in which demand for our products is increasing, especially if demand increases more quickly than we expect. We also have extended support contracts with these suppliers and are dependent on their ability to perform over a period of
years.
We are dependent on a limited number of product families
Currently, we derive the majority of our revenues from sales of integrated appliances and Internet security products, as well as related
revenues from subscriptions and from software updates and maintenance. We expect that this concentration of revenues from a small number of product families will continue for the foreseeable future. Endpoint security products and associated software
updates, maintenance and subscriptions represent an additional revenue source. Our future growth depends heavily on our ability to effectively develop and sell new and acquired products as well as add new features to existing products. For more
details, see Item 4 Information on Check Point and Item 5 Operating and Financial Review and Prospects.
We
incorporate third party technology in our products, which may make us dependent on the providers of these technologies and expose us to potential intellectual property claims
Our products contain certain technology that we license from other companies. Third party developers or owners of technologies may not be
willing to enter into, or renew, license agreements with us regarding technologies that we may wish to incorporate in our products, either on acceptable terms or at all. If we cannot obtain licenses to these technologies, we may be at a disadvantage
compared with our competitors who are able to license these technologies. In addition, when we do obtain licenses to third party technologies that we did not develop, we may have little or no ability to determine in advance whether the technology
infringes the intellectual property rights of others. Our suppliers and licensors may not be required or may not be able to indemnify us
9
in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or
damages. Any failure to obtain licenses to intellectual property or any exposure to liability as a result of incorporating third party technology into our products could materially and adversely affect our business, operating results and financing
condition.
We incorporate open source technology in our products which may expose us to liability and have a material impact on our product
development and sales
Some of our products utilize open source technologies. These technologies are licensed to us under varying
license structures, including the General Public License. If we have improperly used, or in the future improperly use software that is subject to such licenses with our products, in such a way that our software becomes subject to the General Public
License, we may be required to disclose our own source code to the public. This could enable our competitors to eliminate any technological advantage that our products may have over theirs. Any such requirement to disclose our source code or other
confidential information related to our products could materially and adversely affect our competitive position and impact our business, results of operations and financial condition.
We are the defendants in various lawsuits and have been subject to tax disputes and governmental proceedings, which could adversely affect our business,
results of operations and financial condition
As a global company we are subject to taxation in Israel, the United States and various
other countries and states, and accordingly attempt to utilize an efficient operating model to structure our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in
different parts of the world.
In 2015, the Organization for Economic Co-operation and Development, or OECD, published final proposals
under its Base Erosion and Profit Shifting, or BEPS, Action Plan. The BEPS Action Plan includes fifteen Actions to address BEPS in a comprehensive manner and represents a significant change to the international corporate tax landscape. These
proposals, if adopted by countries, may increase tax uncertainty and adversely affect our provision for income taxes.
In addition, we are
subject to the continuous examination of our income tax returns by tax authorities around the world. It is possible that tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a
negative effect on our financial position and operating results. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, but the determination of our
worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the
ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made. There can be no assurance that the
outcomes from continuous examinations will not have an adverse effect on our business, financial condition and results of operations.
We
are the defendant in various other lawsuits, including employment-related litigation claims, construction claims and other legal proceedings in the normal course of our business. Litigation and governmental proceedings can be expensive, lengthy and
disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. We will continue to vigorously assert and protect their interests in these lawsuits. While we currently intend to
defend the aforementioned matters vigorously, we cannot predict the results of complex legal proceedings, and an unfavorable resolution of a lawsuit or proceeding could materially adversely affect our business, results of operations and financial
condition. See also Item 8 Financial Information under the caption Legal Proceedings.
In November 2013, we
reached a settlement agreement (the Settlement Agreement), with the Israeli Tax Authorities (ITA) for years 2002 through 2011 and accordingly, we and the ITA notified the court that they have reached an agreement outside of
the court and obtained the courts approval (see Note 12 of our Consolidated Financial Statements).
Class action litigation due to stock price
volatility or other factors could cause us to incur substantial costs and divert our managements attention and resources
In the
past, following periods of volatility in the market price of a public companys securities, securities class action litigation has often been instituted against that company. Companies such as ours in the technology industry are particularly
vulnerable to this kind of litigation as a result of the volatility of their stock prices. We have been named as a defendant in this type of litigation in the past. Any litigation of this sort could result in substantial costs and a diversion of
managements attention and resources.
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We may not be able to successfully protect our intellectual property rights
We seek to protect our proprietary technology by relying on a combination of statutory as well as common law copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions as indicated below in the section entitled Proprietary Rights in Item 4 Information on Check Point. We have certain patents in the United States and
in several other countries, as well as pending patent applications. We cannot assure you that pending patent applications will be issued, either at all or within the scope of the patent claims that we have submitted. In addition, someone else may
challenge our patents and these patents may be found invalid. Furthermore, others may develop technologies that are similar to or better than ours, or may work around any patents issued to us. Despite our efforts to protect our proprietary rights,
others may copy aspects of our products or obtain and use information that we consider proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, Israel or
Sweden. Our efforts to protect our proprietary rights may not be adequate and our competitors may independently develop technology that is similar to our technology. If we are unable to secure, protect and enforce our intellectual property rights,
such failure could harm our brand and adversely impact our business, financial condition and results of operations.
If a third-party asserts that we
are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, which could harm our business
There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our
ability not to infringe upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, own or claim to own intellectual property relating to our industry. From time to time, third parties
have brought, and continue to bring, claims that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In addition, third-parties have in the past sent us correspondence claiming that we
infringe upon their intellectual property, and in the future we may receive claims that our products infringe or violate their intellectual property rights. Furthermore, we may be unaware of the intellectual property rights of others that may cover
some or all of our technology or products. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or royalty payments, prevent us from selling our
products, or require that we comply with other unfavorable terms. In addition, we may decide to pay substantial settlement costs and/or licensing fees in connection with any claim or litigation, whether or not successfully asserted against us. Even
if we were to prevail, any disputes or litigation regarding intellectual property matters could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. As such, third-party claims with
respect to intellectual property may increase our cost of goods sold or reduce the sales of our products, and may have a material and adverse effect on our business.
We are exposed to various legal, business, political and economic risks associated with international operations; these risks could increase our costs,
reduce future growth opportunities and affect our operating results
We operate our business primarily from Israel, we sell our
products worldwide, and we generate a significant portion of our revenue outside the United States. We intend to continue to expand our international operations, which will require significant management attention and financial resources. In order
to continue to expand worldwide, we will need to establish additional operations, hire additional personnel and recruit additional channel partners, internationally. To the extent that we are unable to do so effectively, our growth is likely to be
limited and our business, operating results and financial condition may be materially adversely affected.
Our international sales and
operations subject us to many potential risks inherent in international business activities, including, but not limited to:
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technology import and export license requirements;
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costs of localizing our products for foreign countries, and the lack of acceptance of localized products in foreign countries;
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imposition of or increases in tariffs or other payments on our revenues in these markets;
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greater difficulty in protecting intellectual property;
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difficulties in managing our overseas subsidiaries and our international operations;
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declines in general economic conditions;
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political instability and civil unrest which could discourage investment and complicate our dealings with governments;
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difficulties in complying with a variety of foreign laws and legal standards and changes in regulatory requirements;
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expropriation and confiscation of assets and facilities;
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difficulties in collecting receivables from foreign entities or delayed revenue recognition;
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recruiting and retaining talented and capable employees;
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differing labor standards;
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potentially adverse tax consequences, including taxation of a portion of our revenues at higher rates than the tax rate that applies to us in Israel;
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fluctuations in currency exchange rates and the impact of such fluctuations on our results of operations and financial position; and
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the introduction of exchange controls and other restrictions by foreign governments.
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These
difficulties could cause our revenues to decline, increase our costs or both. This is also specifically tied to currency exchange rates which has an impact on our financial statements based on currency rate fluctuations.
Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our
costs of compliance
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), new SEC regulations, new amendments to the Israeli Companies Law and NASDAQ Global Select Market rules are
creating increased compliance costs and uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. For example, certain provisions of Dodd-Frank are
currently in the process of being implemented through regulatory action, and recently implemented provisions of Dodd-Frank remain subject to evolving application and interpretation by regulatory authorities. The implementation of these laws and
their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing
revisions to such governance standards.
In addition, continuing compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and the report of an independent registered public accounting firm
on the Companys internal control over financial reporting.
In connection with our Annual Report on Form 20-F for fiscal 2015, our
management assessed our internal control over financial reporting, and determined that our internal control over financial reporting was effective as of December 31, 2015, and our independent auditors have expressed an unqualified opinion over
the effectiveness of our internal control over financial reporting as of December 31, 2015. However, we will undertake management assessments of our internal control over financial reporting in connection with each annual report, and any
deficiencies uncovered by these assessments or any inability of our auditors to issue an unqualified report could harm our reputation and the price of our ordinary shares.
The SEC has also adopted rules pursuant to Dodd-Frank setting forth new disclosure requirements concerning the use of certain minerals that
are mined from the Democratic Republic of Congo and adjoining countries. We have incurred and expect to continue to incur costs associated with determining whether any of our products include materials that are covered by the conflict minerals
rules. In the event that our products do contain materials covered by the conflict minerals rules, we would be required to comply with applicable disclosure requirements, including conducting diligence procedures to determine the sources of certain
minerals that may be used or necessary to the production of our products and, if applicable, undertake potential changes to products, processes or sources of supply as a consequence of such verification activities. In addition, if our products do
contain materials covered by the conflict mineral rules, these rules could adversely affect the sourcing, supply and pricing of materials used in our products, particularly if the number of suppliers offering the minerals identified as
conflict minerals sourced from locations other than the Democratic Republic of Congo and adjoining countries is limited. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals
not determined to be conflict free and/or we are unable to alter our products, processes or sources of supply to avoid such materials.
If
we fail to comply with new or changed laws or regulations, our business and reputation may be harmed.
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A small number of shareholders own a substantial portion of our ordinary shares, and they may make decisions
with which you or others may disagree
As of January 31, 2016, our directors and executive officers owned approximately 26.6% of
the voting power of our outstanding ordinary shares, or 29.8% of our outstanding ordinary shares if the percentage includes options currently exercisable or exercisable within 60 days of January 31, 2016. The interests of these shareholders may
differ from your interests and present a conflict. If these shareholders act together, they could exercise significant influence over our operations and business strategy. For example, although these shareholders hold considerably less than a
majority of our outstanding ordinary shares, they may have sufficient voting power to influence matters requiring approval by our shareholders, including the election and removal of directors and the approval or rejection of mergers or other
business combination transactions. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive a shareholder of a possible premium for its ordinary shares as part of a sale of our company.
We may be required to indemnify our directors and officers in certain circumstances
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them against some types of
claims, subject to dollar limits and other limitations. Subject to Israeli law, these agreements provide that we will indemnify each of these directors and senior officers for any of the following liabilities or expenses that they may incur due to
an act performed or failure to act in their capacity as our director or senior officer:
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Monetary liability imposed on the director or senior officer in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court.
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Reasonable legal costs, including attorneys fees, expended by a director or senior officer as a result of an investigation or proceeding instituted against the director or senior officer by a competent authority;
provided, however, that such investigation or proceeding concludes without the filing of an indictment against the director or senior officer and either:
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No financial liability was imposed on the director or senior officer in lieu of criminal proceedings, or
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Financial liability was imposed on the director or senior officer in lieu of criminal proceedings, but the alleged criminal offense does not require proof of criminal intent.
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Reasonable legal costs, including attorneys fees, expended by the director or senior officer or for which the director or senior officer is charged by a court:
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In an action brought against the director or senior officer by us, on our behalf or on behalf of a third party,
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In a criminal action in which the director or senior officer is found innocent, or
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In a criminal action in which the director or senior officer is convicted, but in which proof of criminal intent is not required.
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Our cash balances and investment portfolio have been, and may continue to be, adversely affected by market conditions and interest rates
We maintain substantial balances of cash and liquid investments, for purposes of acquisitions and general corporate purposes. Our cash, cash
equivalents, short-term bank deposits and marketable securities totaled $3,615 million as of December 31, 2015. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject
to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their value. We expect that market conditions will continue to fluctuate and that the fair value of our investments may be
affected accordingly.
Financial income is an important component of our net income. The outlook for our financial income is dependent on
many factors, some of which are beyond our control, and they include the future direction of interest rates, the amount of any share repurchases or acquisitions that we effect and the amount of cash flows from operations that are available for
investment. We rely on third-party money managers to manage the majority of our investment portfolio in a risk-controlled framework. Our investment portfolio throughout the world is invested primarily in fixed-income securities and is affected by
changes in interest rates which continue to be low. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. In a low or declining interest rate
environment, borrowers may seek to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities we hold more quickly than we initially expected. This action may cause us to reinvest the redeemed proceeds in lower yielding
investments. Any significant decline in our financial income or the value of our investments as a result of the low interest rate environment, falling interest rates, deterioration in the credit rating of the securities in which we have invested, or
general market conditions, could have an adverse effect on our results of operations and financial condition.
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We generally buy and hold our portfolio positions, while minimizing credit risk by setting
maximum concentration limit per issuer and credit rating. Our investments consist primarily of government and corporate debentures. Although we believe that we generally adhere to conservative investment guidelines, the continuing turmoil in the
financial markets may result in impairments of the carrying value of our investment assets. We classify our investments as available-for-sale. Changes in the fair value of investments classified as available-for-sale are not recognized to income
during the period, but rather are recognized as a separate component of equity until realized. Realized losses in our investments portfolio may adversely affect our financial position and results. Had we reported all the accumulated changes in the
fair values of our investments into income, our reported net income for the year ended December 31, 2015, would have decreased by $4 million.
Currency fluctuations may affect the results of our operations or financial condition
Our functional and reporting currency is the U.S. dollar. We generate a majority of our revenues and expenses in U.S. dollars. In 2015, we
incurred approximately 41% of our expenses in foreign currencies, primarily Israeli Shekels and Euros. Accordingly, changes in exchange rates may have a material adverse effect on our business, operating results and financial condition. The exchange
rates between the U.S. dollar and certain foreign currencies have fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our revenues will continue to be generated in U.S.
dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in the currencies referred to above. The results of our
operations may be adversely affected in relation to foreign exchange fluctuations. During 2015, we entered into forward contracts to hedge against some of the risk of foreign currency exchange rates fluctuations resulting in changes in future cash
flow from payments of payroll and related expenses denominated in Israeli Shekels. As of December 31, 2015, we had outstanding forward contracts that hedge against changes in foreign currency exchange rates of $26 million.
We entered into forward contracts to hedge the exchange impacts on assets and liabilities denominated in Israeli Shekels and other currencies.
As of December 31, 2015, we had outstanding forward contracts that did not meet the requirement for hedge accounting, in the amount of $319 million. We use derivative financial instruments, such as foreign exchange forward contracts, to
mitigate the risk of changes in foreign exchange rates on accounts receivable and forecast cash flows denominated in certain foreign currencies. We may not be able to purchase derivative instruments adequate to fully insulate ourselves from foreign
currency exchange risks and over the past year we have incurred losses as a result of exchange rate fluctuations on exposures that have not been covered by our hedging strategy.
Additionally, our hedging activities may also contribute to increased losses as a result of volatility in foreign currency markets. If foreign
exchange currency markets continue to be volatile, such fluctuations in foreign currency exchange rates could materially and adversely affect our profit margins and results of operations in future periods. Also, the volatility in the foreign
currency markets may make it difficult to hedge our foreign currency exposures effectively.
The imposition of exchange or price controls
or other restrictions on the conversion of foreign currencies could also have a material adverse effect on our business, results of operations and financial condition.
Our business and operations are subject to the risks of earthquakes, fire, floods and other natural catastrophic events, as well as manmade problems such
as power disruptions or terrorism
Our headquarters in the United States, as well as certain of our research and development
operations, are located in the Silicon Valley area of Northern California, a region known for seismic activity. We also have significant operations in other regions that have experienced natural disasters. A significant natural disaster occurring at
our facilities in Israel or the U.S. or elsewhere, or where our channel partners are located, could have a material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in
our or our customers businesses or the economy as a whole. Further, we rely on information technology systems to communicate among our workforce located worldwide. Any disruption to our internal communications, whether caused by a natural
disaster or by manmade problems, such as power disruptions or terrorism, could delay our research and development efforts. To the extent that such disruptions result in delays or cancellations of customer orders, our research and development efforts
or the deployment of our products, our business and operating results would be materially and adversely affected.
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Third parties might attempt to gain unauthorized access to our network or seek to compromise our products and
services.
We regularly face attempts by others to gain unauthorized access through the Internet or to introduce malicious software to
our information technology (IT) systems. Additionally, malicious hackers may attempt to gain unauthorized access and corrupt the processes of hardware and software products that we manufacture and services we provide. We or our products are a
frequent target of computer hackers and organizations that intend to sabotage, take control of, or otherwise corrupt our manufacturing or other processes and products. We are also a target of malicious attackers who attempt to gain access to our
network or data centers or those of our customers or end users; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems or those of our customers or others. We believe such attempts are
increasing in number. From time to time we encounter intrusions or attempts at gaining unauthorized access to our products and network. To date, none have resulted in any material adverse impact to our business or operations. While we seek to detect
and investigate all unauthorized attempts and attacks against our network and products, and to prevent their recurrence where practicable through changes to our internal processes and tools and/or changes or patches to our products, we remain
potentially vulnerable to additional known or unknown threats. Such incidents, whether successful or unsuccessful, could result in our incurring significant costs related to, for example, rebuilding internal systems, reduced inventory value,
providing modifications to our products and services, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps with respect to third parties. Publicity about vulnerabilities and
attempted or successful incursions could damage our reputation with customers or users, and reduce demand for our products and services.
We may need
to change our pricing models to compete successfully.
The intense competition we face in the sales of our products and services and
general economic and business conditions can put pressure on us to change our prices. If our competitors offer deep discounts on certain products or services or develop products that the marketplace considers more valuable, we may need to lower
prices or offer other favorable terms in order to compete successfully. Any such changes may reduce margins and could adversely affect operating results. Additionally, the increasing prevalence of cloud and SaaS delivery models offered by us and our
competitors may unfavorably impact pricing in both our on-premise enterprise software business and our cloud business, as well as overall demand for our on-premise software product and service offerings, which could reduce our revenues and
profitability. Our competitors may offer lower pricing on their support offerings, which could put pressure on us to further discount our product or support pricing.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Because we incorporate encryption technology into our products, certain of our products are subject to U.S. export controls and may be
exported outside the U.S. only with the required export license or through an export license exception. If we were to fail to comply with U.S. export licensing requirements, U.S. customs regulations, U.S. economic sanctions, or other laws, we could
be subject to substantial civil and criminal penalties, including fines, incarceration for responsible employees and managers, and the possible loss of export or import privileges. Obtaining the necessary export license for a particular sale may be
time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments, and persons.
Even though we take precautions to ensure that we comply with all relevant regulations, any failure by us or any partners to comply with such regulations could have negative consequences for us, including reputational harm, government
investigations, and penalties.
In addition, various countries regulate the import of certain encryption technology, including through
import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our end-customers ability to implement our products in those countries. Changes in our products or changes in
export and import regulations may create delays in the introduction of our products into international markets, prevent our end-customers with international operations from deploying our products globally or, in some cases, prevent or delay the
export or import of our products to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in
the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers with
international operations. Any decreased use of our products or limitation on our ability to export to or sell our products in international markets would likely adversely affect our business, financial condition, and operating results.
Risks Related to Our Operations in Israel
Potential
political, economic and military instability in Israel, where our principal executive offices and our principal research and development facilities are located, may adversely affect our results of operations
We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development
facilities are located in Israel. Accordingly, political, economic and military conditions in and surrounding Israel may directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred
between Israel and its Arab neighbors. Terrorist attacks and hostilities within Israel; the hostilities between Israel and Hezbollah and between Israel and Hamas; as well as tensions between Israel and Iran, have also heightened these risks,
including an escalation in terrorist
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attacks since October 2015 and extensive hostilities from July to August 2014 along Israels border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into
Israel. Our principal place of business is located in Tel Aviv, Israel, which is approximately 40 miles from the nearest point of the border with the Gaza Strip. There can be no assurance that attacks launched from the Gaza Strip will not reach our
facilities, which could result in a significant disruption of our business. In addition, there are significant ongoing hostilities in the Middle East, particularly in Syria and Iraq, which may impact Israel in the future. Any hostilities involving
Israel, a significant increase in terrorism or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could materially adversely affect
our operations. Ongoing and revived hostilities or other Israeli political or economic factors could materially adversely affect our business, operating results and financial condition. In addition, there have been increased efforts by activists to
cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our products.
Recent uprisings and armed conflicts in various countries in the Middle East and North Africa are affecting the political stability of those
countries. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries. In addition, this instability may affect the global economy and marketplace, including as a
result of changes in oil and gas prices.
Our operations may be disrupted by the obligations of our personnel to perform military service
Many of our employees in Israel are obligated to perform annual military reserve duty in the Israel Defense Forces, in the event of a military
conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key
employees. Military service requirements for our employees could materially adversely affect our business, operating results and financial condition.
The tax benefits available to us require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.
For the year ended December 31, 2015, our effective tax rate was 21.5%. We have benefited or currently benefit from a variety of
government programs and tax benefits that generally carry conditions that we must meet in order to be eligible to obtain any benefit. Our tax expenses and the resulting effective tax rate reflected in our financial statements may increase over time
as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in which we operate or changes in the mix of countries where we generate profit.
If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and
could be required to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time.
Any of the following could have a material effect on our overall effective tax rate:
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Some programs may be discontinued,
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We may be unable to meet the requirements for continuing to qualify for some programs,
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These programs and tax benefits may be unavailable at their current levels,
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Upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that would offset the loss of the expiring tax benefit, or
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We may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.
|
Additional details are provided in Item 5 Operating and Financial Review and Products under the caption Taxes on
income, in Item 10 Additional Information under the caption Israeli taxation, foreign exchange regulation and investment programs and in Note 12 to our Consolidated Financial Statements.
Provisions of Israeli law and our articles of association may delay, prevent or make difficult an acquisition of us, prevent a change of control, and
negatively impact our share price
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential acquisition
transactions unappealing to us or to some of our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his or her ordinary shares for shares in a foreign corporation, to taxation before disposition of the investment in
the foreign corporation. These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.
16
In addition, our articles of association contain certain provisions that may make it more
difficult to acquire us, such as the provision which provides that our board of directors may issue preferred shares. These provisions may have the effect of delaying or deterring a change in control of us, 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 our securities.
Additional details are provided in Item 10 Additional Information under the caption Articles of Association and
Israeli Companies Law Anti-takeover measures.
As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we
may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
As a foreign private issuer
whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. For example, we follow our home country law,
instead of the NASDAQ Stock Market Rules, which require that we obtain shareholder approval for the establishment or amendment of certain equity based compensation plans and arrangements. Under Israeli law and practice, in general, the approval of
the board of directors is required for the establishment or amendment of equity based compensation plans and arrangements, unless the arrangement is for the benefit of a director or a controlling shareholder, in which case compensation committee or
audit committee and shareholder approval are also required. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in
such issuers home country certifying that the issuers practices are not prohibited by the home countrys laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange
Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under
NASDAQs corporate governance rules.
ITEM 4.
|
INFORMATION ON CHECK POINT
|
Overview
Check Points mission is to secure the Internet. Check Point was founded in 1993, and has since developed technologies to secure
communications and transactions over the Internet by enterprises and consumers. Two decades ago, risks and threats were limited and securing the Internet was relatively simple. A firewall and an antivirus solution generally provided adequate
security for business transactions and communications over the Internet. Today, enterprises require many (in some cases 15 or more) point solutions to secure their information technology (IT) networks from the multitude of threats and potential
attacks and are facing an increasingly complex IT security infrastructure.
Check Points core competencies are developing security
solutions to protect business and consumer transactions and communications over the Internet, and reducing the complexity in Internet security. We strive to solve the security maze by bringing more, better and simpler security solutions
to our customers.
Check Point develops, markets and supports a wide range of products and services for IT security. We offer our
customers an extensive portfolio of network security, endpoint security, data security and management solutions. Our solutions operate under a unified security architecture that enables end-to-end security with a single line of unified security
gateways, and allow a single agent for all endpoint security that can be managed from a single unified management console. This unified management allows for ease of deployment and centralized control and is supported by, and reinforced with,
real-time security updates.
Check Point was an industry pioneer with our FireWall-1 and our patented Stateful Inspection technology.
Check Point extended its IT security innovation with the development of our Software Blade architecture. Our dynamic Software Blade architecture delivers secure, flexible and simple solutions that can be customized to meet the security needs of any
organization or environment.
Our products and services are sold to enterprises, service providers, small and medium sized businesses and
consumers. Our Open Platform for Security framework allows customers to extend the capabilities of our products and services with third-party hardware and security software applications. Our products are sold, integrated and serviced by a network of
partners worldwide. Check Point customers include tens of thousands of businesses and organizations of all sizes. Check Points award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft.
17
Business Highlights
Details regarding the important events in the development of our business since the beginning of 2015 are provided in Item 5
Operating and Financial Review and Prospects under the caption Overview.
We were incorporated as a company under the
laws of the State of Israel in 1993 under the name of Check Point Software Technologies Ltd. Our registered office and principal place of business is located at 5 HaSolelim Street, Tel Aviv 6789705 Israel. The telephone number of
our registered office is 972-3-753-4555. Our companys web site is www.checkpoint.com. The contents of our web site are not incorporated by reference into this Annual Report on Form 20-F.
This Annual Report on Form 20-F is available on our web site. If you would like to receive a printed copy via mail, please contact our
Investor Relations department at 959 Skyway Road, Suite 300, San Carlos, CA 94070, U.S.A., Tel.: 650-628-2050, email:
ir@us.checkpoint.com
.
Our agent for service of process in the United States is CT Corporation System, 818 West Seventh Street, Los Angeles, CA 90017 U.S.A.; Tel:
213-627-8252.
Cyber Security Industry Today
Organizations of all sizes will continue to face a challenging threat landscape. With countless new connections formed every day, the world is
more globally linked than ever. Cloud, mobility, virtualization and the Internet of Things (IoT) are changing the way customers deploy and consume technology. Enterprises have more opportunities than ever before to innovate and compete
more effectively and efficiently. However, the network edges in their infrastructure are blurring and boundaries between entities are disappearing, which increases the risk of cyberattacks. Specific trends within this dynamic include:
Growth in Remote Connectivity
. The proliferation of smartphones and the growing number of people who work remotely and conduct
business through mobile devices has expanded the need to safeguard and manage the access to information. Whether remote or mobile, workers need constant connectivity to the enterprise network. In 2015, Check Point discovered significant
vulnerabilities in applications such as WhatsApp and in the Android operating system which allowed applications to gain illegitimate privileged access rights within hundreds of millions of mobile devices. Because of this trend toward remote
connectivity, enterprises will need to ensure security across all points of their infrastructure and deploy mobile-specific security solutions.
Cloud Computing and Network Virtualization
. Cloud computing, or Internet-based computing, provides shared servers which provide
resources, software and data storage to computers and other devices on demand, and drives the need for enterprise security for both on-premises and in-the-cloud infrastructures. New virtual environments and public and private clouds jeopardize
enterprises overall security posture if they are not deployed within the appropriate security infrastructure. These are complex environments to manage and secure due to multiple network layers. Deploying virtualized security solutions are
crucial to ensuring that attacks are immediately contained before they spread across virtualized server and network environments.
Overall Complexity within the Enterprise IT infrastructure
. Another key trend affecting IT security is the increasing complexity
of deploying, managing and monitoring the many technologies needed to fully secure the enterprise IT network. This trend creates two challenges for enterprises: how to cost-effectively manage a patch-work of point product solutions, and how to
ensure that no gaps are left in the infrastructure. To solve these problems, enterprises seek out single-architecture solutions with simplified management in an effort to keep the security infrastructure robust, yet simple to manage and adaptable to
on-going changes.
Increased Data Privacy and Compliance Regulation
. The increasing number of governmental regulations around
the world regarding data privacy and compliance is also impacting enterprise security. Enterprises need to put in place data security technologies to prevent violations of applicable laws regarding data privacy and protection and to avoid
experiencing data loss or data theft, which could cause enterprises to suffer reputational harm and governmental sanctions, fines and penalties. Data has long been a prime target for hackers seeking financial information, intellectual property, and
insider business information and authentication credentials. In 2015, we saw attacks on BlueCross, Morgan Stanley and Anthem . These attacks exposed personal health and financial data on millions of consumers.
Emergence of Social Engineering
. As security solutions improve and are more thoroughly deployed throughout enterprises, attackers
attempt to bypass security mitigations and restrictions by hacking the human mind , in other words, by deceiving employees into providing credentials, sending infected files or clicking on an infected link. Many of the attacks in
2015 have taken root within the attacks target through social engineering and phishing techniques. Specific security policies, increased segmentation of the infrastructure and multi-layer defense solutions will be needed to prevent these types
of attacks.
18
Increase in Sophistication of Threats and Attacks
. Todays threats use
sophisticated technology, the internet and deception to acquire sensitive information and to disrupt business operations. Many of these threats contain new, unknown signatures when they reach their targets. These new unknown signatures deploy and
cause damage to their target immediately. Commonly called zero-day threats, these threats present unique challenges to the enterprise. Enterprises need to put in place multi-layer defenses to prevent, detect and extract threats before
they cause damage.
Increase in the Number of Attacks and Potential Targets.
By 2020, estimates indicate that there will be one
billion smart meters, over one million smart light bulbs, over 50% of the consumers will utilize wearable technology and more than five major car manufacturers will have smart, driverless cars. Wearables can be hacked to record conversations, cars
can be hacked to compromise safety and smart meters can be hacked to access information. Critical infrastructures such as SCADA and IOS are increasingly targeted as they are older infrastructures not originally designed with cybersecurity in mind.
Manufacturers of these products will need more robust security solutions, and enterprises that are connected to these types of products through the ecosystem will need to consider how to prevent these devices might be leveraged to gain access to
their infrastructure.
Check Point Legacy and Vision
Since its inception, Check Points pure focus has been on IT security. Adapting to customers changing needs, the company has
developed numerous technologies to secure the use of the Internet by corporations and consumers when transacting and communicating. Today, Check Point is the largest pure security vendor globally. Making Internet communications and critical data
secure, reliable and available everywhere has been and continues to be our ongoing vision. We are committed to staying focused on real customer needs and to developing new and innovative security solutions that redefine the security landscape. An
interconnected, digital economy is here to stay, empowering business leaders to invent, to inspire and to drive positive change throughout the world.
Innovative leaders seize opportunities that emerge from change. They constantly question every assumption. These leaders rely on the latest
SaaS or IoT platforms to speed their time to market. They add partners from around the world to their supply chain to ensure they get the best suppliers and the best prices. They deploy beta applications in mobile environments to speed time to
market. These leaders push the envelope, but not at the expense of security, performance, or their ability to compete in the market.
The
ecosystem is rapidly changing, and is less and less controlled. Digital assets are harder to track and control. Infrastructure is no longer in one place as boundaries disappear. Hackers are innovating just as quickly as enterprises are and are
finding new ways to attack our connected world. More and more malware is being put into our ecosystem that traditional security techniques are powerless to prevent. Increasingly, vulnerabilities are exploited, brands are damaged, assets are stolen,
and our personal safety is at risk.
Business leaders today must stay One Step Ahead of things they cannot see, know or
control. To be one step ahead, enterprises must have visibility to tomorrows threats, not just the threats of today. They can no longer rely on continuously integrating layers of point solutions that result in complex mosaics that still
contain gaps in the infrastructure. Enterprises need to be able to prevent attacks at every stage, from start to finish. They need to contain threats and extract them the second they are detected. To be One Step Ahead they need access to a global
intelligence network and leverage it for real-time protection. These leaders need to protect every point in the infrastructure, from mobile to cloud to virtual and physical, from one location, while being flexible and adapting to change.
Organizations around the world rely on Check Point to protect their brand, assets and data from cyberattacks. For more than 20 years, Check
Points single architecture, comprehensive management and integrated threat intelligence, combined with the most advanced prevention and extraction solutions, have yielded the highest malware catch rate in the industry, thereby enabling
millions of users to safely and productively accelerate their businesses.
With a legacy of industry firsts and continuous innovation,
Check Point gives business leaders the freedom to invent, inspire and compete securely in the ever changing digital economy.
Check Point Technology
Leadership in 2015
Gartner
Number One Worldwide Firewall Equipment Market Share 2014
Leader Enterprise Network Firewall Market Quadrant 2015
Leader Unified Threat Management Magic Quadrant 2015
Leader Mobile Data Protection Magic Quadrant 2015
Number One Worldwide Firewall Equipment Market Share 2015 1st. 2nd, 3rd Quarter
19
IDC
Top Position Worldwide Combined Firewall & UTM Appliance Market 2014
Top Position Worldwide Combined Firewall and UTM Appliance Market 2015 1st. 2nd, 3rd Quarter
NSS Breach Detection Systems Results
: Check Points Next Generation Threat Prevention Solution received a recommended
rating in the NSS Labs Breach Detection Systems (BDS) group test. Check Point received a 100 percent catch rate of HTTP, 100 percent catch rate for email and 100 percent catch rate for drive by malware.
Common Criteria Certification
: Check Point was awarded Common Criteria (CC) certification for R77.30, following a rigorous third-party
evaluation and testing process.
Best Product of 2015:
Check Point SandBlast was named Coolest Security Product of 2015
by
CRN Magazine
.
Product Strategy
In an effort to simultaneously address the need for scalable security solutions and the retention of initial investments, Check Point
introduced the Software Blade architecture in February 2009. The architecture provides customers with the ability to tailor their security gateways based on their specific needs at any time. It offers enterprises a common platform to deploy
independent, modular and interoperable security applications or Software Blades such as firewall, virtual private network (VPN), intrusion prevention system (IPS), Application Control, Anti-Bot, antivirus, data loss prevention (DLP),
policy management, event analysis, or multi-domain management. The new architecture allows customers to select the exact security they need from a library of over 20 Software Blades, and to combine these blades into a single, centrally-managed
solution. Customers can easily extend their security solutions by adding new Software Blades without the need to purchase additional hardware. This allows our customers to deploy security dynamically, when needed, with lower total cost of ownership,
full integration, and on a single management console. Check Point also offers these software blades grouped into functional packages to address specific security issues. The four packages offered are Next Generation Firewall, Next Generation Threat
Prevention, Next Generation Secure Web Gateway and Next Generation Data Protection.
Threat Prevention software blades are fed by a cloud
based threat intelligence knowledge base, introduced in 2012, the Check Point ThreatCloud. The ThreatCloud, the first collaborative network to fight cybercrime, gathers threat data from an innovative worldwide network of threat sensors and
distributes threat intelligence to security gateways around the globe. Today, ThreatCloud scans more than 250 million addresses for bot discovery, keeps track of over 11 million malware signatures and has detected over 5.5 million
malware infested sites. On average, thousands of Check Point gateways detect more than 700,000 malwares every day. The ThreatCloud powers the Threat Prevention software blades by feeding threat updates directly to customers gateways, enabling
them to enforce pre-emptive protection against advanced threats, such as bots, Advanced Persistent Threats (APTs) and other forms of sophisticated malware.
In 2015, Check Point continued its track record of innovation through strategic acquisitions and new product introductions:
|
|
|
February:
|
|
Hyperwise Acquisition: Unique CPU-Level threat prevention technology.
|
March:
|
|
SandBlast Threat Extraction Technology: Providing zero malware in zero second protection.
|
April:
|
|
Lacoon Mobile Security Acquisition: Advanced threat prevention for mobile devices.
|
May:
|
|
1200R SCADA Appliance: Securing industrial control systems and critical infrastructure.
|
July:
|
|
Check Point vSEC: Private cloud security solution for VMware NSX environments.
|
July:
|
|
ZoneAlarm 2016: Consumer endpoint security software.
|
August:
|
|
Check Point Protect: Mobile Threat Prevention Solution for smartphones.
|
September:
|
|
SandBlast Threat Prevention: Evasion Resistant Sandboxing and Threat Extraction
|
Check Point continued its commitment to inspecting and discovering vulnerabilities that exist in various
platforms, applications and devices for the sole purpose of ensuring that all consumers of technology, whether they are currently Check Point customers or not, have important information regarding security vulnerabilities. In 2015, we published a
number of vulnerability reports, including:
Volatile Cedar:
Campaign allowing attackers to monitor a victims actions and
steal data.
2015 Check Point Security Report
: Report revealed that 96% of organizations are using high-risk applications and that
there was an increase in security incidents across all categories.
Magento eCommerce Platform
: Critical RCE (remote code execution)
vulnerability found in eBays Magento web ecommerce platform, affecting nearly 200,000 online shops.
20
WhatsApp Web Vulnerabilities
: Vulnerabilities discovered that exploit the WhatsApp Web
logic and put up to 200 million users at risk.
Certifi-gate Vulnerability in Android
: Allows applications to gain illegitimate
privileged access rights and exists in hundreds of millions of devices.
BrainTest related Mobile Malware
: Malware, packaged within
an Android game app called BrainTest, affected between 200,000 and one million users.
EZCast Vulnerability
: HDMI dongle-based TV
streamer that converts non-connected TVs into smart TVs allowing hackers ability to gain unauthorized access to an EZCast subscribers home network.
Rocket Kitten
: Uncovered Iranian-linked cyber-espionage global campaign.
Check Point Product Offerings
Check
Point continues to develop new innovations based on the Software Blade Architecture, providing customers with flexible and simple solutions that can be fully customized to meet the exact security needs of any organization. Check Point 3D Security
uniquely combines policy, people and enforcement for greater protection of information assets and helps organizations implement a blueprint for security that aligns with business needs. Our products provide end-to-end security from the enterprise to
the cloud to your mobile workers personal devices. We prevent and mitigate cyber-attacks and limit the data theft that often results from these threats. Our unified security management solution delivers extensibility and ease of use. Check
Point keeps customers one step ahead with industry leading security products for Threat Prevention, Mobility, Firewalls, Security Management and more. Our products protect individuals, SMBs and large data center enterprises.
Next Generation Firewalls.
Check Point provides customers of all sizes with the latest data and network security protection in an
integrated next generation firewall platform, reducing complexity and lowering the total cost of ownership. Offerings include the following:
|
a.
|
Data Center & Enterprise
|
Enterprises deploy security along well defined
boundaries at the perimeter and internally within software defined data centers. Our next generation firewall solutions for protecting both north-south and east-west traffic include:
|
|
|
Check Point Appliances
. Our data center and enterprise network security appliances combine high-performance, multi-core capabilities with fast networking technologies to provide the highest level of security. By
consolidating multiple security technologies into a single security gateway, these appliances are designed to deliver advanced and integrated security solutions to meet all of your business security needs.
|
|
|
|
Integrated Appliance Solutions
. Check Point Integrated Appliance Solutions (IAS) offer flexibility and choice for data center and enterprise network security. Powered by Fujitsu and Blue Coat, these
appliances provide integrated software and hardware bundles and direct support that are customized to organizations exact specifications.
|
|
|
|
Public and Private Cloud
. Enterprises seeking the availability, scalability and cost reduction are shifting more and more applications to cloud computing models. Check Point vSEC products provide integrated
security and expertise to help customers build secure cloud infrastructure today and protect future deployments.
|
|
b.
|
Small Business and Branch
|
Check Point has an affordable, easy to use and effective
solution to secure small businesses and branch offices. This includes turn-key appliances and a Cloud Managed Security Service option, giving you the freedom to focus on growing your business.
|
|
|
600 Appliance
. Available in three models to match the number of users protected, the 600 Appliance is ideal for small offices with a staff of 50 employees or fewer. You can manage the appliance via simplified
web-based local management, or centrally via our Cloud Managed Security Service
|
|
|
|
1100 Appliance
. Available in three models to match the number of users protected, the 1100 Appliance is ideal for branch offices with a staff of 50 employees or fewer. Small businesses can manage the appliance
via simplified web-based local management, or centrally via our enterprise security management product.
|
21
|
|
|
Cloud Managed Security Service
. This cost-effective, enterprise-class security solution is managed by experts, leaving small businesses free to focus on growing their business instead of managing their security.
Our partners offer this service with an attractive and predictable pricing structure that makes security budget and planning simple and affordable.
|
|
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|
2200 Appliance
. With its multi-core technology and six 1-gigabit Ethernet ports, the 2200 Appliance can easily secure any branch or small office. The appliance includes our enterprise security management product
for up to two gateways.
|
Check Points ZoneAlarm products are used by more than
90 million people to provide integrated threat protection to safeguard all of their PCs and mobile devices. Offerings include an a fully integrated Extreme Security Suite, an Internet Security Suite, AV + Firewall or PRO Firewall option so
consumers choose the level of protection they need.
Next Generation Threat Prevention
. The growing frequency and sophistication of
cyber security threats makes protecting organizations more important than ever. Check Point Next Generation Threat Prevention delivers a multi-layered line of defense and extensive security intelligence coverage to help combat threats of today, and
tomorrow. Our Threat Prevention products fall into the following five categories:
|
a.
|
Sandblast Zero Day Protection
: Attackers have become more creative, reaching corporate resources with modern and complex malware attacks. Check Point SandBlast Zero-Day Protection combines innovative technologies
to proactively protect against even the most dangerous targeted attacks and unknown malware, while ensuring quick delivery of safe content.
|
|
b.
|
Threat Prevention Appliances and Software
. To combat todays sophisticated cyberattacks and meet enterprise requirements, customers need a multi-layered approach to threat prevention. Check Points
cyber security threat prevention solutions enable detection and prevention of known vulnerabilities and advanced threats dedicated threat prevention appliances or specialized Software Blades to give customers maximum flexibility in designing their
security solution.
|
|
c.
|
Threat Intelligence
. In the constant fight against malware, threat intelligence and rapid response capabilities are vital. Check Point helps keep customers up and running with comprehensive intelligence to
proactively stop threats, manage security services to monitor your network and incident response to quickly respond to and resolve attacks. Our ThreatCloud IntelliStore, Incident Response and Managed Security Services provide tools to help
organizations stay one step ahead of attackers and mitigate future risks
|
|
d.
|
Web Security
. Web-borne malware is more clever than ever. Check Point Web Security solutions provide real-time protection for secure use of the web and educate users on web-use policy.
|
|
e.
|
Distributed denial-of-service.
DDoS attacks can be unleashed by anyone, but with a little preparation, customers can prevent service disruptions caused by DDoS. Check Point DDoS-P (DDoS Protection) uses a hybrid
of dedicated on-premises and cloud-based resources to defend against volumetric, application, reflective and resource exhaustive DDoS attacks
|
Security Management.
As network complexity grows, so does the difficulty of applying complete, consistent security management policies
and efficient processes to investigate events and oversee resolution. Check Point offers a variety of smart management solutions designed to tackle the security management challenges of today and tomorrow.
|
a.
|
Policy Management
. With many and varied network affiliated devices to manage, organizations find strict policy enforcement time consuming and challenging. We offer centralized policy management solutions that
make it easy to ensure that all gateways, mobile devices and endpoint devices are in complianceand stay that way
|
|
|
|
Network Policy Management Software Blade
. Comprehensive, centralized network security policy management for Check Point gateways and Software Blades, via SmartDashboarda single, unified console that
provides control over even the most complex security deployments
|
|
|
|
Endpoint Policy Management Software Blade
. Simplify endpoint security management by unifying all endpoint security capabilities for PC & Mac in a single console. Monitor, manage, educate and enforce
policy, from an at-a-glance dashboard down to user and machine details, all with a few clicks.
|
|
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|
Multi-Domain Security Management (Provider-1) Software Blade.
Deliver more security and control by segmenting security management into multiple virtual domains. Businesses of all sizes can easily create virtual
domains based on geography, business unit or security function to strengthen security and simplify management.
|
22
|
|
|
Management Portal Software Blade
. Browser-based security management access to outside groups such as support staff or auditors, while maintaining centralized control of policy enforcement. View security policies,
the status of all Check Point products and administrator activity as well as edit, create and modify internal users
|
|
b.
|
Operations and Workflow
As network complexity grows, security management processes inevitably slow down. Our Operations and Workflow solutions are designed to accelerate security management and restore efficiency
with centralized device and user management, security best practices and automated change management.
|
|
|
|
Compliance Software Blade
. Monitor management, Software Blades and security gateways to constantly validate that your Check Point environment is configured in the best way possible. The Check Point Compliance
Software Blade provides 24/7 security monitoring, security alerts on policy violations, and out-of-the-box audit reports.
|
|
|
|
SmartProvisioning Software Blade
. Provide centralized administration and security provisioning of Check Point devices. Using profiles, administrators can automate device configuration and easily roll out changes
to settings to multiple, geographically distributed devices, via a single security management console.
|
|
|
|
User Directory Software Blade
. Leverage LDAP servers to obtain identification and security information about network users, eliminating the risks associated with manually maintaining and synchronizing redundant
data stores, and enabling centralized user management throughout the enterprise.
|
|
|
|
SmartWorkflow Software Blade
. Provide a seamless and automated process for policy change management that helps administrators reduce errors and enhance compliance. Enforce a formal process for editing, reviewing,
approving and auditing policy changes from a single console, for one-stop, total policy lifecycle management
|
|
c.
|
Monitoring and Analysis
When security events customers need well-defined follow-up procedures and visibility into critical security events impacting the organization. We facilitate greater insight and efficiency
in event investigation with ongoing monitoring and customized reporting tailored to different stakeholder needs
|
|
|
|
Next Generation SmartEvent Software Blade
. Real-time cyber threat visibility in the era of Big Data. Quickly search and analyze billions of data logs to identify critical security events. Gain greater network
visibility with Next Generation SmartEvent on Smart-1 Appliances, and more easily manage big data security to make faster, more informed security decisions.
|
|
|
|
Logging and Status Software Blade.
Transform data into security intelligence with SmartLog, an advanced log analyzer that delivers split-second search results providing real-time visibility into billions of log
records over multiple time periods and domains.
|
|
|
|
Monitoring Software Blade
. Present a complete picture of network and security performance, enabling fast responses to changes in traffic patterns or security events. The Software Blade centrally monitors Check
Point devices and alerts to changes to gateways, endpoints, tunnels, remote users and security activities.
|
|
|
|
SmartReporter Software Blade
. Increase the visibility of security threats by centralizing network security reporting of network, security and user activity into concise predefined or custom-built reports. Easy
report generation and automatic distribution save time and money and allow organizations to maximize security investments.
|
Mobile Security.
Today every business is a mobile business, with requirements to safeguard business data, provide secure mobile access
to business documents and keep mobile devices safe from threats. Use of mobile devices and apps has introduced a wide range of new attack vectors and new data security challenges for IT. Mobile technology has made the network security challenge much
bigger and more diverse - cybercriminals frequently optimize their attacks to exploit the technologies that people use the most. Document protection is limited on mobile devices. Employees use a wide variety of personal devices on the job, but few
users realize the importance of preventing third parties from accessing their devices. Check Point Enterprise Mobile Security solutions provide the widest range of products to help secure the mobile world. Our offerings include:
|
a.
|
Mobile Threat Prevention
. Using smartphones and tablets to access critical business information on the go has many benefits, but it can also expose sensitive data to risk. Check Point Mobile Threat Prevention
protects iOS and Android devices from advanced mobile threats, ensuring you can deploy and defend devices with confidence
|
|
b.
|
Mobile Document Protection
. Mobile security and complexity dont have to go hand in hand. Check Point Capsule is one seamless solution that addresses all mobile security needs. Capsule provides a secure
business environment for mobile device use and protects business documents wherever they go.
|
23
Endpoint Security
. Check Point Endpoint Security combines data security, network security,
threat prevention technologies and remote access VPN into one package for complete Windows and Mac OS X protection. This integrated suite allows you to manage security protection in a single console.
|
a.
|
Secure Data.
Most corporate laptops and PCs store proprietary data on their hard drives, and many users regularly work outside of a secure corporate environment. A data breach from a lost, stolen or compromised
laptop can result in costly fines, lawsuits and lost revenue. Full Disk Encryption secures the entire hard drive. Media Encryption and Port Control secure removable media. Capsule Docs enables organizations to seamlessly protect documents, ensuring
access for authorized users only. Remote Access VPN provides secure access to corporate resources when traveling or working remotely. Check Point data security solutions cover the following areas:
|
|
b.
|
Secure Devices
. Threats from malware like viruses, worms and bots change constantly. Users are targets of phishing emails that may contain links to websites infected with this malware. To prevent these new and
emerging threats, IT departments need control and visibility into endpoint activity. We secure devices with products that address the following:
|
|
|
|
Firewall and Compliance Check
|
|
|
|
Anti-malware and Application Control
|
|
c.
|
Security Policy
. Check Point Endpoint Policy Management gives security administrators the power to enforce, manage, report and educate users with one console. With a customizable management dashboard,
administrators have maximum visibility into the specific security areas important to the organization. They can take the steps to deploy and remediate endpoints to ensure compliance with company policy. Our products include solutions for:
|
|
|
|
Endpoint Policy Management
|
|
|
|
Endpoint Security Threat Forensics
|
Revenues by Category of Activity
The following table presents our revenues for the last three fiscal years by category of activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Category of Activity:
|
|
|
|
|
Products and licenses
|
|
$
|
555,792
|
|
|
$
|
520,312
|
|
|
$
|
496,930
|
|
Subscriptions
|
|
$
|
318,624
|
|
|
$
|
265,021
|
|
|
$
|
217,088
|
|
Software updates and maintenance
|
|
$
|
755,422
|
|
|
$
|
710,483
|
|
|
$
|
680,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,629,838
|
|
|
$
|
1,495,816
|
|
|
$
|
1,394,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenues for the last three fiscal years by geographic area are set out in Item 5 Operating
and Financial Review and Prospects under the caption Overview.
Sales and Marketing
We leverage the expertise of over 2700 partners to deliver our security solutions to consumers and enterprises of all sizes around the world.
Our network of partners accounts for 100% of our revenue and includes two-tier distributors, value-added resellers, retail and direct marketing partners, global systems integrators and managed service providers. In concert with our inside sales and
channel sales teams, our direct sales teams work closely with our partner ecosystem to support pre-sales selling efforts to ensure that we stay close to customer requirements for current and future security solutions. In addition to our traditional
outbound channels we leverage web-based e-commerce solutions to serve the needs of the majority of our consumer customers. To ensure integration with strategic applications within our customer ecosystem, we work with a variety of hardware and
software suppliers such as, IBM, Hewlett-Packard, VMWare, Blue Coat Systems, Apple and Google.
24
We drive awareness and preference for Check Point solutions through global media campaigns,
thought leadership programs, digital marketing, social media, as well as press and analyst relations. We accelerate our innovation and technology agenda globally through frequent product launches and associated demand generation programs. In
addition to our annual Check Point User Conference we host C-level, strategic IT and technical decision makers at a variety of custom events such as Cyber Day, CISO Roundtables, and local seminars. We also participate in targeted industry events
such as RSA, CyberTech and Black Hat.
As of December 31, 2015, we had 1,679 employees and contractors dedicated to sales and
marketing.
Support and Services
We
operate a worldwide technical services organization which provides a wide range of services including the following: (i) technical customer support programs and plans, as well as (ii) certification and educational training on Check Point
products; and (iii) professional services in implementing, upgrading and optimizing Check Point products, such as design planning and security implementation.
Our technical assistance centers in the United States, Israel, Canada and Japan offer support worldwide, 24-hour service, seven days per week.
There are employees in additional locations supporting our call centers, as well as call centers operated by third parties (for consumer support only). As of December 31, 2015, we had 590 employees and contractors in our technical services
organization, with 464 employees and contractors dedicated to customer service and support.
Our support solutions include both indirect
and direct offerings. Channel partners provide customers with installation, training, maintenance and support, while we provide high-level technical support to our channel partners. Alternatively, our customers may elect to receive support directly
from us. As part of our pre-sale support to our channel partners, we employ technical consultants and systems engineers who work closely with our channel partners to assist them with pre-sale configuration, use and application support. In addition,
because of the increased demand for our portfolio of security gateway appliances, from small office locations to telco grade and capacity infrastructure platforms, we have expanded our technical support offerings around the world. This includes same
and next business day replacements, on-site support availability and device pre-configuration. We have also added new ThreatCloud Managed Security Services and Incident Response. These new services are focused on helping our partners and customers
maximize the effectiveness of advanced protections and mitigate and remediate critical security events quickly.
Research and Product Development
We believe that our future success will depend upon our ability to enhance our existing products, and to develop, acquire and
introduce new products to address the increasingly sophisticated needs of our customers. We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for product development and
innovation. Our product development efforts are focused on providing a unified security architecture, named the Check Point Software Blade Architecture, that functions throughout all layers of the network and devices that carry data. This includes
enhancements to our current family of products and the continued development of new products to respond to the rapidly changing threat landscape through the provision of services, such as network perimeter protections, protection against
cyber-threats, data protection for todays mobile environments, web security and security for managed enterprise endpoints. Our technology also centrally manages all of these layers and solutions. We develop most of our new products internally
and also expect to leverage the products and technologies we have acquired. We may decide, based upon timing and cost considerations that it would be more efficient to acquire or license certain technologies or products from third parties, or to
make acquisitions of other businesses. Research and development expenses were $149 million in 2015, $133 million in 2014 and $122 million in 2013. These amounts include stock-based compensation in the amount of $12 million in 2015, $9 million in
2014 and $9 million in 2013. As of December 31, 2015, we had 1,303 employees and contractors dedicated to research and development activities and quality assurance.
Competition
Information concerning
competition is provided in Item 3 Key Information under the caption Risk Factors Risks Relating to Our Business and Our Market We may not be able to successfully compete.
Proprietary Rights
We rely on a
combination of copyright and trademark laws, patents, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We rely on trade secret, copyright laws and patents to protect our software, documentation
and other written materials. These laws provide only limited protection. Further, we generally enter into confidentiality agreements with employees, consultants, customers and potential customers, and limit access and distribution of materials and
information that we consider proprietary.
We have 45 U.S. patents, 34 U.S. patents pending, and additional patents issued and patent
applications pending worldwide. Our efforts to protect our patent rights and other proprietary rights may not be adequate and our competitors may independently develop technology that is similar. Additional details are provided in Item 3
Key Information under the caption Risk Factors Risks Relating to Our Business and Our Market We may not be able to successfully protect our intellectual property rights.
25
Effect of Government Regulation on our Business
Information concerning regulation is provided in Item 5 Operating and Financial Review and Products under the caption
Taxes on income and in Item 10 Additional Information under the caption Israeli taxation, foreign exchange regulation and investment programs.
Organizational Structure
We are
organized under the laws of the State of Israel. We wholly own the subsidiaries listed below, directly or through other subsidiaries, unless otherwise specified in the footnotes below:
|
|
|
NAME OF SUBSIDIARY
|
|
COUNTRY OF INCORPORATION
|
Check Point Software Technologies, Inc.
|
|
United States of America (Delaware)
|
Check Point Software (Canada) Technologies Inc.
|
|
Canada
|
Check Point Software Technologies (Japan) Ltd.
|
|
Japan
|
Check Point Software Technologies (Netherlands) B.V.
|
|
Netherlands
|
Check Point Holding (Singapore) PTE Ltd.
|
|
Singapore
|
Check Point Holding (Singapore) PTE Ltd. (Representative Office)
|
|
Indonesia
|
Check Point Holding (Singapore) PTE Ltd. U.S. Branch (1)
|
|
United States of America (New York)
|
Israel Check Point Software Technologies Ltd. China (2)
|
|
China
|
Check Point Holding AB (3)
|
|
Sweden
|
SofaWare Technologies Ltd.
|
|
Israel
|
Dynasec Ltd.
|
|
Israel
|
Check Point Advanced Threat Prevention Ltd.
|
|
Israel
|
Check Point Mobile Security Ltd.
|
|
Israel
|
(1)
|
Branch of Check Point Holding (Singapore) PTE Ltd.
|
(2)
|
Representative office of Check Point Software Technologies Ltd.
|
(3)
|
Subsidiary of Check Point Holding (Singapore) PTE Ltd. (former name: Protect Data AB)
|
Check
Point Software Technologies (Netherlands) B.V. acts as a holding company. It wholly owns the principal operating subsidiaries listed below, unless otherwise indicated in the footnotes below:
|
|
|
NAME OF SUBSIDIARY
|
|
COUNTRY OF INCORPORATION
|
Check Point Software Technologies S.A.
|
|
Argentina
|
Check Point Software Technologies (Australia) PTY Ltd.
|
|
Australia
|
Check Point Software Technologies (Austria) GmbH
|
|
Austria
|
Check Point Software Technologies (Belarus) LLC
|
|
Belarus
|
Check Point Software Technologies (Belgium) S.A.
|
|
Belgium
|
Check Point Software Technologies (Brazil) LTDA
|
|
Brazil
|
Check Point Software Technologies (Hong Kong) Ltd. (Guangzhou office) (1)
|
|
China
|
Check Point Software Technologies (Hong Kong) Ltd. (Shanghai office) (1)
|
|
China
|
Check Point Software Technologies (Czech Republic) s.r.o.
|
|
Czech Republic
|
Check Point Software Technologies (Denmark) ApS
|
|
Denmark
|
Check Point Software Technologies (Finland) Oy
|
|
Finland
|
Check Point Software Technologies SARL
|
|
France
|
Check Point Software Technologies GmbH
|
|
Germany
|
Check Point Software Technologies (Greece) SA
|
|
Greece
|
Check Point Software Technologies (Hungary) Ltd.
|
|
Hungary
|
Check Point Software Technologies (Hong Kong) Ltd.
|
|
Hong Kong
|
Check Point Software Technologies (India) Private Limited
|
|
India
|
Check Point Software Technologies (Italia) Srl (2)
|
|
Italy
|
Check Point Software Technologies Mexico S.A. de C.V.
|
|
Mexico
|
Check Point Software Technologies B.V.
|
|
Netherlands
|
Check Point Software Technologies Norway A.S.
|
|
Norway
|
26
|
|
|
NAME OF SUBSIDIARY
|
|
COUNTRY OF INCORPORATION
|
Check Point Software Technologies (Poland) Sp.z.o.o.
|
|
Poland
|
CPST (Portugal), Sociedade Unipessoal Lda.
|
|
Portugal
|
Check Point Software Technologies (RMN) SRL.
|
|
Romania
|
Check Point Software Technologies (Russia) OOO
|
|
Russia
|
Check Point Software Technologies (Korea) Ltd.
|
|
S. Korea
|
Check Point Software Technologies (Spain) S.A.
|
|
Spain
|
Check Point Software Technologies (Switzerland) A.G.
|
|
Switzerland
|
Check Point Software Technologies (Taiwan) Ltd.
|
|
Taiwan
|
Check Point Yazilim Teknolojileri Pazarlama A.S. (3)
|
|
Turkey
|
Check Point Software Technologies (UK) Ltd.
|
|
United
Kingdom
|
(1)
|
Representative office of Check Point Software Technologies (Hong Kong) Ltd.
|
(2)
|
97% owned by Check Point Software Technologies (Netherlands) B.V. and 3% owned by Check Point Software Technologies Ltd.
|
(3)
|
96% owned by Check Point Software Technologies (Netherlands) B.V., 1% owned by Check Point Software Technologies Ltd. and 3% owned in trust by the directors of Check Point Yazilim Teknolojileri Pazarlama A.S. on behalf
of Check Point Software Technologies (Netherlands) B.V.
|
Check Point Holding AB wholly owns the subsidiaries listed below,
directly or through other subsidiaries:
|
|
|
NAME OF SUBSIDIARY
|
|
COUNTRY OF INCORPORATION
|
Check Point Software Technologies (Sweden) AB
|
|
Sweden
|
Pointsec Norway AS
|
|
Norway
|
Reflex Software Ltd. (Jersey)
|
|
Jersey
|
Reflex Magnetics Ltd. (1)
|
|
United Kingdom
|
Reflex Software Luxembourg SARL (1)
|
|
Luxembourg
|
(1)
|
The company is dormant.
|
Check Point Software Technologies Inc. wholly owns the subsidiaries
listed below:
|
|
|
NAME OF SUBSIDIARY
|
|
COUNTRY OF INCORPORATION
|
Pointsec Mobile Technologies, LLC.
|
|
United States of America (California)
|
NFR Security, Inc.
|
|
United States of America (Delaware)
|
Zone Labs, L.L.C.
|
|
United States of America (California)
|
Liquid Machines Inc.
|
|
United States of America (Delaware)
|
Property and Equipment
Our international headquarters are located in Tel Aviv, Israel. We occupy our headquarters pursuant to a long-term lease with the City of Tel
Aviv Jaffa, which expires in August 2059. We made a prepayment for the entire term upon entering into this lease and we are not required to make any additional payments under the lease. Our international headquarters building currently
contains approximately 172,000 square feet of office space and we leased approximately 40,000 square feet of additional space. Our international headquarters building is used mainly for research and development as well as all other supporting
functions. We also acquired the rights to construct an additional building with approximately 160,000 square feet, which we began building in December 2014. We expect the investment to be approximately $60 million through 2017.
We lease 92,601 square feet in various locations in the United States. Examples of principal office locations in the U.S. are as follows:
|
|
|
|
|
Location
|
|
Primary Usage
|
|
Space (square feet)
|
San Carlos, California
|
|
U.S. Headquarters
|
|
40,265
|
Irving, Texas
|
|
Technical support, education and professional services
|
|
24,807
|
New York, New York
|
|
Sales
|
|
6,787
|
27
Outside of Israel and the U.S., we lease offices in various locations throughout the world. Our
primary locations are set forth below:
|
|
|
|
|
Location
|
|
Primary Usage
|
|
Space (square feet)
|
Europe
|
|
Sales, research and development
|
|
43,389
|
Asia and Japan
|
|
Sales
|
|
26,436
|
Canada
|
|
Sales and technical services
|
|
20,705
|
Principal Capital Expenditures and Divestitures
For more information regarding our principal capital expenditures currently in progress, see Item 5 Operating and Financial Review and
Prospects under the caption Liquidity and Capital Resources.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion and analysis is
based on our consolidated financial statements including the related notes, and should be read in conjunction with them. Our consolidated financial statements are provided in Item 18 Financial Statements.
Overview
We develop, market and support
a wide range of products and services for IT security and offer our customers an extensive portfolio of network and gateway security solutions, management solutions and data and endpoint security solutions. Our solutions operate under a unified
security architecture that enables end-to-end security with a single line of unified security gateways and allow a single agent for all endpoint security that can be managed from a single unified management console. This unified management allows
for ease of deployment and centralized control and is supported by, and reinforced with, real-time security updates. Our products and services are sold to enterprises, service providers, small and medium sized businesses and consumers. Our open
platform framework allows customers to extend the capabilities of our products and services with third-party hardware and security software applications. Our products are sold, integrated and serviced by a network of channel partners worldwide.
Our business is subject to the effects of general global economic conditions and, in particular, market conditions in the IT, Internet
security and data security industries. If general economic and industry conditions deteriorate, demand for our products could be adversely affected.
We derive our sales primarily through indirect channels. During 2015, 2014 and 2013, we derived approximately 53%, 54% and 57%, respectively
of our sales from our ten largest channel partners. In 2015, 2014 and 2013, our two largest distributors accounted for approximately 38%, 37% and 30% of our sales. The following table presents the percentage of total consolidated revenues that we
derive from sales in each of the regions shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, principally U.S.
|
|
|
48
|
%
|
|
|
49
|
%
|
|
|
47
|
%
|
Europe
|
|
|
37
|
%
|
|
|
37
|
%
|
|
|
38
|
%
|
Asia, Middle East and Africa
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
For information on the impact of foreign currency fluctuations, please refer to Item 11
Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Risk.
On February 17, 2015, we completed
the acquisition of Hyperwise Ltd, a privately-held Israeli-based company. Hyperwise Ltd. has developed a unique and cutting-edge CPU-level threat prevention engine that eliminates threats at the point of pre-infection. The unrivaled exploit
prevention technology provides a higher catch rate of threats and provides organizations an unmatched level of protection against attackers.
28
On April 2, 2015, we completed the acquisition of Lacoon Mobile Security, a privately held
Israeli based company. Lacoon provides a comprehensive solution for iOS and Android, delivering real-time mobile security and intelligence to an organizations existing security and mobility infrastructure.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain
estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we make are reasonable based upon information available to us at the time that these estimates, judgments and assumptions were made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material
differences between these estimates, judgments or assumptions and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we
believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:
|
|
|
Revenue recognition (including sales reserves),
|
|
|
|
Realizability of long-lived assets (including intangible assets),
|
|
|
|
Accounting for income taxes,
|
|
|
|
Equity-based compensation expense,
|
|
|
|
Allowances for doubtful accounts,
|
|
|
|
Derivative and hedge accounting, and
|
|
|
|
Impairment of marketable securities.
|
In many cases, the accounting treatment of a particular
transaction is specifically dictated by U.S. GAAP and does not require managements judgment in its application. There are also areas in which managements judgment in selecting among available alternatives would not produce a materially
different result. Our senior management has reviewed these critical accounting policies and related disclosures with the audit committee of our board of directors. You can see a summary of our significant accounting policies in Note 2 to our
consolidated financial statements, as set forth in Item 18.
Revenue recognition
We derive our revenues mainly from sales of products and licenses, subscriptions and software updates and maintenance. Our products are
generally integrated with software that is essential to the functionality of the product. We sell our products primarily through channel partners including distributors, resellers, OEMs, system integrators and MSPs, all of whom are considered end
users. We also sell certain products directly to end users primarily through our website.
Subscriptions include security solutions that
are sold as a service or annuity.
Software updates and maintenance provide customers with rights to unspecified software product upgrades
released during the term of the agreement and maintenance includes multiple services to customers, primarily telephone access to technical support personnel and hardware support services.
We recognize revenues when persuasive evidence of an arrangement exists, the product or software license has been delivered or services were
rendered, the amounts are fixed or determinable and collection of the amount is considered probable. Revenues from subscriptions and from software updates and maintenance are recognized ratably over the term of the agreement. Revenues from
arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, in which this case revenue is deferred and recognized when payments become due, provided that all other revenue recognition
criteria have been met.
29
Our products and services generally qualify as separate units of accounting. As such, revenues
from multiple element arrangements that include products, subscriptions and software updates and maintenance are separated into their various elements using the relative selling price. The estimated selling price for each deliverable is based on its
vendor specific objective evidence (VSOE), if available, third party evidence (TPE) if VSOE is not available, or best estimated selling price (BESP) if neither VSOE nor TPE is available.
For products, we determined the fair value based on BESP by reviewing historical transactions, and considering several other external and
internal factors including, but not limited to, our pricing practices.
We established VSOE of fair value for subscriptions and for
software updates and maintenance based on the renewal prices charged for such services.
Deferred revenues represent mainly the
unrecognized revenue billed for subscriptions and for software updates and maintenance. Such revenues are recognized ratably over the term of the related agreement.
We recognize revenues net of estimated amounts that may be refunded for sales returns, rebate arrangements with customers and for our
distributors right to rotate our products, subject to varying limitations. We estimate and record these reductions based on our historical sales returns experience, analysis of credit memo data, stock rotation and other known factors. In each
accounting period, we use judgments and estimates to determine potential future sales credits, returns and stock rotation, related to current period revenue. These estimates affect our revenue line item on our consolidated statements of
income and affect our accounts receivable, net and our deferred revenues on our consolidated balance sheets.
Goodwill
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible
assets acquired less liabilities assumed. We have one operating segment, and this segment comprises our only reporting unit.
We review
goodwill for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350 Intangibles Goodwill and
other. ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit
unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting
unit and proceed directly to performing the first step of the goodwill impairment test. Goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its fair value. In such cases, we then calculate the goodwills
implied fair value by performing a hypothetical allocation of the reporting units fair value to the underlying assets and liabilities, with the residual being the implied fair value of goodwill. This allocation process involves using
significant estimates, including estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and assumptions about the future deployment of the long-lived assets of the reporting unit. Other factors
we consider are the brand awareness and the market position of the reporting unit and assumptions about the period of time we will continue to use the brand in our product portfolio. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for our goodwill.
We perform the first step of the quantitative goodwill
impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present and compare the fair value of the reporting unit with its carrying value. Our annual goodwill impairment analysis did not result
in impairment. As of December 31, 2015, the market capitalization of the Company was significantly higher than the equity book value.
Realizability of long-lived assets (including intangible assets)
We are required to assess the impairment of tangible and intangible long-lived assets subject to amortization, under ASC 360 Property,
Plant and Equipment, on a periodic basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the
strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period.
30
Upon determination that the carrying value of a long-lived asset may not be recoverable based
upon a comparison of aggregate undiscounted projected future cash flows from the use of the asset or asset group to the carrying amount of the asset, an impairment charge is recorded for the excess of carrying amount over the fair value. We measure
fair value using discounted projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. No impairment charges were recognized during 2015, 2014 and 2013.
Accounting for income tax
We are subject
to income taxes in Israel, the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based on the guidance in ASC 740 Income
Taxes, we use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not
that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of
these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of changes to reserve provisions that
are considered appropriate, as well as the related interest.
Accounting for tax positions requires judgments, including estimating
reserves for potential uncertainties. While we believe the resulting tax balances are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and
such adjustments could be material. See Note 12 to our Consolidated Financial Statements for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the
respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we have adequately provided for any reasonably foreseeable outcomes related
to tax audits and settlements. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on
potential assessments expire. See: Item 3 Key Information Risk Factors Risks Related to Our Business and Our Market.
Equity-based compensation expense
We
account for equity-based compensation in accordance with ASC 718 Compensation Stock Compensation. Under the fair value based measurement approach of this statement, stock-based compensation cost is measured at the grant date based
on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date as well as the determination of the amount of stock-based awards that are expected
to be forfeited requires the exercise of judgment. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted. Performance restricted share units are subject to certain
performance criteria. We recognized compensation expense for such awards when we determine it is probable that the related performance condition will be satisfied.
We estimate the fair value of employee stock options and employee stock purchase plan using a Black-Scholes-Merton valuation model. The fair
value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees
to hold their stock options. The risk-free interest rate assumption is based upon United States treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded shares in order to
estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical exercise rates of employee groups by job classification. Our expected dividend rate is
zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. We base the fair value of restricted stock units on the market value of the underlying shares at the date of grant.
31
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for losses that may result from the failure of our channel partners to make required payments.
We estimate this allowance based on our judgment as to our ability to collect outstanding receivables. We form this judgment based on factors that may affect a customers ability to pay, such as age of the receivable balance and past
experience. If the financial condition of our channel partners were to deteriorate, resulting in their inability to make payments, we would need to increase the allowance for doubtful accounts.
Derivative and Hedge Accounting
Approximately 59% of our operating expenses were denominated in U.S. dollars or linked to the U.S. dollar. In 2015, 2014 and 2013, we entered
into foreign exchange forward contracts to hedge our balance sheet items and significant portion of our future cash flow from payments of payroll and related expenses, in order to reduce the impact of foreign currency on our results. These foreign
exchange forward contracts are mainly denominated in Israeli Shekel. Our cash flow from operations could be affected from the outcome of these instruments.
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure
being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. If the derivatives meet the definition of a hedge and are so designated, depending on the nature of the hedge, changes in the fair value of
such 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 derivatives change in fair value is recognized immediately in earnings. We estimate the fair value of such derivative contracts based on forward and spot rates quoted in active markets.
Establishing and accounting for foreign exchange contracts involve judgments, such as determining the fair value of the contracts, determining
the nature of the exposure, assessing its amount and timing, and evaluating the effectiveness of the hedging arrangement.
Although we
believe that our estimates are accurate and meet the requirement of hedge accounting, actual results could differ from these estimates, and such difference could cause fluctuation in our recorded operating expenses.
Impairment of Marketable Securities
Our
marketable securities are classified as available-for-sale securities. We assess our available-for-sale marketable securities on a regular basis for other-than-temporary impairment. Pursuant to the accounting guidance in ASC 320 Investments-
Debt and Equity Securities, if we have a security with a fair value less than its amortized cost and we intend to sell the security or it is more likely than not we will be required to sell the security before it recovers, an other-than
temporary impairment has occurred and we must record the entire amount of the impairment in earnings. If we do not intend to sell the security or it is not more likely than not we will be required to sell the security before it recovers in value, we
must estimate the net present value of cash flows expected to be collected. If the amortized cost exceeds the net present value of cash flows, such excess is considered a credit loss and an other-than-temporary impairment has occurred. The credit
loss component is recognized in earnings and the residual portion of the other-than-temporary impairment is recorded in other comprehensive income. The determination of credit losses requires significant judgment and actual results may be materially
different than our estimate. We consider the likely reason for the decline in value, the period of time the fair value was below amortized cost, changes in and performance of the underlying collateral, the ability of the issuer to meet payment
obligations, changes in ratings and market trends and conditions.
We measure our money market funds and marketable securities at fair
value. Money market funds and marketable securities are classified within Level 1 or Level 2. This is because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
32
Results of Operations
The following table presents information concerning our results of operations in 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and licenses
|
|
$
|
555,792
|
|
|
$
|
520,312
|
|
|
$
|
496,930
|
|
Subscriptions
|
|
|
318,624
|
|
|
|
265,021
|
|
|
|
217,088
|
|
Software updates and maintenance
|
|
|
755,422
|
|
|
|
710,483
|
|
|
|
680,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,629,838
|
|
|
|
1,495,816
|
|
|
|
1,394,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses(*):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and licenses
|
|
|
101,158
|
|
|
|
95,868
|
|
|
|
88,862
|
|
Cost of subscriptions
|
|
|
7,623
|
|
|
|
5,626
|
|
|
|
5,480
|
|
Cost of software updates and maintenance
|
|
|
78,468
|
|
|
|
74,807
|
|
|
|
67,680
|
|
Amortization of technology
|
|
|
1,808
|
|
|
|
240
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
189,057
|
|
|
|
176,541
|
|
|
|
162,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
149,279
|
|
|
|
133,300
|
|
|
|
121,764
|
|
Selling and marketing
|
|
|
359,804
|
|
|
|
306,363
|
|
|
|
276,067
|
|
General and administrative
|
|
|
91,981
|
|
|
|
78,558
|
|
|
|
72,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
790,121
|
|
|
|
694,762
|
|
|
|
633,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
839,717
|
|
|
|
801,054
|
|
|
|
760,905
|
|
Financial income, net
|
|
|
34,073
|
|
|
|
28,762
|
|
|
|
34,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
873,790
|
|
|
|
829,816
|
|
|
|
795,836
|
|
Taxes on income
|
|
|
187,924
|
|
|
|
170,245
|
|
|
|
143,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
685,866
|
|
|
$
|
659,571
|
|
|
$
|
652,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Including pre-tax charges for stock-based compensation, amortization of intangible assets and acquisition related expenses in the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets and acquisition related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of technology
|
|
$
|
1,808
|
|
|
$
|
240
|
|
|
$
|
612
|
|
Research and development
|
|
|
6,146
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
3,267
|
|
|
|
1,866
|
|
|
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets and acquisition related expenses
|
|
$
|
11,221
|
|
|
$
|
2,106
|
|
|
$
|
3,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and licenses
|
|
$
|
65
|
|
|
$
|
66
|
|
|
$
|
77
|
|
Cost of software updates and maintenance
|
|
|
1,520
|
|
|
|
1,024
|
|
|
|
971
|
|
Research and development
|
|
|
11,544
|
|
|
|
9,284
|
|
|
|
9,001
|
|
Selling and marketing
|
|
|
16,351
|
|
|
|
13,339
|
|
|
|
11,193
|
|
General and administrative
|
|
|
46,822
|
|
|
|
39,456
|
|
|
|
29,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
76,302
|
|
|
$
|
63,169
|
|
|
$
|
51,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The following table presents information concerning our results of operations as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and licenses
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
Subscriptions
|
|
|
20
|
|
|
|
18
|
|
|
|
16
|
|
Software updates and maintenance
|
|
|
46
|
|
|
|
47
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and licenses
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Subscriptions
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Cost of software updates and maintenance
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
Amortization of technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
12
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
Selling and marketing
|
|
|
22
|
|
|
|
20
|
|
|
|
20
|
|
General and administrative
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48
|
|
|
|
46
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
52
|
|
|
|
54
|
|
|
|
55
|
|
Financial income, net
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
54
|
|
|
|
56
|
|
|
|
57
|
|
Taxes on income
|
|
|
12
|
|
|
|
12
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
42
|
|
|
|
44
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
We derive our revenues mainly from the sale of products and licenses, subscriptions and software updates and maintenance. Our revenues were
$1,630 million in 2015, $1,496 million in 2014 and $1,394 million in 2013.
Total revenues in 2015 grew by 9% compared to 2014. Product
and license revenues increased by $36 million, or 7%, from $520 million in 2014 to $556 million in 2015, which was attributed primarily to growth in sales of our security solutions products. Subscription revenues increased by $54 million, or 20%,
from $265 million in 2014 to $319 million in 2015, which was driven by continuing shift toward Blade Packages which include our Next Generation Firewall, Next Generation Threat Prevention and Next Generation Threat Extraction. In 2015, product and
license and subscription revenues as a percentage of total revenues were 54%, compared to 53% in 2014. Software updates and maintenance revenues increased by $45 million, or 6%, from $710 million in 2014 to $755 million in 2015, primarily as a
result of renewals of existing and new sales of maintenance contracts.
Total revenues in 2014 grew by 7% compared to 2013. Product and
license revenues increased by $23 million, or 5%, from $497 million in 2013 to $520 million in 2014, which was attributed primarily to growth in sales of our security solutions products. Subscription revenues increased by $48 million, or 22%, from
$217 million in 2013 to $265 million in 2014, which was driven by continuing shift toward Blade Packages which include our Next Generation Firewall and Next Generation Threat Prevention. In 2014, product and license and subscription revenues as a
percentage of total revenues were 53%, compared to 51% in 2013. Software updates and maintenance revenues increased by $30 million, or 4%, from $680 million in 2013 to $710 million in 2014, primarily as a result of renewals of existing and new sales
of maintenance contracts.
34
Cost of Revenues
Total cost of revenues was $189 million in 2015, $177 million in 2014 and $163 million in 2013. Cost of revenues includes cost of product and
licenses, cost of subscriptions and cost of software updates and maintenance and amortization of technology. Our cost of products and licenses includes mainly cost of software and hardware production, packaging and shipping. Our cost of
subscriptions includes mainly license fees paid to third parties. Our cost of software updates and maintenance include mainly the cost of post-sale customer support.
Cost of products and licenses was $101 million in 2015, $96 million in 2014 and $89 million in 2013, and represented 18% of products and
licenses revenues in each of 2015, 2014 and 2013. The increase of $5 million in 2015 and $7 million in 2014 in cost of products and licenses was in line with the growth in revenues from product and licenses.
Cost of subscriptions was $8 million in 2015, $6 million in 2014 and $5 million in 2013, and represented 2%, 2% and 3% of subscription
revenues in 2015, 2014 and 2013, respectively. The reduction in the percentage of these costs is attributable to the reduced cost of license fees.
Cost of software updates and maintenance was $78 million in 2015, $75 million in 2014 and $68 million in 2013 and represented 10%, 11% and 10%
of software updates and maintenance revenues in 2015, 2014 and 2013, respectively. In 2015, the $3 million increase in the cost of updates and maintenance was primarily the result of a $3 million increase in compensation expenses, which was
related mainly to increase in headcount of employees and contractors, from 557 at the end of 2014 to 590 at the end of 2015.
In 2015,
amortization of technology increased from $0.2 in 2014 to $1.8 million. The increase is attributed to the acquisition made during the year.
Research
and Development
Research and development expenses were $149 million in 2015, $133 million in 2014 and $122 million in 2013, and
represented 9% of revenues in 2015, 2014, and 2013. Research and development expenses consist primarily of salaries and other related expenses for personnel, as well as the cost of facilities and depreciation of capital equipment. Out of the
increase of $16 million in 2015 compared to 2014, $11 million was primarily as a result of an increase in compensation for employees engaged in research and development, mainly attributed to new hires and acquisitions made during the year. Out of
the increase of $11 million in 2014 compared to 2013, $9 million was primarily as a result of an increase in compensation for employees engaged in research and development.
The majority of our personnel engaged in research and development are located in Israel, where compensation-related expenses are paid in
Israeli Shekels, and in Sweden, where compensation-related expenses are paid in Swedish Krona, while our research and development expenses are reported in U.S. dollars. Therefore, changes to the exchange rate between the Israeli Shekel and the U.S.
dollar, and between the Swedish Krona and the U.S. dollar, have affected and may in the future affect our research and development expenses. We have forward contracts to hedge against a certain portion of the exposure mentioned above.
Selling and Marketing
Selling and
marketing expenses consist primarily of salaries, commissions, advertising, trade shows, seminars, public relations, co-op activities with partners, travel and other related expenses. Selling and marketing expenses were $360 million in 2015, $306
million in 2014 and $276 million in 2013, which represented 22% of revenues in 2015, 20% of the revenues in 2014 and 2013. In 2015 and 2014, there was an increase of $54 million and $30 million, respectively. Of this increase, $35 million and $25
million was primarily as a result of an increase in headcount and compensation committed to sales and marketing, respectively.
Our
selling and marketing expenses worldwide are paid in local currencies and are reported in U.S. dollars. Therefore, changes to the exchange rates between the local currencies and the U.S. dollar have affected, and may in the future affect, our
expense level.
35
General and Administrative
General and administrative expenses consist primarily of salaries and other related expenses for personnel, professional fees, insurance costs,
legal and other expenses. General and administrative expenses were $92 million in 2015, $79 million in 2014 and $73 million in 2013, and represented 5% of revenues in each of 2015, 2014 and 2013. In 2015, there was an increase of $13 million in
general and administrative expenses, which was primarily due to increase in share-based compensation of $7 million and increase in legal expenses and compensation. In 2014, there was an increase of $6 million in general and administrative expenses,
which was primarily due to increase in share-based compensation of $10 million, primarily offset by a decrease of legal expenses.
Operating Income
Margin
We had operating margin of 52% in 2015, 54% in 2014 and 55% in 2013. Our operating margin decreased by 2% and 1% in 2015 and
2014, respectively, due to the increase in compensation expense related to the growth in headcount during these years.
We may experience
future fluctuations or declines in operating margins from historical levels due to several factors, as described above in Item 3 Key Information under the caption Risk Factors Risks Relating to Our Business and Our
Market Our operating margins may decline.
Financial Income, Net
Net financial income consists primarily of interest earned on cash equivalents and marketable securities. Net financial income was $34 million
in 2015, $29 million in 2014 and $35 million in 2013. As we generally hold debt securities until maturity, our current portfolios yield is derived primarily from market interest rates and the yield of securities on the date of the investment.
Since most of our investments are in U.S. dollars denominated securities, our net financial income is heavily dependent on prevailing U.S. interest rates changes and the market expectations to such changes. The increase in net financial income in
2015 was primarily due to market expectations for an increase in U.S. interest rates, leading to better yields on securities purchased in 2015. The decrease in net financial income in 2014 was primarily due to lower interest rates for our cash
equivalents and marketable securities.
We review various factors in determining whether we should recognize an impairment charge for our
marketable securities, including whether the Company intends to sell, or if it is more likely than not that the Company will be required to sell before recovery of the amortized cost basis of, such marketable securities, the length of time and
extent to which the fair value has been less than its cost basis in such marketable securities, the credit ratings of such marketable securities, the nature of underlying collateral as applicable and the financial condition, expected cash flow and
near-term prospects of the issuer. In evaluating when declines in fair value are other-than-temporary, we considered all available evidence, including market declines subsequent to the end of the period. We may recognize additional losses in the
future should the prospects of the issuers of these securities continue to deteriorate. In 2015, no other-than-temporary impairment was recorded.
For further risk related to our portfolio see also Item 3, Risk Factors Risks Related to Our Business and Our Market
Our cash balances and investment portfolio have been, and may continue to be, adversely affected by market conditions and interest rates.
Taxes
on Income
Total taxes on income were $188 million in 2015, $170 million in 2014 and $143 million in 2013. Our effective tax rate was
21.5% in 2015, 20.5% in 2014 and 18% in 2013. The higher effective tax rates in 2015 and 2014 are attributed to the increase in the Preferred Enterprise tax rates during these years, from 12.5% in 2013 to 16% in 2014 and 2015 as well as the increase
in the statutory tax rates from 25% in 2013 to 26.5% in 2014 and 2015. See Note 12 to our consolidated financial statements for further information on our statutory rates.
Additional details are provided in Item 10 Additional Information under the caption Israeli taxation, foreign
exchange regulation and investment programs and Item 3 Key Information under the caption The tax benefits available to us require us to meet several conditions, and may be terminated or reduced in the future, which
would increase our taxes.
36
Liquidity and Capital Resources
During 2015, 2014 and 2013, we financed our operations through cash generated from operations. Our total cash and cash equivalents, short-term
investments and long-term interest bearing investments, were $3,615 million as of December 31, 2015 and $3,683 million as of December 31, 2014. Our cash and cash equivalents and short-term investments were $1,284 million as of
December 31, 2015 and $1,312 million as of December 31, 2014. Our long-term interest bearing investments were $2,331 million as of December 31, 2015 and $2,370 million as of December 31, 2014. Our financial assets are held and
managed through the parent company in Israel and our subsidiaries in Singapore and the U.S.
We generated net cash from operations of $947
million in 2015, $786 million in 2014 and $811 million in 2013. Net cash from operations for 2015, 2014 and 2013 consisted primarily of net income adjusted for non-cash activity including stock-based compensation expenses, depreciation, amortization
of intangible assets plus changes in deferred revenues, accrued expenses and other liabilities, trade receivables and prepaid expenses and other assets. In addition to the increase in our net income in 2015, our cash flows provided by operating
activities reflect also the increase in our deferred revenues and accrued expenses and other current liabilities. In 2014 and 2013, we paid additional taxes as a result of a settlement agreement with the Israeli Tax Authority. See also Item 8
Financial Information under the caption Legal Proceedings and Note 12 to our Consolidated Financial Statements for further information.
Net cash used in investing activities was $153 million in 2015, $246 million in 2014 and $546 million in 2013. In 2015 net cash used in
investing activities consisted primarily of additional investments and proceeds related to marketable securities and short terms deposits as well as cash paid for acquisitions of subsidiaries. In 2014 and 2013 our net cash used in investing
activities consisted primarily of investments and proceeds related to marketable securities and short terms deposits. Our capital expenditures amounted to $17 million in 2015, $13 million in 2014 and $10 million in 2013. Our capital expenditures
consisted primarily of computer equipment and software, construction of a new office building in Israel and leasehold improvements.
Net
cash used in financing activities was $864 million in 2015, $686 million in 2014 and $432 million in 2013. In 2015, 2014 and 2013, net cash used in financing activities was attributed primarily to the repurchase of ordinary shares. Under the
repurchase programs, we may purchase our ordinary shares from time to time, depending on market conditions, share price, trading volume and other factors. In 2015, 2014 and 2013, we repurchased ordinary shares in the amount of $986 million, $768
million and $534 million, respectively. We re-issue the repurchased shares to settle exercises of options and awards of restricted share units to our employees and directors. Proceeds from such activities were $103 million, $70 million and $67
million in 2015, 2014 and 2013, respectively.
Our investments in marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, recorded in other comprehensive income. Amortization of premium, discount and interest is recorded in our statements of income.
Our liquidity could be negatively affected by a decrease in demand for our products and services, including the impact of changes in customer
buying that may result from the current general economic downturn. Also, if the financial system or the credit markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our
investments could be adversely affected.
Our principal sources of liquidity consist of our cash and cash equivalents, short-term deposits
and marketable securities (which aggregated $3,615 million as of December 31, 2015) and our cash flow from operations. We believe that these sources of liquidity will be sufficient to satisfy our capital expenditure requirements for the next
twelve months.
Research and Development, Patents and Licenses, etc.
Additional details are provided in this Item 5, under the caption Results of Operations.
Trend Information
Additional details are
provided in this Item 5, under the caption Results of Operations.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create contingent obligations.
37
Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015:
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Payments due by period
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Total
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Less than 1
year
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1-3 years
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4-5 years
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(in thousands)
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Operating lease obligations
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$
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18,554
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$
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8,889
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$
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8,491
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$
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1,174
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Uncertain income tax positions(*)
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$
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284,108
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Severance pay(**)
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$
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9,451
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Total
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$
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312,113
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$
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8,889
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$
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8,491
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$
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1,174
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(*)
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Accrual for uncertain income tax position under ASC 740 Income Taxes, is paid upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 12f of our
Consolidated Financial Statements for further information regarding the Companys liability under ASC 740.
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(**)
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Severance pay obligations to our Israeli employees, as required under Israeli labor law, are payable only upon termination, retirement or death of the respective employee and there is no obligation for benefits accrued
prior to 2007, if the employee voluntarily resigns. These obligations are partially funded through accounts maintained with financial institutions and recognized as an asset on our balance sheet. Of this amount, $4 million is unfunded.
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ITEM 6.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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Directors and Senior Management
Our directors and executive officers as of December 31, 2015, were as follows:
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Name
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Position
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Independent
Director (1)
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Outside
Director
(2)
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Member
of Audit
Committee
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Member of
Compensation
Committee
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Member of
Nominating
Committee
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Gil Shwed
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Chief Executive Officer and Director
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Marius Nacht
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Chairman of the Board
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Jerry Ungerman
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Vice Chairman of the Board
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Amnon Bar-Lev
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President
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Tal Payne
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Chief Financial Officer and Chief Operating Officer
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Julie Parrish
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Chief Marketing Officer
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Dorit Dor
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Vice President of Products
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Yoav Chelouche (3)
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Director
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Ö
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Ö
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Ö
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Ö
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Irwin Federman (3)
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Director
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Ö
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Ö
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Ö
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Ö
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Ö
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Guy Gecht (3)
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Director
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Ö
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Ö
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Ö
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Ö
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Dan Propper
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Director
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Ö
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Ray Rothrock(3)
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Director
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Ö
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Ö
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Ö
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Ö
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Ö
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David Rubner
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Director
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Ö
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Ö
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Tal Shavit
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Director
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Ö
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Ö
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(1)
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Independent Director under the NASDAQ Global Select Market regulations and the Israeli Companies Law (see explanation below).
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(2)
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Outside Director as required by the Israeli Companies Law (see explanation below).
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(3)
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Financial expert as required by the Israeli Companies Law and NASDAQ requirements with respect to membership on the audit committee (see Item 16A Audit Committee Financial Expert).
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38
Gil Shwed
is the founder, Chief Executive Officer and Director. Mr. Shwed served as
Chairman of our board of directors until September 2015. Mr. Shwed is considered the inventor of the modern firewall and authored several patents, such as the companys Stateful Inspection technology. Mr. Shwed has received numerous
accolades for his individual achievements and industry contributions, including an honorary Doctor of Science from the Technion Israel Institute of Technology, an honorary Doctor of Science from Tel Aviv University, the World Economic
Forums Global Leader for Tomorrow for his commitment to public affairs and leadership in areas beyond immediate professional interests, and the Academy of Achievements Golden Plate Award for his innovative contribution to business and
technology. Mr. Shwed is the Chairman of the Board of Trustees of the Youth University of Tel Aviv University. Mr. Shwed is a Tel Aviv University Governor and founder of the Universitys Check Point Institute for Information Security.
He is also Chairman of the Board of the board of directors of Yeholot Association Founded by the Rashi Foundation whose charter is, among other things, to reduce the dropout rates in high schools.
Marius Nacht
, one of Check Points founders, has served as Chairman of our board of directors since September 2015 and as Vice
Chairman of our board of directors from 2001 until September 2015. Mr. Nacht has also served as one of our directors since we were incorporated in 1993. From 1999 through 2005, Mr. Nacht held Senior Vice President roles at Check Point.
Mr. Nacht earned a B.S. (cum laude) in Physics and Mathematics from the Hebrew University of Jerusalem in 1983, and an M.S. in Electrical Engineering and Communication Systems from Tel Aviv University in 1987.
Jerry Ungerman
has served as Vice Chairman of our board of directors since 2005. From 2001 to 2005, Mr. Ungerman served as our
President and before that, from 1998 until 2000, he served as our Executive Vice President. Prior to joining us, Mr. Ungerman accumulated more than 30 years of high-tech sales, marketing and management experience at Hitachi Data Systems (HDS),
a data storage company and a member of the Hitachi, Ltd. group. He began his career with International Business Machines Corp. (IBM), a global technology products and services company, after earning a B.A. in Business Administration from the
University of Minnesota.
Amnon Bar-Lev
, President at Check Point, is responsible for worldwide sales, global partner programs,
business development and technical services for the company. Mr. Bar-Lev joined Check Point in 2005 and brings more than 15 years of high-tech sales, marketing and management experience to the organization. Prior to joining Check Point,
Mr. Bar-Lev was founder and CEO of Xpert Integrated System Ltd., a leading provider of security, business-continuity and infrastructure platforms and solutions. Before forming Xpert, Mr. Bar-Lev began his career in the Israeli Air Force
where he held several positions within the operational and administration units. Mr. Bar-Lev holds a B.A. in Computer Science (HONS) and Management (HONS) from Tel-Aviv University.
Tal Payne
brings over 15 years of financial management experience, serving as Chief Financial Officer of Check Point since joining in
2008 and as Chief Financial and Operations Officer since 2015. Ms. Payne oversees Check Points global operations and finance, including investor relations, legal, treasury, purchasing and facilities. Prior to joining Check Point,
Ms. Payne served as Chief Financial Officer at Gilat Satellite Networks, Ltd., where she held the role of Vice President of Finance for over five years. Ms. Payne began her career as a certified public accountant at PricewaterhouseCoopers.
Ms. Payne holds a B.A. in Economics and Accounting and an Executive M.B.A., both from Tel Aviv University. Ms. Payne is a certified public accountant.
Julie Parrish,
Chief Marketing Officer at Check Point since December 2015, is responsible for leading the companys global
marketing team, overseeing strategic initiatives to drive awareness and demand for Check Point solutions. Prior to joining Check Point, Ms. Parrish was the Chief Marketing Officer at NetApp, Inc., where she had also served as senior vice
president of worldwide channel sales. She has held numerous senior leadership positions in marketing and channel sales at Fortune 1000 companies including Symantec, Veritas, Nokia and 3Com (now part of HP). Ms. Parrish holds a Bachelor of
Science degree in Decision Information Science from the University of Santa Clara.
Dr. Dorit Dor,
Vice President of Products
at Check Point, manages all product and development functions for both the enterprise and consumer divisions of the company. Her core responsibilities include leading the companys product management, research and development (R&D) and
quality assurance (QA) initiatives from concept to delivery. Since joining the company in 1995, Dr. Dor has served in several pivotal roles in Check Points R&D organization. She has been instrumental to the organizations growth
and managed many successful product releases. Dr. Dor holds a Ph.D. and M.S degree in computer science from Tel-Aviv University, in addition to graduating cum laude for her B.S. She has been published in several influential scientific journals
for her research on graph decomposition, median selection and geometric pattern matching in d-dimensional space. In 1993, she won the Israel National Defense Prize.
Yoav Z. Chelouche
has served on our board of directors since 2006. Mr. Chelouche has also served as one of our outside directors
under the Israeli Companies Law since 2006. Mr. Chelouche has been Managing Partner of Aviv Venture Capital since August 2000. Prior to joining Aviv Venture Capital, Mr. Chelouche served as President and Chief Executive Officer of Scitex
Corp., a world leader in digital imaging and printing systems, from December 1994 until July 2000. From August 1979 until December 1994, Mr. Chelouche held various managerial positions with Scitex, including VP Strategy and Business
Development, VP Marketing and VP Finance for Europe. Mr. Chelouche is a member of the board of directors of a number of private companies. He is a director of Arava Bio-Tech Ltd. He is also an external director of the Tel Aviv Stock Exchange
(TASE). Mr. Chelouche earned a B.A. in Economics and Statistics from Tel Aviv University, and an M.B.A. from INSEAD University in Fontainebleau, France.
39
Irwin Federman
has served on our board of directors since 1995. Mr. Federman has also
served as one of our outside directors under the Israeli Companies Law since 2000. Mr. Federman has been a General Partner of U.S. Venture Partners, a venture capital firm, since 1990. Mr. Federman serves as director of SanDisk Corp.,
Mellanox Technologies Ltd., Intermolecular, Inc. and a number of private companies. Mr. Federman received a B.S. in Economics from Brooklyn College.
Guy Gecht
has served on our board of directors since 2006. Mr. Gecht has also served as one of our outside directors under the
Israeli Companies Law since 2006. Mr. Gecht is the Chief Executive Officer of Electronics For Imaging, Inc. (EFI), a company that provides digital imaging and print management solutions for commercial and industrial applications and has served
in this position since January 2000. From October 1995 until January 2000, Mr. Gecht held various positions with EFI, including President of the company. Prior to joining EFI, Mr. Gecht held various software engineering positions with
technology companies. Mr. Gecht holds a B.S. in Computer Science and Mathematics from Ben-Gurion University in Israel.
Dan
Propper
has served on our board of directors since 2006. Mr. Propper is the Chairman of the Board for the Osem Group, a leading Israeli manufacturer of food products. Mr. Propper served as the Chief Executive Officer of Osem for 25
years until April 2006. In addition to his role at Osem, from 1993 until 1999, Mr. Propper served as President of Israels Manufacturers Association, an independent umbrella organization representing industrial enterprises in Israel,
and as Chairman of the Federation of Economic Organizations in Israel, which unites economic and business organizations that represents all business sectors in Israel. Mr. Propper has received numerous awards for his contributions to the
Israeli industry and economy, including an honorary Doctorate from the Technion Israel Institute of Technology in 1999. Mr. Propper serves as a member of the board of directors of Osem Investments Ltd., Teva Pharmaceutical Industries and
a number of private companies. Mr. Propper is also a member of the board of governors of the Technion, the Weizmann Institute of Science, TA University and Ben-Gurion University in Israel. Mr. Propper earned a B.Sc. (summa cum laude) in
Chemical Engineering and Food Technology from the Technion. From October 2011 to September 2014, Mr. Propper served as the Chairman of the Supervisory Council of the Bank of Israel.
Ray Rothrock
has served on our board of directors since 1995. Mr. Rothrock has also served as one of our outside directors under
the Israeli Companies Law since 2000. Mr. Rothrock is a Partner emeritus at Venrock, a venture capital firm, where he was a member since 1988 and a general partner since 1995. He retired from Venrock in 2013. Presently, Mr. Rothrock is the
Chairman and Chief Executive Officer of RedSeal, Inc., a cybersecurity analytics company. 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 on our
board of directors since 1999. Mr. Rubner is Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd., a venture capital firm, and is a general partner at Hyperion Israel Advisors Ltd., a venture capital fund. Prior to founding
Rubner Technology Ventures, Mr. Rubner served as President and Chief Executive Officer of ECI Telecommunications Ltd., a provider of telecommunications networking infrastructure solutions from September 1991 to February 2000. Prior to his
appointment as President and Chief Executive Officer, Mr. Rubner held various management positions at ECI Telecom. Mr. Rubner serves as a member of the boards of directors of Messaging International Ltd., Radware Ltd., Eltek Ltd., and a
number of private companies. Mr. Rubner is also a member of the Board of Trustees of Jerusalem College of Technology and Shaare Zedek Hospital. Mr. Rubner holds a B.S. in Engineering from Queen Mary College, University of London and an
M.S. in Electrical Engineering from Carnegie Mellon University, and he was a recipient of the Industry Prize in 1995.
Dr. Tal
Shavit
has served on our board of directors since 2000. Dr. Shavit is an organizational consultant specializing in international collaboration between Israeli and American companies, consulting in the management of cultural differences in
order to forge effective collaboration. Her work with leading management teams includes the definition of organizational culture as the engine of the companys activities. She consults with companies undergoing structural change with emphasis
on organizational growth through effective mergers and acquisitions and a redefining of management roles in order to meet market changes.
Of the individuals mentioned above, only Gil Shwed and Marius Nacht owned more than one percent of our outstanding shares as of
December 31, 2015. Additional details are provided in this Item 6, under the caption Share ownership and in Item 7 Major Shareholders and Related Party Transactions.
Some of our directors are board members of multiple companies, some of which may be technology companies. The board of directors has
determined that there are no current conflicts of interest with respect to any of our directors.
The terms of Gil Shwed, Marius Nacht,
Jerry Ungerman, Dan Propper, David Rubner and Dr. Tal Shavit will expire at our 2016 annual meeting of shareholders. The terms of Irwin Federman and Ray Rothrock will expire at our 2017 annual meeting of shareholders, and the terms of Yoav
Chelouche and Guy Gecht will expire at our 2018 annual meeting of shareholders.
40
There are no arrangements or understandings with major shareholders, customers, suppliers or
others, pursuant to which any of the directors or members of senior management are elected.
Compensation of Directors and Officers
The total direct cash compensation that we accrued for our directors and executive officers as a group was approximately $2.5 million for the
year ended December 31, 2015. These amounts include $0.15 million that were set aside or accrued to provide for severance and retirement insurance policies in 2015. These amounts do not include amounts accrued for expenses related to
business travel, professional and business association dues and other business expenses reimbursed to officers. We do not have any agreements with our directors who are also officers that provide for benefits upon termination of employment, except
for severance payments mandated by Israeli law for all employees employed in Israel.
Following is a summary of the salary and benefits
paid to our five most highly compensated executive officers in 2015 (in thousands of U.S dollars) (referred to as the
Covered Executives
):
Mr. Gil Shwed, Chief Executive Officer and Director
. Cash compensation expenses recorded in 2015 consisted of $14.0 in salary
expenses, and $12.7 in benefit costs. Mr. Shwed requested to forego his salary and bonus for 2015, as he has done for the past several years. Following consideration of Mr. Shweds request, our compensation committee and board of
directors have determined that Mr. Shwed will not receive a bonus for 2015, and will not receive any cash compensation for 2015 except for an amount equal to the minimum wage required under Israeli law.
Mr. Amnon Bar-Lev, President
. Compensation expenses recorded in 2015 included $384.4 in salary expenses and $85.7 in benefit
costs.
Dr. Dorit Dor, Vice President, Products
. Compensation expenses recorded in 2015 included $305.0 in salary expenses and
$70.4 in benefit costs.
Ms. Tal Payne, Chief Financial Officer
. Compensation expenses recorded in 2015 included $368.0 in
salary expenses and $84.7 in benefit costs.
Ms. Miryam Steinitz, Head of Human Resources
. Compensation expenses recorded in
2015 included $180.9 in salary expenses and $45.8 in benefit costs.
The salary expenses summarized above include the gross salary paid to
the Covered Executives, and the benefit costs include the social benefits paid by us on behalf of the Covered Executives, including convalescence pay, contributions made by the company to an insurance policy or a pension fund, work disability
insurance, severance, educational fund and payments for social security. We do not lease vehicles for our Covered Executives.
In
accordance with the companys executive compensation policy, we also paid cash bonuses to our Covered Executives (other than the Chief Executive Officer) upon compliance with predetermined 2015 performance parameters set by the Compensation
Committee and the Board of Directors. The 2015 cash bonus expenses for Mr. Bar-Lev, Dr. Dor, Ms. Payne and Ms. Steinitz were $413.9, $267.8, $359.8 and $128.1, respectively. The cash compensation amounts were denominated in
Israeli Shekels and converted into U.S. Dollars at the exchange rate as of year-end.
We currently pay each of our non-executive directors
an annual cash retainer of $40,000 for the services provided to our board of directors and an annual cash retainer of $7,500 for each committee membership. In addition, we pay the chair of our audit committee an annual cash retainer of $7,500 and
the chair of each of our nominating committee and compensation committee an annual cash retainer of $2,500. Only directors who are not officers receive compensation for serving as directors.
From time to time, we grant options and other awards under our equity incentive plans (described below) to our executive officers and
directors. See Item 10 Additional Information Compensation of Executive Officers and Directors; Executive Compensation Policy for a detailed description of the approval procedures we follow in compensating our directors and
executive officers.
Our non-employee directors receive an automatic option grant and are also eligible for discretionary awards under the
plans. Each non-employee director who is first elected or appointed to the board of directors is granted an option to purchase 50,000 ordinary shares on the date of the initial election or appointment, vesting in equal annual installments over a
four-year period. On the date of
41
each annual general meeting of shareholders, each non-employee director who is to continue to serve as a non-employee director after the annual meeting is granted an option to purchase an
additional 25,000 ordinary shares, of which 50% vest six months after the grant date, 25% vest nine months after the grant date, and another 25% vest a year after the grant date, provided that the director has served as a non-employee director for
at least six months prior to the date of the annual meeting. The directors in office immediately prior to the date of initial appointment or election, or of the annual meeting, as applicable, may determine to reduce the initial or annual grant to
all non-employee directors or specific non-employee directors.
All options to directors are granted at an exercise price equal to 100% of
the closing price of the ordinary shares on the NASDAQ Global Select Market on the date of grant.
In line with our goal of aligning the
compensation of Mr. Gil Shwed, our Chief Executive Officer and Director, with the objectives of our shareholders, on June 9, 2015, we granted Mr. Shwed options to purchase 1.6 million ordinary shares at an exercise price equal to
100% of the closing price of the ordinary shares on the NASDAQ Global Select Market on the date of the grant, vesting over a period of 4 years.
As of December 31, 2015, our executive officers and directors held options to purchase an aggregate of approximately 12.23 million
shares and held 96,486 restricted stock units under our stock option and equity incentive plans. The exercise prices of these options range between $ 26.47 and $ 83.59, and their expiration dates range between July 2016 and June 2022. During 2015,
we granted our executive officers and directors options to purchase an aggregate of approximately 2.35 million shares and approximately 32.23 thousand RSUs under our equity incentive plans. The exercise price of these options was
$80.67-$83.59, and their expiration is January 2022-June 2022. Other than as specified in the share ownership table under the caption Share ownership below, none of our directors and executive officers holds more than 1% of our
outstanding shares.
We recorded equity-based compensation expenses in our financial statements for the year ended December 31, 2015
for Mr. Shwed, Mr. Bar-Lev, Dr. Dor, Ms. Payne and Ms. Steinitz, of $35,717.1, $4,028.3, $2,932.7, $2,499.7 and $576.1, respectively. Assumptions and key variables used in the calculation of such amounts are described in
Note 2 u. to our audited consolidated financial statements included in Item 18 of this Annual Report. All equity-based compensation grants to our Covered Executives were made in accordance with the parameters of our companys executive
compensation policy and were approved by the companys Compensation Committee and Board of Directors, and, in the case of the equity-based compensation granted to the Chief Executive Officer, also by the companys shareholders in
accordance with Israels Companies Law.
Board Practices
Our board of directors currently consists of ten members. Under our articles of association, the board is to consist of between six and twelve
members. Each director (other than an outside director as described below) is elected to serve until the next annual general meeting of shareholders and until his or her successor has been elected. Each executive officer is elected by the board of
directors and serves at the discretion of the board. All of our executive officers and directors, other than non-employee directors, devote substantially all of their working time to our business. There are no family relationships among any of our
directors, officers or key employees.
Our articles of association provide that any director may, by written notice to us, appoint another
person to serve as an alternate director or may cancel the appointment of an alternate director. Any person eligible to serve as a director, other than a person who is already a director or an alternate director, may act as an alternate director.
The term of appointment of an alternate director may be for one meeting of the board, for a specified period of time, a specified meeting or action of the board or until notice is given of the cancellation of the appointment. No director has
appointed, and, to our knowledge, no director currently intends to appoint, any other person as an alternate director. We do not have any service contracts with our directors providing for benefits upon termination of service.
Outside and Independent Directors
Outside directors
. In accordance with the Israeli Companies Law and the relevant regulations, we must have at least two outside
directors who meet the Israeli statutory requirements of independence. At least one of the outside directors is required to have financial and accounting expertise and the other outside director or directors are required to have
professional expertise, all as defined under the Israeli Companies Law. Our board of directors has determined that each of Yoav Chelouche, Irwin Federman, Guy Gecht and Ray Rothrock has financial and accounting expertise, and
each of Guy Gecht and Ray Rothrock has professional expertise.
An outside director serves for a term of three years, which
may be extended for additional three-year terms. An outside director can be removed from office only under very limited circumstances. All of the outside directors must serve on the companys audit committee and compensation committee
(including one outside director serving as the chair of the audit committee and the
42
compensation committee), and at least one outside director must serve on each committee of the board of directors. As of December 31, 2015, Yoav Chelouche, Irwin Federman, Guy Gecht and Ray
Rothrock are our outside directors under the Israeli Companies Law. Yoav Chelouches and Guy Gechts term of office will expire in 2018, and Irwin Federmans and Ray Rothrocks term of office will expire in 2017.
Independent directors
. The Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented by the Securities and Exchange
Commission and the NASDAQ Global Select Market, requires issuers to comply with various corporate governance practices. Under the rules applicable to us as a foreign private issuer, we are required to have a majority of independent directors within
the meaning of the applicable NASDAQ regulations. Our board of directors complies with these requirements by including a majority of members who are independent directors within the meaning of the applicable NASDAQ regulations.
Pursuant to the Israeli Companies Law, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors (or a third of its board of directors in case the company has a controlling shareholder) will constitute individuals complying with certain independence criteria prescribed by the
Israeli Companies Law, as well as certain other recommended corporate governance provisions. Although we have not included these provisions in our articles of association because our board of directors already complies with the independence
requirements and the corporate governance rules of the NASDAQ Global Select Market, as described below, a majority of our board of directors and all the members of our audit committee, compensation committee and nominating committee are directors
who comply with the independence criteria prescribed by the Israeli Companies Law.
As of December 31, 2015, Yoav Chelouche, Irwin
Federman, Guy Gecht, Dan Propper, Ray Rothrock, David Rubner and Tal Shavit are our independent directors under the applicable NASDAQ regulations and the Israeli Companies Law. Our independent directors have regularly held meetings at which only
independent directors are present.
Committees of the Board of Directors
Our articles of association provide that the board of directors may delegate all of its powers to committees of the board as it deems
appropriate, subject to the provisions of Israeli law. Our board of directors has established an audit committee, compensation committee and nominating committee.
Audit committee
. Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee. The
audit committee must consist of at least three directors, must include all of the outside directors (including one outside director serving as the chair of the audit committee), and a majority of the committee members must comply with the director
independence requirements prescribed by the Israeli Companies Law.
The audit committee may not include the chairman of the board, or any
director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a
regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder. Individuals who are not permitted to be audit committee
members may not participate in the committees meetings other than to present a particular issue at the request of the chair of the committee. However, an employee who is not a controlling shareholder or relative may participate in the
committees discussions but not in any vote, and the companys legal counsel and corporate secretary (if they are not a controlling shareholder or relative) may participate in the committees discussions and votes if requested by the
committee.
In addition, the NASDAQ regulations also require us to maintain an audit committee consisting of at least three directors, all
of whom must be independent under the NASDAQ regulations applicable to audit committee members. Irwin Federman is the chairman of the audit committee. Yoav Chelouche, Guy Gecht and Ray Rothrock serve as the other members of our audit committee. The
audit committee has adopted an audit committee charter as required by the NASDAQ regulations.
The audit committees duties include
providing assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions. In this respect the audit committee
approves the services performed by our independent accountants and reviews their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audits conducted by our independent
accountants and takes those actions, as it deems necessary to satisfy itself that the accountants are independent of management. Under the Israeli Companies Law, the audit committee also is required to monitor whether there are any deficiencies in
the administration of our company, including by consulting with the internal auditor and independent accountant, to review, classify and approve related party transactions and extraordinary transactions, to review the internal auditors audit
plan and to establish and monitor whistleblower procedures.
43
Under the Israeli Companies Law, a meeting of the audit committee is properly convened if a
majority of the committee members attend the meeting, and in addition a majority of the attending committee members are independent directors within the meaning of the Israeli Companies Law and include at least one outside director.
Compensation committee
. Under the Israeli Companies Law, the board of directors of any public company must establish a compensation
committee. The compensation committee must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the compensation committee), and a majority of the committee members must
comply with the director independence requirements prescribed by the Israeli Companies Law.
Similar to the rules that apply to the audit
committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a
controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its
relatives. Individuals who are not permitted to be compensation committee members may not participate in the committees meetings other than to present a particular issue; provided, however, that an employee that is not a controlling
shareholder or relative may participate in the committees discussions but not in any vote, and the companys legal counsel and corporate secretary may participate in the committees discussions and votes if requested by the
committee.
In addition, the NASDAQ regulations also require us to maintain a compensation committee consisting of independent directors.
Ray Rothrock is the chairman of the compensation committee. Yoav Chelouche, Irwin Federman and Guy Gecht serve as the other members of our compensation committee. The compensation committee has adopted a compensation committee charter.
The compensation committees duties include recommending to the board of directors a compensation policy for executives and monitor its
implementation, approve compensation terms of executive officers, directors and employees affiliated with controlling shareholders, make recommendations to the board of directors regarding the issuance of equity incentive awards under our equity
incentive plans and exempt certain compensation arrangements from the requirement to obtain shareholder approval under the Israeli Companies Law.
Nominating committee
. The nominating committee identifies prospective board candidates, recommends nominees for election to our board
of directors, develops and recommends board member selection criteria, considers committee member qualification, supervises the selection and composition of committees of our board of directors, and provides oversight in the evaluation of our board
of directors and each committee. David Rubner is the chairman of the nominating committee. Irwin Federman, Ray Rothrock and Tal Shavit serve as the other members of our nominating committee. The nominating committee has adopted a nominating
committee charter.
New Israeli Regulations
On March 30, 2016, the Israeli Companies Law Regulations were amended to reduce certain duplicative regulatory burden to which Israeli
companies publicly-traded on NASDAQ, such as Check Point, are subject to.
Generally, pursuant to the new regulations, an Israeli company
traded on NASDAQ that does not have a controlling shareholder (as defined in the Israeli Companies Law) will be able to elect not to appoint Outside Directors to its Board of Directors and not to comply with the Audit Committee and
Compensation Committee composition and chairman requirements of the Israeli Companies Law (as described above under the headings Outside and Independent Directors and Committees of our Board of Directors);
provided
, the company complies with the applicable NASDAQ independent director requirements and the NASDAQ Audit Committee and Compensation Committee composition requirements.
Accordingly, Check Point will be eligible to benefit from the relief provided by the new amended Israeli regulations.
We are currently evaluating the effect the new regulations will have on our Board of Directors and Board committees. At this time, we do not
expect any changes to the composition of the Audit Committee and Compensation Committee and we expect that our four Outside Directors (Yoav Chelouche, Irwin Federman, Guy Gecht and Ray Rothrock) will transition in due course to become regular
independent directors.
44
Employees
As of December 31, 2015, we had 3,898 employees.
Over the past three years, the number of our employees by function was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Function
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Research, development and quality assurance
|
|
|
1,296
|
|
|
|
1,048
|
|
|
|
1,055
|
|
Marketing, sales and business development
|
|
|
1,650
|
|
|
|
1,252
|
|
|
|
1,158
|
|
Customer support
|
|
|
558
|
|
|
|
504
|
|
|
|
436
|
|
Information systems, administration, finance and operation
|
|
|
394
|
|
|
|
354
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,898
|
|
|
|
3,158
|
|
|
|
2,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, we also engage a limited number of subcontractors. As of December 31, 2015, we had 76
contractors.
Over the past three years, the number of our employees by geographic area was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Function
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Israel
|
|
|
1,803
|
|
|
|
1,486
|
|
|
|
1,437
|
|
United States
|
|
|
926
|
|
|
|
776
|
|
|
|
712
|
|
Rest of the World
|
|
|
1,169
|
|
|
|
896
|
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,898
|
|
|
|
3,158
|
|
|
|
2,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are subject to Israeli labor laws and regulations with respect to our Israeli employees. The Israeli labor
laws differ materially from U.S. labor laws and, in some cases, impose material obligations on us (such as severance pay and mandatory cost of living increases). We are also subject to the labor laws and regulations of other jurisdictions in the
world where we have employees.
Share Ownership
The following table shows information regarding beneficial ownership by our directors and executive officers as of February 29, 2016.
Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission.
All information with respect to
the beneficial ownership of any principal shareholder has been furnished by such shareholder and, unless otherwise indicated below, we believe that persons named in the table have sole voting and sole investment power with respect to all of the
shares shown as beneficially owned, subject to community property laws, where applicable. All shares shown as beneficially owned have identical rights in all respects. The shares beneficially owned by the directors include the shares owned by their
family members to which such directors disclaim beneficial ownership.
The share numbers and percentages listed below are based on shares
outstanding as of February 29, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
shares
beneficially
owned (1)
|
|
|
% of
class of
shares (2)
|
|
|
Title of securities
covered by the
options
|
|
Number of
options
and RSUs (3)
|
|
|
Exercise price of
options
|
|
|
Date of expiration of
options
|
|
Gil Shwed
|
|
|
31,263,878
|
|
|
|
17.5
|
%
|
|
Ordinary shares
|
|
|
6,300,000
|
|
|
$
|
29.49 - $83.59
|
|
|
|
06/28/2017-06/08/2022
|
|
Marius Nacht
|
|
|
21,214,986
|
|
|
|
12.3
|
%
|
|
Ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and officers as a group (14 persons including Messrs. Shwed and Nacht) (4)
|
|
|
54,242,118
|
|
|
|
30.0
|
%
|
|
Ordinary shares
|
|
|
7,952,500
|
|
|
$
|
26.47 - $83.59
|
|
|
|
07/28/2016-06/08/2022
|
|
(1)
|
The number of ordinary shares shown includes shares that each shareholder has the right to acquire pursuant to stock options that are exercisable and restricted share units that vest within 60 days after
February 29, 2016.
|
(2)
|
If a shareholder has the right to acquire shares by exercising stock options (as determined in accordance with footnote (1)), these shares are deemed outstanding for the purpose of computing the percentage owned by the
specific shareholder (that is, they are included in both the numerator and the denominator), but they are disregarded for the purpose of computing the percentage owned by any other shareholder.
|
45
(3)
|
Number of options immediately exercisable or exercisable and restricted share units that vest within 60 days from February 29, 2016.
|
(4)
|
Each of Messrs./Mmes. Ungerman, Bar-Lev, Payne, Dor, Chelouche, Federman, Gecht, Propper, Rothrock, Rubner and Dr. Shavit beneficially owns less than one percent of our outstanding ordinary shares.
|
Equity Incentive Plans
The following table summarizes our equity incentive plans, which have outstanding awards as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Outstanding
options, RSUs &
ESPP Shares
|
|
|
Options
outstanding
exercise price
|
|
|
Date of expiration
|
|
|
Options
exercisable
|
|
2005 United States Equity Incentive Plan
|
|
|
1,002,467
|
|
|
$
|
26.47-$83.59
|
|
|
|
07/28/2016-06/08/2022
|
|
|
|
561,750
|
|
2005 Israel Equity Incentive Plan
|
|
|
12,704,750
|
|
|
$
|
26.47-$83.59
|
|
|
|
07/28/2016-07/28/2022
|
|
|
|
7,236,250
|
|
Employee Stock Purchase Plan
|
|
|
476,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares reserved for outstanding options, RSU and for future grants under the amended equity incentive
plans is 17,490,152, which is 9.1% of (i) our total outstanding ordinary shares, plus (ii) our ordinary shares reserved for issuance under our amended equity incentive plans, in each case as of December 31, 2015.
In 2005, we adopted our 2005 United States Equity Incentive Plan and our 2005 Israel Equity Incentive Plan, which were subsequently amended in
January 2014. We refer to the plans, as amended in January 2014, as the U.S. Equity Plan and the Israel Equity Plan, and, together, as the Equity Plans.
Number of Ordinary Shares Reserved for Future Grants under the Equity Plans
Following the amendment of the U.S. Equity Plan and the Israel Equity Plan in January 2014, we reserved a total of 19,000,000 ordinary shares
under the two Equity Plans together. Commencing December 31, 2014, on December 31st of each year, the number of Reserved and Authorized Shares (as defined below) under both Equity Plans together shall be automatically reset on such date to
equal 10% of the number of ordinary shares issued and outstanding on such date (provided that the number shall not be less than the number of outstanding awards granted under the Equity Plans as of such date). The number of
Reserved and
Authorized Shares
under the Equity Plans shall equal the sum of (i) the number of ordinary shares reserved and authorized under the Equity Plans for outstanding awards granted under the Equity Plans as of such date, and (ii) the
number of ordinary shares reserved, authorized and available for issuance under the Equity Plans on such date.
As of December 31,
2015, we had granted options to purchase an aggregate of 24,546,690 ordinary shares under the Equity Plans combined, of which options to purchase 12,738,500 ordinary shares were outstanding on that date. The option exercise prices range between
$26.47 and $83.59 per share. As of December 31, 2015, we had granted an aggregate of 5,486,034 RSUs and PSUs under the equity plans combined, of which 968,717 RSUs and PSUs were outstanding on that date.
Administration
Both Equity Plans are
administered by our board of directors or a committee of our board. The compensation committee of our board of directors currently operates as the administrator of the Equity Plans. The administrator has full power to determine the persons to whom
awards shall be granted and the other terms of the awards granted, including (a) the number of shares subject to each award, (b) the duration of the related award agreement, (c) the time, manner and form of payment upon the exercise
of an award, and (d) other terms and provisions governing the awards. The administrator also establishes the vesting schedule of awards that are granted.
2005 United States Equity Incentive Plan, as Amended
Awards
. The U.S. Equity Plan provides for the following kinds of awards, which we refer to generically as awards: (i) Incentive
Stock Options (ISOs), (ii) Non-statutory Stock Options (NSOs), (iii) Restricted Stock, (iv) Restricted Stock Units (RSUs), (v) Performance Shares, (vi) Performance RSUs (PSUs) and (vii) Deferred Stock Units.
All of these awards can vest based on time or performance milestones.
46
Granting of options, price and duration
. Our U.S. Equity Plan provides that each option
will expire on the date stated in the notice of grant, which will not be more than seven years from its date of grant (or five years, in the case of an ISO granted to a person who on the date of grant owns 10% or more of our voting power). The
exercise price of an option cannot be less than 100% of the fair market value per share on the date of grant (or 110% of the fair market value, in the case of an ISO granted to a person who on the date of grant owns 10% or more of our voting power).
The administrator will fix the period within which the award can be exercised and the exercise price. No option award can vest until at least six months after the grant date.
Granting of awards, other than options, and price
. The administrator can determine the conditions that must be satisfied, which
typically will be based principally or solely on the recipients continuing to provide services to us, but conditions may also include a performance-based component. We can issue ordinary shares under grants of Restricted Stock, RSUs,
Performance Shares and PSUs upon payment of their nominal value. No such award can vest until at least one year after the grant date. Deferred Stock Units consist of Restricted Stock, RSUs, Performance Shares, or PSUs that the administrator permits
to be paid out in installments or on a deferred basis.
2005 Israel Equity Incentive Plan, as Amended
Awards
. The Israel Equity Plan provides for the following kinds of awards, which we refer to generically as awards:
(i) Approved 102 Options/Shares, which are grants to directors, employees and officers that are eligible for favorable tax treatment in Israel and which must be held by a trustee for a minimum period; (ii) Non-approved
102 Options/Shares, which are grants of options or shares that are not eligible for favorable tax treatment in Israel and which may be held directly by the participants; (iii) Restricted Stock; (iv) RSUs; (v) Performance Shares;
(vi) PSUs; and (vii) Deferred Stock Units. All of these awards can vest based on time or performance milestones.
Trustee
. A trustee designated by our board of directors and approved by the Israel Tax Authority must hold any shares allocated or
issued upon exercise of Approved 102 Options or other shares subsequently received following any realization of rights, including bonus shares (stock dividends), for at least the period of time specified by Section 102 of Israels Income
Tax Ordinance.
Granting of options, price and duration
. Our Israel Equity Plan provides that each option will expire on the
date stated in the option agreement, which will not be more than seven years from its date of grant. The exercise price of an option cannot be less than 100% of the fair market value per share on the date of grant. The administrator will fix the
period within which the award can be exercised and the exercise price. No option award can vest until at least six months after the grant date.
Granting of awards, other than options, and price
. The administrator can determine the conditions that must be satisfied, which
typically will be based principally or solely on the recipients continuing to provide services to us, but conditions may also include a performance-based component. We can issue ordinary shares under grants of Restricted Stock, RSUs,
Performance Shares and PSUs upon payment of their nominal value. No such award can vest until at least one year after the grant date. Deferred Stock Units consist of Restricted Stock, RSUs, Performance Shares, or PSUs that the administrator permits
to be paid out in installments or on a deferred basis.
Change of control arrangements.
Upon a change of control of us, if the
acquirer refuses to assume or provide substitute awards, then the administrator of the equity plans, which is currently the compensation committee of our board of directors, can either terminate all unvested awards or accelerate the vesting period
of any award under our Equity Plans. The administrator also has the authority to accelerate the vesting of the ordinary shares subject to outstanding awards held by our directors, officers and employees in connection with the subsequent termination
of some officers employment following a change of control event.
Employee Stock Purchase Plans
In 1996, we adopted an Employee Stock Purchase Plan, which was subsequently amended and restated in 2015. We refer to the Employee Stock
Purchase Plan, as amended and restated, as the US ESPP, and the Employee Stock Purchase Plan (Non-U.S. Employees), as the ROW ESPP, and together with the US ESPP, as the ESPPs. The ESPPs permit our full-time employees (and full-time
employees of some of our subsidiaries) to purchase ordinary shares through payroll deductions. As of December 31, 2015, 5,523,283 ordinary shares had been issued under the ESPP.
Each ESPP has six-month offering periods, with purchases occurring in January and July. The compensation committee of our board of directors
administers each of the ESPPs. Each of the ESPPs will terminate on the earliest of (i) the last business day in January 2036, (ii) when no more shares are available for issuance under the applicable ESPP, or (iii) when all purchase
rights under the applicable ESPP are granted or exercised in connection with a Corporate Transaction as defined in the applicable ESPP. Commencing the purchase period that begins February 1, 2016, 1,000,000 ordinary shares are
authorized for issuance under the US ESPP and 500,000 ordinary shares are authorized for issuance under the ROW ESPP.
47
An eligible employee can purchase ordinary shares at a price of 85% of the fair market value of
the ordinary shares at the beginning of the six-month offering period (or 85% of the fair market value of the ordinary shares on the semi-annual purchase date, if that is lower). Each eligible employee can elect to purchase ordinary shares under the
ESPP in an amount of up to 15% of the employees compensation, but not more than 1,250 shares per participant on any purchase date. Employees may terminate their participation in the ESPP at any time during the offering period, and
participation ends automatically on termination of employment with us. Each outstanding purchase right will be exercised immediately prior to our merger or consolidation with another company. Our board of directors may amend or terminate each of the
ESPPs immediately after the close of any purchase date.
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The following table shows information
as of December 31, 2015, 2014 and 2013, for each person who, to the best of our knowledge, beneficially owned more than 5% of our outstanding ordinary shares as December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Five Percent Shareholders
|
|
No. of shares
beneficially
held (1)
|
|
|
% of
class of
shares
(2)
|
|
|
No. of shares
beneficially
held (1)
|
|
|
% of
class of
shares
(2)
|
|
|
No. of shares
beneficially
held (1)
|
|
|
% of
class of
shares
(2)
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
December 31, 2013
|
|
Gil Shwed
|
|
|
31,263,862
|
|
|
|
17.3
|
%
|
|
|
31,385,828
|
|
|
|
16.5
|
%
|
|
|
31,436,485
|
|
|
|
15.8
|
%
|
Marius Nacht
|
|
|
21,214,986
|
|
|
|
12.1
|
%
|
|
|
21,214,986
|
|
|
|
11.5
|
%
|
|
|
21,214,986
|
|
|
|
11
|
%
|
(1)
|
The amount includes ordinary shares owned by each of the individuals, directly or indirectly, and options immediately exercisable or that are exercisable within 60 days from December 31
st
, of each of the years shown in this table.
|
(2)
|
If a shareholder has the right to acquire ordinary shares by exercising stock options exercisable within 60 days from December 31
st
, of each of the years shown
in this table, these Ordinary shares are deemed outstanding for the purpose of computing the percentage owned by the specific shareholder (that is, they are included in both the numerator and the denominator), but they are disregarded for the
purpose of computing the percentage owned by any other shareholder.
|
Our major shareholders do not have different voting
rights from other shareholders with respect to our ordinary shares.
According to our transfer agent, as of December 31, 2015, there
were 148 holders of record of our ordinary shares in the United States, representing approximately 85 % of our outstanding shares. The number of record holders in the United States is not representative of the number of beneficial holders nor
is it representative of where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees.
We are not controlled by another corporation or by any foreign government, directly or through any other entity. Each of our outstanding
ordinary shares has identical rights in all respects.
As of December 31, 2014, we had employee and payroll accrual for related
parties in total of $3 million, for the years 2002 through 2007. As of December 31, 2015, the accrual amounted to a total of $2.6 million for the years 2002 through 2007.
ITEM 8.
|
FINANCIAL INFORMATION
|
Consolidated Financial Statements
You can find our financial statements in Item 18 Financial Statements.
48
Dividend policy
We currently do not intend to distribute any amounts as dividend in the near-term. As described below, during 2013, we entered into a
settlement agreement with the Israel Tax Authority, resulting in the full release of the profits we generated under the Israeli Law for the Encouragement of Capital Investments (the Investment Law) through the year ended
December 31, 2011 (known in Israel as trapped profits), provided that in accordance with the Investment Law and the regulations thereunder, during the five years commencing 2013, we are obligated to invest approximately $111 million
in (i) production assets (as defined therein), (ii) research and development activities in Israel and (iii) employment payments for certain new employees (other than office holders) added after 2011. For amounts distributed as
dividends from earnings from 2015, 2014 and 2013 we are exempt from additional taxes.
Legal Proceedings
We operate our business in various countries, and accordingly attempt to utilize an efficient operating model to structure our tax payments
based on the laws in the countries in which we operate. This can cause disputes between the Company and various tax authorities in different parts of the world.
In November 2013, we reached a settlement agreement (the Settlement Agreement), with the Israeli Tax Authorities (ITA)
for years 2002 through 2011 and accordingly, we and the ITA notified the court that we have reached an agreement outside of the court and obtained the courts approval (see Note 12 of our Consolidated Financial Statements).
Further, we are the defendant in various other lawsuits, including employment-related litigation claims, lease termination claims and other
legal proceedings in the normal course of our business. Litigation and governmental proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their
merit. While we currently intend to defend the aforementioned matters vigorously, we cannot predict the results of complex legal proceedings, and an unfavorable resolution of a lawsuit or proceeding could materially adversely affect our business,
results of operations and financial condition.
ITEM 9.
|
THE OFFER AND LISTING
|
Our ordinary shares are traded publicly on the NASDAQ Global
Select Market under the symbol CHKP and on the Frankfurt Stock Exchange under the symbol CPW.
The following table
lists the high and low prices of the ordinary shares on the NASDAQ Global Select Market for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
Year
|
|
|
|
|
|
|
|
|
2011
|
|
|
61.60
|
|
|
|
43.20
|
|
2012
|
|
|
65.00
|
|
|
|
40.60
|
|
2013
|
|
|
64.95
|
|
|
|
44.41
|
|
2014
|
|
|
80.82
|
|
|
|
60.50
|
|
2015
|
|
|
88.49
|
|
|
|
65.09
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
69.92
|
|
|
|
62.31
|
|
Second quarter
|
|
|
68.50
|
|
|
|
60.50
|
|
Third quarter
|
|
|
72.78
|
|
|
|
63.70
|
|
Fourth quarter
|
|
|
80.82
|
|
|
|
65.27
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
86.00
|
|
|
|
75.35
|
|
Second quarter
|
|
|
88.49
|
|
|
|
78.12
|
|
Third quarter
|
|
|
86.71
|
|
|
|
65.09
|
|
Fourth quarter
|
|
|
87.98
|
|
|
|
77.74
|
|
|
|
|
Most recent six months
|
|
|
|
|
|
|
|
|
September 2015
|
|
|
81.25
|
|
|
|
76.31
|
|
October 2015
|
|
|
85.14
|
|
|
|
77.74
|
|
November 2015
|
|
|
87.30
|
|
|
|
80.31
|
|
December 2015
|
|
|
87.98
|
|
|
|
80.54
|
|
January 2016
|
|
|
80.53
|
|
|
|
71.64
|
|
February 2016
|
|
|
84.63
|
|
|
|
75.20
|
|
March 2016
|
|
|
85.52
|
|
|
|
81.77
|
|
49
On March 31, 2016, the last reported sale price of our ordinary shares on the NASDAQ Global
Select Market was $87.47 per share.
ITEM 10.
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ADDITIONAL INFORMATION
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We were incorporated in Israel in July 1993, and we are
registered with the Israeli Registrar of Companies as public company number 52-004282-1.
The objectives and purposes stated in our
memorandum of association are to engage in any lawful activity. We develop market and support a wide range of software and combined hardware and software products and services for IT security, and offer our customers an extensive portfolio of
network security, endpoint security, data security and management solutions. A broad range of our network security solutions operate under a unified security architecture, with central management and enforcement of security policy, and with
centralized real-time security updates. Our products and services are sold to enterprises, service providers, small and medium-sized businesses and consumers.
Articles of Association and Israeli Companies Law
The following is a summary of the material provisions of our articles of association and related provisions of Israeli corporate law. For the
complete text of our articles of association, see Item 19 Exhibits.
Description of shares
Our authorized share capital consists of the following: (i) 500,000,000 ordinary shares, NIS 0.01 nominal value; (ii) 5,000,000
preferred shares, NIS 0.01 nominal value; and (iii) 10 deferred shares, NIS 1.00 nominal value.
Description of ordinary shares
All of the issued and outstanding ordinary shares are validly issued, fully paid, and non-assessable. The ordinary shares do not have
pre-emptive rights. Our memorandum of association, our articles of association and Israeli law do not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries that
are in a state of war with Israel.
Dividend and liquidation rights
. The holders of our ordinary shares will be entitled to their
proportionate share of any cash dividend, share dividend, or dividend in kind distributed with respect to our ordinary shares. This right may be changed if shares with special dividend rights are authorized in the future. Under the Israeli Companies
Law, we may declare dividends out of the higher of retained earnings and earnings generated over the two most recent years (the profits test), in either case, provided that our board of directors reasonably believes that the dividend will not render
us unable to meet our current or foreseeable obligations when due (the solvency test). Even if we do not comply with the profits test, a court may allow us to distribute a dividend as long as the court is convinced that the solvency test is
fulfilled.
Our articles of association provide that the board of directors may declare and distribute interim dividends without the
approval of the shareholders. Shareholder approval is required for the payment of a final dividend proposed by the board of directors, but shareholders cannot approve a final dividend that is greater than the boards proposal. In addition, once
an interim dividend has been declared and paid, it cannot be affected by any subsequent resolution of the shareholders or the shareholders failure to approve a final dividend.
In the event of our liquidation, holders of our ordinary shares have the equal right to participate in the distribution of assets remaining
after payment of liabilities. This right may be changed if shares with special liquidation or dividend rights are issued in the future.
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. This right may be changed if shares with special voting rights are issued in the future.
Under the
Israeli Companies Law, we must hold an annual meeting of our shareholders once every calendar year and not more than 15 months from the date of the previous annual shareholders meeting. The board of directors determines the location of the
meeting, which can be in Israel or elsewhere. In addition, our board of directors may, in its discretion, convene additional meetings as special shareholders meetings. The board of directors is also required to convene a special
shareholders meeting upon the demand of any of the following: (i) two directors; (ii) one quarter of the directors in office; (iii) the holder or holders of 5% of our outstanding share capital and 1% of our voting power; or
(iv) the holder or holders of 5% of our voting power. Our articles of association provide that each shareholder of record is entitled to receive prior notice of any shareholders meeting in accordance with the requirements of the Israeli
Companies Law. The law currently provides for at least 21 days notice, with certain specified matters requiring at least 35 days notice. For purposes of determining the shareholders entitled to notice and to vote at such meeting, the
board of directors may fix a record date, which shall be between 4 and 40 days prior to the date of the meeting.
50
The quorum required for a meeting of shareholders consists of at least two shareholders present
in person or by proxy and holding more than 50% of the voting power. The chairman of the board of directors presides at each of our shareholders meetings. The chairman of the meeting does not have an additional or casting vote. A meeting
adjourned for lack of a quorum will be adjourned to the same day in the following week, at the same time and place, or to the day, time and place that the chairman determines, with the consent of the holders of a majority of the shares present in
person or by proxy and voting on the question of adjournment. At the reconvened meeting, the required quorum consists of any two shareholders, regardless of the number of shares they hold or represent.
The Israeli Companies Law requires that shareholders approve certain transactions, actions and arrangements, as described below under the
caption Approval of certain transactions; obligations of directors, officers and shareholders.
Shareholders resolutions
will be deemed adopted if approved by the holders of a majority of the voting power voting at a shareholders meeting, except for the following decisions which require a different majority:
|
(1)
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A special or extraordinary resolution (such as a resolution amending our memorandum of association or articles of association). A majority of at least 75% of the shares voting on the matter is needed.
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(2)
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A voluntary liquidation process or a merger. A majority of at least 75% of the shares voting on the matter is needed.
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(3)
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A compromise or arrangement between us and our creditors or shareholders, reorganization, stock split or reverse split. This has to be approved by a majority in the number of the persons participating in the vote
(except for those abstaining) who together hold at least 75% of the value represented at the vote. In addition, court approval is needed.
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(4)
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The nomination and dismissal of outside directors. Outside directors may be elected or removed by a majority vote at a shareholders meeting, as long as either:
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(i)
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The majority of shares includes a majority of the shares of non-controlling shareholders and shareholders who have no personal interest in the election of the outside directors (excluding a personal interest that is not
related to a relationship with the controlling shareholders) voted at the meeting, or
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(ii)
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The total number of shares of non-controlling shareholders and disinterested shareholders voted against the proposal does not exceed 2% of our aggregate voting rights.
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(5)
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Extraordinary transactions with a controlling shareholder (i.e., any shareholder that has the ability to direct our actions, including any shareholder who holds 25% or more of our voting rights if no other shareholder
owns more than 50% of our voting rights), with another person in which the controlling shareholder has a personal interest; or a transaction with a controlling shareholder (or a relative of such controlling shareholder) concerning terms of
compensation for service as an office holder, or as a service provider to the company, including through a company controlled by a controlling shareholder. Following audit committee (or, alternatively, compensation committee if it relates to terms
of compensation for service as an office holder or as a service provider) and board of directors approval, these transactions must be approved by a majority vote at a shareholders meeting, as long as either:
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(i)
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The majority of shares includes at least a majority of the shares of the voting shareholders who have no personal interest in the transaction, or
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(ii)
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The total shareholdings of those who have no personal interest in the transaction and who vote against the transaction does not exceed 2% of our aggregate voting rights.
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Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction
with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern terms of compensation for service as an office holder, or as a service provider to the company, the transaction may be approved for a
longer period if the audit committee determines that the approval of the transaction for a period longer than three years is reasonable under the circumstances.
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(6)
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The adoption of an executive compensation policy. Following compensation committee and board of directors approval, the policy must be approved by a majority vote at a shareholders meeting, as long as either:
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(i)
|
The majority of shares includes a majority of the shares of non-controlling shareholders and shareholders who have no personal interest in the adoption of the policy voted at the meeting, or
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(ii)
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The total number of shares of non-controlling shareholders and disinterested shareholders voted against the proposal does not exceed 2% of our aggregate voting rights.
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51
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(7)
|
The approval of a compensation arrangement with the chief executive officer or the approval of a compensation arrangement with an executive officer or director that is not in compliance with the companys executive
compensation policy. Following compensation committee and board of directors approval specifying the special circumstances requiring the arrangement of such arrangement (in the case of an arrangement that is not in compliance with the executive
compensation policy), the compensation arrangement must be approved by a majority vote at a shareholders meeting, as long as either:
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|
(i)
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The majority of shares includes a majority of the shares of non-controlling shareholders and shareholders who have no personal interest in the adoption of the compensation arrangement voted at the meeting, or
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(ii)
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The total number of shares of non-controlling shareholders and disinterested shareholders voted against the proposal does not exceed 2% of our aggregate voting rights.
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Transfer of shares
. Fully paid ordinary shares are issued in registered form and, subject to applicable securities laws, may be
transferred freely.
Election of directors
. Our ordinary shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of shares representing more than 50% of the voting rights at the shareholders meeting, voting in person or by proxy, have the power to elect any or all of the directors whose positions are being filled at that meeting,
subject to the special approval requirements for outside directors described above.
Chairman of the Board.
Under the Israeli
Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may
not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Israeli Companies Law. In any event, the shareholder vote cannot authorize the appointment for a period longer than three years, which
period may be extended from time to time by the shareholders with a similar special majority vote. The chairman of the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with
the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her
subordinate to the general manager.
Transfer agent and registrar
. The transfer agent and registrar for our ordinary shares is
American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 10038 U.S.A., Tel.: 718-921-8124.
Description of preferred
shares
We have 5,000,000 preferred shares authorized. Our articles of association provide that 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 the preferred 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. If this provision withstands judicial scrutiny under the Israeli Companies Law, the issuance of
preferred shares may have the effect of delaying, deferring or preventing a change in control of us without further action by the shareholders. For example, the board of directors could issue preferred shares with voting and conversion rights that
may adversely affect the voting power of the holders of ordinary shares, including the loss of voting control to others.
Anti-takeover measures
Some of the provisions of our articles of association and Israeli law could, together or separately:
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|
|
Discourage potential acquisition proposals,
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|
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Delay or prevent a change in control,
|
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|
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Limit the price that investors might be willing to pay in the future for our ordinary shares.
|
Israeli corporate law regulates acquisitions of shares through tender offers and mergers; requires special approvals for transactions
involving directors, officers or significant shareholders; and regulates other matters that may be relevant to these types of transactions.
52
Under the Israeli Companies Law, in the case of a merger, the shareholders and board of directors
of each of the merging companies generally need to approve the merger. Shares held in one of the merging companies by the other merging company (or certain of its affiliates) are not counted toward the required approval. If a merging company has
different classes of shares, the approval of each class may be required. Under the Israeli Companies Law, a merger of our company requires the approval of a supermajority of at least 75% of our shares that are voted on the merger. A merger cannot be
completed until 30 days have passed after shareholder approval of each of the merging companies, all approvals have been submitted to the Israeli Registrar of Companies and 50 days have passed from the time that a proposal for approval of the merger
is filed with the Registrar of Companies. In addition, a creditor can seek to block a merger on the ground that the surviving company will not be able to meet its obligations.
The Israeli Companies Law also provides that an acquisition of shares in a public company, such as our company, must be made by means of a
tender offer, if as a result of the acquisition, the purchaser would become the holder of 25% or more of the voting rights in the company (unless there is another 25% shareholder of the company, or the shares are acquired from another 25%
shareholder). Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company, such as our company, must be made by means of a tender offer, if as a result of the acquisition the purchaser would hold more than 45% of
the shares of the company (unless there is another holder of more than 45% of the shares of the company, or the shares are acquired from another holder of more than 45% of the shares of the company). These rules do not apply if the acquisition takes
the form of a merger.
Regulations promulgated under the Israeli Companies Law provide that these tender offer requirements do not apply
to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded or the rules and regulations of the stock exchange on which the shares are traded:
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|
|
There is a limitation on acquisition of any level of control of the company, or
|
|
|
|
The acquisition of any level of control requires the purchaser to make 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 more than 90% 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.
In addition, our articles of association contain certain provisions that may make it more difficult to acquire us, such as the ability of our
board of directors to issue preferred shares, as described above under the caption Description of preferred shares.
Our
articles of association provide that we may not engage in any business combination with an interested shareholder for a period of three years after the date that the shareholder became an interested shareholder, unless:
|
|
|
Prior to that date, the board of directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder; or
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|
|
|
Upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 75% of our voting shares outstanding at the time the transaction
commenced.
|
A business combination includes:
|
|
|
Any merger or consolidation between the interested shareholder and us;
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|
|
Any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of our assets in a transaction involving the interested shareholder;
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|
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Subject to certain exceptions, any transaction that results in our issuance or transfer of any of our shares to the interested shareholder;
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|
|
Any transaction in which we are involved that has an effect of increasing the proportionate share of our shares, of any class or series, beneficially owned by the interested shareholder; or
|
|
|
|
The receipt by the interested shareholder of the benefit of any loans, advances, guarantees, pledges, or other financial benefits provided by or through us.
|
In general, the articles of association define an interested shareholder as any entity or person that beneficially owns 15% or more of our
outstanding voting shares and any entity or person affiliated with, controlling or controlled by such entity or person.
In addition, our
shareholders are not able to cumulate votes at a meeting, which may require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.
53
Approval of certain transactions; obligations of directors, officers and shareholders
Officers and directors
. The Israeli Companies Law codifies the fiduciary duties that office holders, which under the law, includes our
directors and executive officers, owe to a company.
Fiduciary duties
. An office holders fiduciary duties consist of a duty
of loyalty and a duty of care.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company,
including to avoid any conflict of interest between the office holders position in the company and personal affairs, and proscribes any competition with the company or the exploitation of any business opportunity of the company in order to
receive personal advantage for himself or herself or for others. This duty also requires an office holder to reveal to the company any information or documents relating to the companys affairs that the office holder has received due to his or
her position as an office holder. A company may approve any of the acts mentioned above; provided, however, that all the following conditions apply: the office holder acted in good faith; neither the act nor the approval of the act prejudices the
good of the company; and the office holder disclosed the essence of his or her personal interest in the act, including any substantial fact or document, in a reasonable time before the date for discussion of the approval. A director is required to
exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director. A violation of these requirements is deemed a breach of the directors duty of loyalty.
The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ
under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant
information material to these actions.
Disclosure of personal interest
. The Israeli Companies Law requires that an office holder
promptly disclose to the company any personal interest that he or she may have and all related material information or documents known to him or her, in connection with any existing or proposed transaction by the company. Personal
interest, as defined by the Israeli Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporation (i) in which that person or a
relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, or a director or general manager, or (ii) in which he or she has the right to appoint at least one director or the general manager, and
includes shares for which the person has the right to vote pursuant to a power-of-attorney. Personal interest does not apply to a personal interest stemming merely from holding shares in the company.
The office holder must immediately make the disclosure of his or her personal interest and no later than the first meeting of the
companys board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an extraordinary transaction. The Israeli
Companies Law defines an extraordinary transaction as a transaction that is not in the ordinary course of business of a company, or that is not on market terms, or which is likely to have a material impact on the companys
profitability, assets or liabilities. The Israeli Companies Law defines a relative as a spouse, sibling, parent, grandparent, descendant and the descendant, sibling or parent of a spouse, as well as the spouse of any of the foregoing.
Approvals
. The Israeli Companies Law provides that a transaction with an office holder or a transaction in which an office holder
has a personal interest requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. The transaction may not be approved if it is adverse to the companys interest. If the
transaction is an extraordinary transaction, or if it concerns exculpation, indemnification, insurance or compensation of an office holder, then the approval of the companys compensation committee and the board of directors is required, except
if the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director (in which case the approval of the compensation committee is sufficient). Exculpation, indemnification, insurance
or compensation of a director or the Chief Executive Officer also requires shareholder approval.
A person 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 attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee also has a personal interest
in the matter or if such person is invited by the chairman of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board of directors has a personal interest in the transaction, all
directors may attend that meeting and vote, and a shareholder approval also would be required.
Shareholders
. The Israeli
Companies Law imposes the same disclosure requirements described above on a controlling shareholder of a public company that it imposes on an office holder. For this purpose, a controlling shareholder is any shareholder who has the
ability to direct the companys actions, including any shareholder holding 25% or more of the voting rights, if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in
the approval of the same transaction are deemed to be one shareholder.
54
Under the Israeli Companies Law, a shareholder has a duty to act in good faith toward the company
and other shareholders and refrain from abusing his or her power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
|
|
|
Any amendment to the articles of association,
|
|
|
|
An increase of the companys authorized share capital,
|
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|
|
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 companys 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 provides that a breach of the duty of fairness will be governed by the laws governing breach of contract. The Israeli Companies Law does not describe the substance of this duty.
Compensation of Executive Officers and Directors; Executive Compensation Policy
In accordance with the Israeli Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of
the policy is to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by the Companies Law. In accordance with the Companies Law, the policy must
be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our
shareholders, in that order, is required for the adoption of the compensation policy. The shareholders approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy
either of two additional tests:
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|
|
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the adoption of the compensation policies; or
|
|
|
|
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the compensation policies, does not exceed 2% of the aggregate voting rights of our
company.
|
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who
are not directors require the approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our executive compensation policy, the arrangement may only be
approved by the compensation committee and the board of directors for special reasons to be noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to an
existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the compensation committee is sufficient.
Arrangements regarding the compensation of the Chief Executive Officer and directors require the approval of the compensation committee, the
board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved without approval of the shareholders.
Indemnification and insurance of directors and officers; limitations on liability
Our articles of association allow us to indemnify, exculpate and insure our office holders to the fullest extent permitted under the Israeli
Companies Law.
Under the Israeli Companies Law, we may indemnify an office holder for any of the following liabilities or expenses that
they may incur due to an act performed or failure to act in his or her capacity as our office holder:
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Monetary liability imposed on the office holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court.
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Reasonable legal costs, including attorneys fees, expended by an office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such
investigation or proceeding concludes without the filing of an indictment against the office holder, and either:
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No financial liability was imposed on the office holder in lieu of criminal proceedings, or
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Financial liability was imposed on the office holder in lieu of criminal proceedings, but the alleged criminal offense does not require proof of criminal intent.
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55
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Reasonable legal costs, including attorneys fees, expended by the office holder or for which the office holder is charged by a court:
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In an action brought against the office holder by us, on our behalf or on behalf of a third party,
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In a criminal action in which the office holder is found innocent, or
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In a criminal action in which the office holder is convicted, but in which proof of criminal intent is not required.
|
A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company
undertakes to indemnify an office holder in advance of an event, the indemnification, other than litigation expenses, must be limited to foreseeable events in light of the companys actual activities when the company undertook such
indemnification, and reasonable amounts or standards, as determined by the board of directors.
A company may obtain insurance for an
office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third party including a breach arising out of negligent conduct of the office holder, a
breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third party. A company may also exculpate an office holder from a breach of duty of care in advance of that breach. Our articles of association provide
for exculpation both in advance or retroactively, to the extent permitted under Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty towards the company or from a breach of duty of care concerning dividend
distribution or a purchase of the companys shares by the company or other entities controlled by the company.
Under the Israeli
Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company.
In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain,
or for a fine or forfeit levied against the office holder in connection with a criminal offense.
We have resolved to indemnify our
directors and officers, to the extent permitted by law and by our articles of association, for liabilities not covered by insurance, that are of certain enumerated types of events, and subject to limitations as to amount.
We have also entered into indemnification, insurance and exculpation agreements with our directors and officers undertaking to indemnify,
insure and exculpate them to the full extent permitted by the Israeli Companies Law.
Charitable Contributions
Our Articles of Association authorize the company to contribute reasonable amounts to worthy causes. In accordance with our charitable
contribution policy, we contribute from time to time to various worthy causes. During 2015, the list of entities to which we contributed included the Tel Aviv University, Youth University of Tel Aviv University and the Yeholot Association. Gil
Shwed, our founder, Chairman and Chief Executive Officer, is a member of the Board of Trustees of Tel Aviv University, the Chairman of the Board of Trustees of the Youth University of Tel Aviv University and the Chairman of the Board of Directors of
Yeholot Association Founded by the Rashi Foundation whose charter is, among other things, to reduce the dropout rates in high schools.
Borrowing
power: amendment of rights of ordinary shares
Our articles of association grant broad powers to the board of directors to have us
borrow, repay borrowings, make guarantees and grant security interests in borrowings. 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%
of the outstanding ordinary shares voting at a duly convened shareholders meeting.
Availability of Annual Report on Form 20-F
In accordance with our articles of association and NASDAQ rules, we post our Annual Report on Form 20-F on our Web site
(
www.checkpoint.com
), rather than mail it to shareholders.
Material Contracts
None.
56
Israeli Taxation, Foreign Exchange Regulation and Investment Programs
The following is a summary of the principal Israeli tax laws applicable to us, the Israeli Government programs from which we benefit, and
Israeli foreign exchange regulations. This section also contains a discussion of material Israeli tax consequences to our shareholders who are not residents or citizens of Israel. This summary does not discuss all aspects of Israeli tax law that may
be relevant to a particular investor in light of his or her personal investment circumstances, or to some types of investors subject to special treatment under Israeli law. Examples of investors subject to special treatment under Israeli law include
residents of Israel, traders in securities, or persons who own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are
based on new tax legislation that has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax consequences.
You are urged to consult your own tax advisor as to the Israeli and other tax consequences of the purchase, ownership and disposition of
our ordinary shares, including, in particular, the effect of any non-Israeli, state or local taxes.
General corporate tax structure in Israel
Taxable income of Israeli companies is subject to tax at the rate of 25% in 2013, 26.5% in 2014 and 2015, 25% in 2016 and onwards.
However, as discussed below, the rate is effectively reduced for income derived from our Preferred Enterprise plan.
Law for the Encouragement of Capital Investments, 1959 (Investment Law)
The Company elected to apply the Preferred Enterprise regime under the Law for the Encouragement of Capital Investment (the Investment
Law). Under the Preferred Enterprise regime, the Companys entire preferred income is subject to tax rates as follows: 2013 - 12.5% and 2014 and thereafter - 16%. The election is irrevocable.
We have derived, and expect to continue to derive, a substantial portion of our operating income from our Preferred Enterprise facilities. We
are, therefore, eligible for reduced tax rates for an unlimited period.
The benefits available to a Preferred Enterprise are conditioned
upon terms stipulated in the Investment Law and the related regulations. If we do not fulfill these conditions, in whole or in part, the benefits can be cancelled, and we may be required to refund the benefits in an amount linked to the Israeli
consumer price index plus interest. We believe that our Preferred Enterprise program currently operates, in compliance with all applicable conditions and criteria, but we cannot assure you that they will continue to do so.
Prior to 2012, most of the Companys income was exempt from tax or subject to reduced tax rates under the Investment Law. Upon
distribution of exempt income, the distributing company will be subject to corporate reduced tax rates ordinarily applicable to such income under the Investment Law.
Reduced income under the Investment Law including the Preferred Enterprise Regime will be freely distributable as dividends, subject to a
15%-20% withholding tax (or lower, under an applicable tax treaty). However, upon the distribution of a dividend from Preferred Income to an Israeli company, no withholding tax will be remitted.
Pursuant to a temporary tax relief initiated by the Israeli government, a company that elected by November 11, 2013, to pay a reduced
corporate tax rate as set forth in the temporary tax relief with respect to undistributed exempt income generated under the Investment Law accumulated by the company until December 31, 2011 (Trapped Earnings) is entitled to
distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investments in Israel over five-year period. A company that has
elected to apply the temporary tax relief cannot withdraw from its election.
On November 11, 2013, the Company reached a settlement
agreement with the ITA which provided (i) the full settlement of all disputes with the ITA with respect to the tax years 2002 through 2011, and (ii) the release of all the Companys Trapped Earnings through the year ended
December 31, 2011. In accordance with the Investments Law and the temporary tax relief, the Company is obligated to invest approximately $ 111,000 during five years period in the following forms (i) production assets (as defined
therein), (ii) research and development activities in Israel and/or (iii) employment payments for new employees (other than office holders) added after 2011. Any amount not invested in the five years period, should be paid at the end of
the 5 years, linked to the Israeli CPI and bears 4% annual interest since the election date.
57
Foreign Exchange Regulations
Under the Foreign Exchange Regulations, an Israeli company calculates its tax liability in U.S. dollars according to certain orders. The tax
liability, as calculated in U.S. dollars is translated into NIS according to the exchange rate as of December 31st of each year.
Dividends, if any, paid to the holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as
well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency. If these amounts are paid in Israeli currency, they may be converted into freely repatriable U.S. dollars at the rate of
exchange prevailing at the time of conversion. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.
Equity Based Compensation
Effective from
January 1, 2003, the Tax Reform Legislation enables a company to grant options/shares through one of three tax tracks:
(a) the
income tax track through a trustee pursuant to which the employee pays income tax rate (according to the marginal tax rate of the employee, up to 45% tax in 2011 and 48% in 2012 and thereafter) plus payments to the National Insurance Institute and
health tax on the profit gained upon the earlier to occur of the transfer of the options/shares or the underlying shares from the trustee to the employee or the sale of the options/shares or the underlying shares by the trustee, and the company may
recognize expenses pertaining to the options/shares for tax purposes. The shares/options (or upon their exercise, the underlying shares), must be held by a trustee for a period of 12 months commencing from the date of which the options/shares were
issued and deposited with the trustee. As of January 1, 2013, the marginal tax rate (48%) of an individual was increased by 2% if the employees taxable income in any tax year exceeds a certain amount.
(b) the capital gains tax track through a trustee pursuant to which the employee pays capital gains tax at a rate of 25% on the capital profit
portion and marginal tax rate (including payments to the National Insurance Institute and health tax) on the income portion (in general, the income portion is the profit derived from the difference between the average market value of the share 30
days before the allotment date and the exercise price of the option/share) upon the earlier to occur of the transfer of the options/shares or the underlying shares from the trustee to the employee or the sale of the options/shares or the underlying
shares by the trustee. (On the capital profit, the employee is not required to make payments to the National Insurance Institute and health tax). In this track, on the capital profit, the Company may not recognize expenses pertaining to the
options/shares for tax purposes but may do so on the income portion. The shares/options (or upon their exercise, the underlying shares), must be held by a trustee for a period of 24 months commencing from the date of which the options/shares were
issued and deposited with the trustee (with respect to options/shares granted before January 1, 2006, a period of 30 months commencing from the date of which the options/shares were granted or a period of 24 months commencing from the date of
which the options/shares were issued and deposited with the trustee). As of January 1, 2013, the capital gain tax rate percentage increased by 2% in the event the employees taxable income in any tax year a certain amount.
(c) the income tax track without a trustee pursuant to which the employee pays income tax rate (according to the marginal tax rate of the
employee up to 45% tax in 2011 and 48% in 2012 and thereafter) plus payments to the National Insurance Institute and health tax on the profit at the allotment date, and pays capital gains tax at a rate of 25% or 30% (pursuant to 2011 tax reform
legislation, the capital tax rate increased from 20% or 25% in 2011 to 25% or 30% in 2012 and thereafter) on the capital profit upon the sale of the underlying shares/shares, and the company may not recognize expenses pertaining to the capital gain
for tax purposes but may recognize expenses pertaining to the profit at the allotment date. As of January 1, 2013, the marginal tax rate (48%) of an individual or the capital gain tax rate percentage, as applicable, increased by 2% in the
event the employees taxable income in any tax year exceeds a certain amount.
In accordance with the provisions of the Israeli Tax
Ordinance, if a company has selected the capital gains track, the company must continue granting options/shares under the selected capital gains track until the end of the year following the year in which the first grant of options/shares under that
trustee track will be made.
We implement the capital gain track on RSUs, PSUs and stock options granted to our employees and directors
and the income tax track without a trustee on our ESPP.
Notwithstanding the above, the company may at any time also grant options/shares
under the provisions of the income tax track without a trustee.
The above rules apply only to employees, including officeholders but
excluding controlling shareholders.
58
Controlling shareholders will be taxable under section 3(i) to the tax ordinance, according to
which, the individual pays income tax rate (according to the marginal tax rate of the individual, up to 45% in 2011 and 48% in 2012 and thereafter) on the profit upon the sale of the underlying shares/shares. As of January 1, 2013, the marginal
tax rate (48%) of an individual increased by 2% in the event the employees taxable income in any tax year exceeds a certain amount.
Taxation of Non-Israeli Subsidiaries
Non-Israeli subsidiaries are generally taxed based upon tax laws applicable in their countries of residence. In accordance with the provisions
of Israeli-controlled foreign corporation rules, certain income of a non-Israeli subsidiary, if the subsidiarys primary source of income is passive income (such as interest, dividends, royalties, rental income or income from capital gains),
may be deemed distributed as a dividend to the Israeli parent company and consequently is subject to Israeli taxation. An Israeli company that is subject to Israeli taxes on such deemed dividend income of its non-Israeli subsidiaries may generally
receive a credit for non-Israeli income taxes paid by the subsidiary in its country of residence or are to be withheld from the actual dividend distributions.
Taxation of Non-Israeli Shareholders on Receipt of Dividends
Under Israeli tax law, a distribution of dividends from income attributable to an Approved Enterprise, Privileged Enterprise or Preferred
Enterprise will be subject to tax in Israel at the rate of 15%-20%, which is withheld and paid by the company paying the dividend, if the dividend is distributed during the benefits period or within the following 12 years (this limitation does not
apply to a Foreign Investors Company or to a Preferred Enterprise). However, if the dividend is attributable partly to income derived from an Approved and Privileged Enterprise, and partly to other sources of income, the withholding rate will be a
blended rate reflecting the relative portions of the two types of income. Any distribution of dividends from income that is not attributable to an Approved Enterprise, Privileged Enterprise or Preferred Enterprise will be subject to tax in Israel at
the rate of 25%, except that dividends distributed to an individual who is deemed a substantial shareholder will be subject to tax at the rate of 30%.
Under the United States-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a United States resident is
25%. Dividends received by a United States company that holds at least 10% of our voting rights, will be subject to withholding tax at the rate of 12.5%, provided that certain other conditions in the tax treaty are met. Dividends distributed to
other foreign shareholders may be subject to different withholding tax rates based on the applicable tax treaty.
A non-resident of Israel
who has interest or dividend income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a
business conducted in Israel by the taxpayer.
Capital Gains Taxes Applicable to Non-Israeli Shareholders
Capital gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from Israeli taxation under the Israeli domestic tax
law, provided that the capital gain is not derived from a permanent establishment in Israel. In addition, the United States-Israel tax treaty exempts United States residents who hold less than 10% of our voting rights, and who held less than 10% of
our voting rights during the 12 months prior to a sale of their shares, from Israeli capital gains tax in connection with such sale under certain circumstances.
United States Federal Income Tax Considerations
The following discussion describes the material U.S. federal income tax considerations relating to the ownership or disposition of our ordinary
shares to a holder who is:
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A citizen or resident (as defined for U.S. federal income tax purposes) of the United States;
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A corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any of its states;
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An estate, if the estates income is subject to U.S. federal income taxation regardless of its source; or
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A trust, if a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons (e.g., a U.S. citizen, resident, or corporation) have the authority to control all of its substantial
decisions or the trust has a valid election in effect under U.S. Treasury Regulations to be treated as a United States person.
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We refer to any of the above as a U.S. Shareholder. If a partnership owns the ordinary shares, the U.S. federal income tax
consequences relating to an investment in the ordinary shares will depend in part upon the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor regarding the U.S. federal income
tax considerations of owning and disposing of the ordinary shares in its particular circumstances.
59
This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended,
referred to as the Code, U.S. Treasury Regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as in effect as of the date of this Annual Report on Form 20-F. This discussion generally
considers only U.S. Shareholders who will hold the ordinary shares as capital assets.
This summary discussion does not address tax
considerations applicable to a U.S. Shareholder that may be subject to special tax rules including, without limitation, the following:
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Aspects of U.S. federal income taxation relevant to U.S. Shareholders by reason of their particular circumstances (including potential application of the alternative minimum tax).
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U.S. Shareholders subject to special treatment under the U.S. federal income tax laws, such as banks, financial institutions, insurance companies, broker-dealers or traders in securities.
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U.S. Shareholders that are tax-exempt organizations and pension funds.
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U.S. Shareholders that are former citizens or long-term residents of the United States.
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U.S. Shareholders that are partnerships or entities treated as partnerships or other pass-through entities and persons who own the ordinary shares through such entities, and non-U.S. individuals or entities.
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U.S. Shareholders that are real estate investment trusts or regulated investment companies.
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U.S. Shareholders who own 10% or more of our outstanding voting shares, either directly or by attribution.
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U.S. Shareholders who hold our ordinary shares as part of a hedging, straddle, integrated, or conversion transaction.
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U.S. Shareholders who acquire their ordinary shares in a compensatory transaction.
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U.S. Shareholders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar.
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Any aspect of U.S. estate, gift, state, or local tax law, or any non-U.S. tax law.
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The
following summary does not address all of the tax consequences of owning or disposing of our ordinary shares to you based on your individual tax circumstances. Accordingly, you should consult your own tax advisor as to the particular tax
consequences to you of owning or disposing of our ordinary shares, including the effects of applicable state, local, or non-U.S. tax laws and possible changes in the tax laws.
Dividends Paid on the Ordinary Shares
Subject to the discussion below under Passive Foreign Investment Company Status, a U.S. Shareholder, as defined above, will
generally be required to include in gross income the amount of any distributions paid in respect of the ordinary shares to the extent that the distributions are paid out of our current or accumulated earnings and profits, as determined for U.S.
federal income tax purposes. We do not expect to maintain calculations of our earnings and profits under United States federal income tax principles. Therefore, if you are a U.S. Shareholder you should expect that the entire amount of any
distribution generally will be reported as dividend income to you. The amount of the distribution would include any Israeli taxes withheld as part of the distributions.
Non-corporate U.S. Shareholders may qualify for preferential rates of taxation with respect to dividends on our ordinary stock if the
dividends are qualified dividend income. Qualified dividend income generally includes dividends paid by a U.S. corporation or a qualified foreign corporation. A non-U.S. corporation, such as ours, generally will be considered
to be a qualified foreign corporation if (i) our shares are readily tradable on an established securities market in the United States, or (ii) we are eligible for the benefits of a comprehensive U.S. income tax treaty determined to be
satisfactory to the U.S. Department of the Treasury for purposes of this provision and which includes an exchange of information provision. The U.S. Department of the Treasury and the Internal Revenue Service have determined that the United
States-Israel tax treaty is satisfactory for this purpose. In addition, the U.S. Department of the Treasury and the Internal Revenue Service have determined that ordinary shares are considered readily tradable on an established securities market if
they are listed on an established securities market in the United States, such as the NASDAQ Global Select Market. The information returns, reporting the dividends paid to U.S. Shareholders, will identify the amount of dividends eligible for the
reduced rates.
Any distributions in excess of earnings and profits will be treated first as non-taxable return of capital, reducing a
U.S. Shareholders tax basis in the ordinary shares to the extent of the distributions, and then as capital gain from a sale or exchange of the ordinary shares. Any capital gain so realized will generally be taxable to the U.S. Shareholder as
either long-term or short-term capital gain depending upon whether the U.S. Shareholder has held the ordinary shares for more than one year as of the time such distribution is received. Our dividends will generally not qualify for the dividends
received deduction available to corporations. Any cash distribution paid in Israeli Shekels will equal the U.S. dollar value of the distribution, calculated based on the spot exchange rate in effect on the date of the distribution, regardless of
whether the foreign currency is converted into U.S. dollars at that time. Any foreign currency gain or loss a U.S. Shareholder realizes on a subsequent conversion of foreign currency into U.S. dollars will be U.S. source ordinary income or loss.
60
Credit for Israeli Taxes Withheld
Subject to certain conditions and limitations, a U.S. Shareholder may be eligible for a credit against United States federal income tax
liability for any Israeli tax withheld or paid with respect to dividends on the ordinary shares. The Code provides limitations on the amount of foreign tax credits. These limitations include extensive separate computation rules under which foreign
tax credits allowable with respect to specific categories of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such category of income. A shareholder who does not elect to claim a foreign tax credit may
instead claim a deduction for Israeli income tax withheld or paid, but only if the shareholder elects to do so for all foreign income taxes in that year. Special rules for determining a U.S. Shareholders foreign tax credit limitation apply in
the case of qualified dividend income. Rules similar to those concerning adjustments to the foreign tax credit limitation to reflect any capital gain rate differential also apply to any qualified dividend income. The rules relating to foreign tax
credits are complex and each U.S. Shareholder should consult his, her, or its own tax advisor to determine whether and if the specific shareholder would be entitled to this credit.
Sale, Exchange, or Other Disposition of the Ordinary Shares
The sale or exchange of ordinary shares will generally result in the recognition of capital gain or loss for the U.S. Shareholder. The amount
of gain or loss is the difference between the U.S. dollar value of the amount realized on the sale or exchange and the tax basis in the ordinary shares. If a U.S. Shareholders holding period for the ordinary shares exceeds one year at the time
of the disposition, the amount of the shareholders gain or loss generally will be long-term capital gain or loss. Long-term capital gains of non-corporate U.S. Shareholders realized upon a sale or exchange of ordinary shares generally will be
eligible for a preferential rate of taxation. The deductibility of capital losses may be subject to limitation. 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.
Additional Tax on Investment Income
U.S. Shareholders that are individuals, estates or trusts and whose income exceeds certain thresholds will be subject to a 3.8% tax on all or a
portion of their net investment income, including, among other things, dividends on and capital gains from the sale or other disposition of our ordinary shares, subject to certain limitations and exceptions.
Passive Foreign Investment Company Status
Based upon our income, assets and activities, we believe that we are not currently, and have not been in prior years, a passive foreign
investment company (PFIC) for U.S. federal income tax purposes. We do not currently anticipate that we will be a PFIC for any subsequent year. We would be classified as a PFIC if, for any taxable year, either:
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75% or more of our gross income in the taxable year is passive income, or
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50% or more of the average percentage of our assets held during the taxable year produce or are held for the production of passive income.
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For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gain over losses from the
disposition of assets that produce passive income.
If we were a PFIC for any taxable year during which you held shares as a U.S.
Shareholder and you did not timely elect to treat us as a qualified electing fund under Section 1295 of the Code or elect to mark the ordinary shares to market, you would be subject to special tax rules that have a penalizing effect
on the receipt of an excess distribution on the ordinary shares. Generally, a distribution is considered an excess distribution to the extent it exceeds 125% of the average annual distributions in the prior three years (or, if shorter,
your holding period of the ordinary shares before the taxable year). You would also be subject to special tax rules that have a penalizing effect on the gain from the disposition of the ordinary shares, including the treatment if any such gain as
ordinary income, not capital gain.
A U.S. Shareholder may be able to mitigate certain adverse tax consequences of holding shares in a
PFIC by making a qualified electing fund, deemed sale or mark-to-market election. However, these elections require specific conditions to be met, for example, as a U.S. Shareholder you may make a qualified
electing fund election only if we agree to furnish certain tax information annually. We do not presently prepare or provide this information, and this information may not be available to you if we are subsequently determined to be a PFIC. A number
of specific rules and requirements apply to a U.S. Shareholder under any of the elections available to owners of a PFIC. You are urged to consult your tax advisor concerning these elections.
61
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. However, backup withholding will not apply 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). Amounts
withheld as backup withholding may be credited against a U.S. Shareholders 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.
Other Reporting Requirements
Certain U.S. Shareholders who are individuals are required to report information relating to an interest in our ordinary shares, subject to
certain exceptions (including an exception for shares held in accounts maintained by U.S. financial institutions) by filing IRS Form 8938 (Statement of Specified Foreign Financial Assets) with their federal income tax return. U.S. Shareholders are
urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
Documents on Display
This report and
other information filed or to be filed by us can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at:
Securities and Exchange Commission
100 F Street, NE
Public
Reference Room
Washington, D.C. 20549
For further information on the operation of the public reference room and copy charges, the Securities and Exchange Commission may be
contacted at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a Web site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR system. We intend to post our Annual Report on Form 20-F on our website (www.checkpoint.com)
promptly following the filing of our Annual Report on Form 20-F with the Securities and Exchange Commission.
Additionally, documents
referred to in this Annual Report on Form 20-F may be inspected at our principal executive offices located at 5 HaSolelim Street, Tel Aviv 6789705, Israel.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to market
risks that result primarily from weak economic conditions in the markets in which we sell our products, and from changes in exchange rates or in interest rates.
As of December 31, 2015, securities representing 6.9% of our investments portfolios are rated as AAA; securities representing 50.0% of
the portfolio are rated as AA; securities representing 42.6% of the portfolio are rated as A; securities representing 0.5% of the portfolio are rated as BBB+.
The table below provides information regarding our investments in cash, cash equivalents, short-term bank deposits and marketable securities,
as of December 31, 2015:
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Maturity
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Total
Amortized
cost
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Fair
Value at
Dec. 31, 2015
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2016
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2017
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2018
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2019
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2020
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(in thousands)
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Government and corporate debentures - fixed interest rates
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$
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994,600
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$
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863,965
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$
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623,612
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$
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319,016
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$
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140,995
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$
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2,942,188
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$
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2,937,309
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U.S. Agencies
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46,230
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114,341
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139,929
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45,740
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66,690
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412,930
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411,804
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Government and corporate debentures - floating interest rates
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41,690
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13,281
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11,025
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997
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66,993
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66,955
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Short-term deposits, money market instruments & cash
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199,346
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199,346
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199,346
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Total
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$
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1,281,866
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$
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991,587
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$
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774,556
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$
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365,7530
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$
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207,685
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$
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3,621,457
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$
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3,615,414
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Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and we incur most of our expenses in U.S. dollars, Euros, Swedish Krona, British Pounds and
Israeli Shekels. According to the factors indicated in ASC 830, Foreign Currency Matters, our cash flow, sale price, sales market, expense, financing and inter-company transactions, and arrangement indicators, are predominantly
denominated in U.S. dollars. In addition, the U.S. dollar is the primary currency of the economic environment in which we operate, and thus, the U.S. dollar is our functional and reporting currency.
On our balance sheet, we convert into U.S. dollars all monetary accounts (principally liabilities) that are maintained in other currencies.
For this conversion, we use the relevant foreign exchange rate at the balance sheet date. Any gain or loss that results from this conversion is reflected in the statement of income as financial income or financial expense, as appropriate.
We measure and record non-monetary accounts in our balance sheet in U.S. dollars. For this measurement, we use the U.S. dollar value in effect
at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).
We entered into
forward contracts to hedge the exchange impacts on assets and liabilities denominated in Israeli Shekels, Euros, British Pounds, Swedish Krona and Japanese Yen. As of December 31, 2015, we had outstanding forward contracts that did not meet the
requirement for hedge accounting, in the amount of $319 million. These contracts were for a period of up to twelve months. The net gains recognized in financial income, net during 2015 were $0.4 million.
During 2015, we entered into forward contracts to hedge against the risk of overall changes in exchange rates on future cash flow from
payments of payroll and related expenses denominated in Israeli Shekels. These contracts met the requirement for cash flow hedge accounting and as such losses in the amount of $2 million were recognized when the related expense were incurred and
classified in operating expenses during 2015. As of December 31, 2015, we had outstanding forward contracts in the notional amount of $26 million and their fair value amounted to $0.01 million.
The Companys operating expenses may be affected by fluctuations in the value of the U.S dollar as it relates to foreign currencies; with
Israel and Europe having the greatest potential impact. In managing our foreign exchange risk we periodically enter into foreign exchange hedging contracts. Our goal is to mitigate the potential exposure with these contracts. By way of example, a
10% weakening in the value of the dollar relative to the currencies in which the Companys operating expenses are denominated in 2015 would result in an increase in operating expenses of $32 million for the year ended December 31, 2015.
This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Our marketable
securities portfolio includes government and government agencies debt instruments (U.S., European and other) and corporate debt instruments. By policy, we limit the amount of credit exposure to any one issuer.
Investments in both fixed rate and floating rate interest bearing securities carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors, our income from investments may decrease in
the future in the event that interest rates fluctuate.
63
ITEM 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per
share data)
|
a.
|
Check Point Software Technologies Ltd. (Check Point Ltd.), an Israeli corporation, and subsidiaries (collectively, the Company or Check Point), are engaged in developing, marketing
and supporting software and combined hardware (appliance) and software products and subscriptions, by offering network security, data security and security management solutions for enterprise networks and service providers.
|
|
|
The Company operates in one operating and reportable segment and its revenues are mainly derived from the sales of its network and data security products, including licenses, related software updates, maintenance and
subscriptions. The Company sells its products worldwide primarily through multiple distribution channels (channel partners), including distributors, resellers, system integrators, Original Equipment Manufacturers (OEMs) and
Managed Security Service Providers (MSPs).
|
|
b.
|
During 2015, 2014 and 2013, approximately 38%, 37% and 30% of the Companys revenues were derived from two channel partners. Revenues derived from one channel partner were 20%, 21% and 14% and from the other
channel partner were 18%, 16% and 16%, respectively. Trade receivable balances from these two channel partners aggregated to $ 181,368 and $ 167,818 as of December 31, 2015 and 2014, respectively.
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated financial statements are prepared in conformity with United States generally accepted accounting
principles (U.S. GAAP).
The preparation of the consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates, judgments and assumptions. The Companys management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These
estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
|
b.
|
Financial statements in United States dollars:
|
Most of the Companys revenues and costs
are denominated in United States dollars (dollars). The Companys management believes that the dollar is the primary currency of the economic environment in which Check Point Ltd. and each of subsidiaries operate. Thus, the dollar
is the Companys functional and reporting currency.
F-12
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Accordingly, non-dollar denominated transactions and balances have been re-measured into the
functional currency in accordance with Accounting Standard Code (ASC) No. 830, Foreign Currency Matters. All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statements of
income as financial income or expenses, as appropriate.
|
c.
|
Principles of consolidation:
|
The consolidated financial statements include the accounts of
Check Point Ltd. and subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.
Cash equivalents are short-term unrestricted highly liquid investments that
are readily convertible to cash and with original maturities of three months or less at acquisition.
|
e.
|
Short-term bank deposits:
|
Bank deposits with maturities of more than three months at
acquisition but less than one year are included in short-term bank deposits. Such deposits are stated at cost which approximates fair values.
|
f.
|
Investments in marketable securities:
|
The Company accounts for investments in marketable
securities in accordance with ASC No. 320, Investments - Debt and Equity Securities.
Management determines the
appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date.
The
Company classifies all of its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) in
shareholders equity. Realized gains and losses on sale of investments are included in financial income, net and are derived using the specific identification method for determining the cost of securities sold.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
together with interest on securities is included in financial income, net.
F-13
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Companys securities are reviewed for impairment in accordance with ASC 320-10-65.
If such assets are considered to be impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors considered in making such a
determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Companys intent to sell, including whether it is more likely than not that the Company will be
required to sell the investment before recovery of cost basis. For securities with an unrealized loss that the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of their amortized cost
basis, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while
declines in fair value related to other factors are recognized in other comprehensive income (loss).
|
g.
|
Property and equipment, net:
|
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:
|
|
|
|
|
%
|
Computers and peripheral equipment
|
|
33 - 50
|
Office furniture and equipment
|
|
10 - 20
|
Building
|
|
4
|
Leasehold improvements
|
|
The shorter of term of the lease or the useful life of the asset
|
Goodwill has been recorded as a result of acquisitions. Goodwill represents the
excess of the purchase price in a business combination over the fair value of identifiable net tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject to an impairment test.
ASC No. 350, Intangibles - Goodwill and other (ASC No. 350) requires goodwill to be tested for impairment at
the reporting unit level at least annually or between annual tests in certain circumstances, and written down when impaired.
ASC
No. 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication
of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC No. 350 permits an entity to bypass the qualitative
assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
F-14
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company operates in one operating segment, and this segment comprises its only reporting
unit. The Company performs the first step of the quantitative goodwill impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present and compares the fair value of the reporting unit with its
carrying value.
During the years 2015, 2014 and 2013, no impairment losses have been identified.
|
i.
|
Other intangible assets, net:
|
Intangible assets that are not considered to have an indefinite
useful life are amortized over their estimated useful lives, which range from 5 to 20 years. These intangible assets consist primarily of core technology, trademarks and trade names which are amortized over their estimated useful lives on a
straight-line basis and customer relationships which are amortized over their estimated useful lives in proportion to the economic benefits realized.
|
j.
|
Impairment of long-lived assets:
|
The Companys long-lived assets are reviewed for
impairment in accordance with ASC No. 360, Property, Plant and Equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. During the years 2015, 2014 and 2013, no impairment indicators have been identified.
|
k.
|
Research and development costs:
|
Research and development costs are charged to the statements
of income as incurred. ASC No. 985-20, Software - Costs of Software to Be Sold, Leased, or Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.
Based on the Companys 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 are expensed as incurred.
F-15
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company derives its revenues mainly from sales of products and
licenses, subscriptions and software updates and maintenance. The Companys products are generally integrated with software that is essential to the functionality of the product. The Company sells its products primarily through channel partners
including distributors, resellers, OEMs, system integrators and MSPs, all of whom are considered end-users. The Company also sells certain products directly to end users primarily through its website.
The Companys subscriptions include security solutions that are sold as a service or annuity.
The Companys software updates and maintenance provide customers with rights to unspecified software product upgrades released during the
term of the agreement and include maintenance services to customers, primarily telephone access to technical support personnel and hardware support services.
Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the amounts are
fixed or determinable and collection of the amount is considered probable. Revenues from subscriptions and from software updates and maintenance are recognized ratably over the term of the agreement. Revenues from arrangements with payment terms
extending beyond customary payment terms are considered not to be fixed or determinable, and therefore revenue is deferred and recognized when payments become due, provided that all other revenue recognition criteria have been met.
The Companys products and services generally qualify as separate units of accounting. As such, revenues from multiple element
arrangement that include products, subscriptions and software updates and maintenance are separated into their various elements using the relative selling price method. The estimated selling price for each deliverable is based on its vendor specific
objective evidence (VSOE), if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (BESP) if neither VSOE nor TPE is available.
The Company determines the fair value of products based on BESP by reviewing historical transactions, and considering several other external
and internal factors including, but not limited to, pricing practices.
The Company established VSOE of fair value for subscriptions and
for software updates and maintenance based on the renewal prices charged for such services.
Deferred revenues represent mainly the
unrecognized revenue billed for subscriptions and for software updates and maintenance. Such revenues are recognized ratably over the term of the related agreement.
F-16
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company records a provision for estimated sales returns, stock rotations and other
rights to customers on product and service related sales in the same period the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data, stock rotation and other known factors. Such
provisions amounted to $ 14,130 and $ 14,618 as of December 31, 2015 and 2014, respectively.
Cost of products and licenses is comprised of cost of software and hardware
production, manuals, packaging and shipping.
Cost of subscriptions is comprised of license fees paid to third parties.
Cost of software updates and maintenance is mainly comprised of cost of post-sale customer support.
Amortization of technology is comprised of amortization of core technology assets which are used in the Companys operations, and is
presented separately as part of cost of revenues.
The Companys liability for severance pay for periods prior to
January 1, 2007, 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 recorded as expenses the increase in
the severance liability, net of earnings (losses) from the related investment fund. Employees were entitled to one months salary for each year of employment, or a portion thereof. Until January 1, 2007, the Companys liability was
partially funded by monthly payments deposited with insurers; any unfunded amounts are covered by a provision established by the Company.
The carrying value of deposited funds in respect to the severance liability for services prior to January 1, 2007, includes profits
(losses) 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.
Effective January 1, 2007, the Companys agreements with employees in Israel, are under Section 14 of the Severance Pay Law,
1963. The Companys contributions for severance pay have replaced its severance obligation. Upon contribution of the full amount of the employees monthly salary for each year of service, no additional calculations is conducted between the
parties regarding the matter of severance pay and no additional payments is made by the Company to the employee. Further, the related obligation and amounts deposited on behalf of the employee for such obligation are not stated on the balance sheet,
as the Company is legally released from the obligation to employees once the deposit amounts have been paid. Severance expenses for the years ended December 31, 2015, 2014 and 2013, were $ 7,140, $ 6,726 and $ 5,987, respectively.
F-17
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
o.
|
Employee benefit plan:
|
The Company has a 401(K) defined contribution plan covering certain
employees in the U.S. In 2015, all eligible employees may elect to contribute up to 50%, but generally not greater than $ 18 per year (and an additional amount of $ 6 for employees aged 50 and over), of their annual compensation to the
plan through salary deferrals, subject to IRS limits. The Company matches 50% of employee contributions to the plan up to a limit of 3% of their eligible compensation. In 2015, 2014 and 2013, the Companys matching contribution to the plan
amounted to $ 1,397, $ 1,148 and $ 1,073, respectively.
The Company accounts for income taxes in accordance with ASC No. 740,
Income Taxes (ASC No. 740). ASC No. 740 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined for temporary 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
amounts more likely than not to be realized.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for
uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.
The
second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. The Company classifies interest related to unrecognized tax benefits in taxes on income.
Advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 2015, 2014 and 2013, were $ 2,311, $ 2,837 and $ 4,260, respectively.
|
r.
|
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 foreign currency derivative contracts.
F-18
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The majority of the Companys cash and cash equivalents and short-term bank deposits
are deposited in major banks in the U.S., Israel and Europe. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be withdrawn upon demand and therefore bear low risk.
Marketable securities are held mainly by the Companys Singaporean subsidiary, the U.S. subsidiary and Check Point Ltd., and are invested in securities denominated in U.S. dollar.
The Companys marketable securities consist of investments in government, corporate and government sponsored enterprises debentures. The
Companys investment policy, approved by the Board of Directors, limits the amount that the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.
The Companys trade receivables are geographically dispersed and derived from sales to channel partners mainly in the United States,
Europe and Asia. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its channel partners and
establishes an allowance for doubtful accounts based on factors that may affect a customers ability to pay, such as age of the receivable balance and past experience. Allowance for doubtful accounts amounted to $ 2,101 and $ 3,928 as
of December 31, 2015 and 2014, respectively. The Company writes off receivables when they are deemed uncollectible, having exhausted all collection efforts. Actual collection experience may not meet expectations and may result in increased bad
debt expense. Bad debt income amounted to ($ 1,834), $ (1,932) and $ (1,090) in 2015, 2014 and 2013, respectively. Total write offs during 2015, 2014 and 2013 amounted to $ 123, $ 1,537 and $ 668, respectively.
The Company utilizes forward contracts to protect against the risk of overall changes in exchange rates. The derivative instruments hedge a
portion of the Companys non-dollar currency exposure. Counterparties to the Companys derivative instruments are all major financial institutions.
F-19
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
s.
|
Derivatives and hedging:
|
The Company accounts for derivatives and hedging based on ASC
No. 815, Derivatives and Hedging (ASC No. 815). ASC No. 815 requires the Company to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, as well as the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging
instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. If the derivatives meet the definition of a hedge
and are designated as such, depending on the nature of the hedge, changes in the fair value of such 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 derivatives change in fair value is recognized in financial income, net.
The Company entered into forward contracts to hedge the fair value of assets and liabilities denominated in New Israeli Shekels, Euros,
British Pounds, Swedish Krona, Japanese Yen, Czech Koruna and Canadian Dollar. As of December 31, 2015 and 2014, the Company had outstanding forward contracts that did not meet the requirement for hedge accounting, in the notional amount of $
319,380 and $ 250,946, respectively. The Company measured the fair value of the contracts in accordance with ASC No. 820, Fair Value Measurement (ASC No. 820) (classified as level 2). The net gains (losses)
resulting from these forward contracts recognized in financial income, net during 2015, 2014 and 2013 were $ 378, $ (21,970) and $ 20,306, respectively. The fair value of the Companys outstanding forward contracts at
December 31, 2015 and 2014 amounted to liabilities of $ 52 and $ 88, respectively.
The Company entered into forward contracts
to hedge against the risk of overall changes in future cash flow from payments of payroll and related expenses denominated in New Israeli Shekels. As of December 31, 2015 and 2014, the Company had outstanding forward contracts in the notional
amount of $ 25,732 and $ 38,784, respectively. These contracts were for a period of up to twelve months. The Company measured the fair value of the contracts in accordance with ASC No. 820 (classified as level 2). These contracts met the
requirement for cash flow hedge accounting and, as such, gains (losses) on the contracts are recognized initially in OCI and reclassified to the statement of income in the period the related hedged items affect earnings. During 2015, 2014 and 2013
gains (losses) in the amount of $ (1,585), $ (3,009) and $ 2,366, respectively, were reclassified when the related expenses were incurred and recognized in operating expenses. The fair value of the Companys outstanding forward
contracts at December 31, 2015 and 2014 amounted to assets (liabilities) of $ 8 and $ (2,854), respectively.
F-20
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
t.
|
Basic and diluted earnings per share:
|
Basic earnings per share are computed based on the
weighted average number of ordinary shares outstanding during each year. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares outstanding
during the year, in accordance with ASC No. 260, Earnings Per Share.
The total weighted average number of shares related
to the outstanding options excluded from the calculations of diluted earnings per share, since it would have an anti-dilutive effect, was 1,594,082, 1,746,613 and 5,694,945 for 2015, 2014 and 2013, respectively.
|
u.
|
Accounting for stock-based compensation:
|
The Company accounts for stock-based compensation in
accordance with ASC No. 718, Compensation-Stock Compensation (ASC No. 718). ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the grant date using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Companys consolidated statements of income.
The Company recognizes compensation expenses for the value of awards granted, based on the straight line method for service based awards and
based on the accelerated method for performance-based awards. Compensation expense is recognized over the requisite service period of the awards, net of estimated forfeitures. ASC No. 718 requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
The Company selected the Black-Scholes-Merton option pricing model as the most appropriate model for determining the fair value method for its
stock options awards and Employee Stock Purchase Plan, whereas the fair value of restricted stock units is based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, the most
significant of which are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the
expected term of the options. The expected term of options granted is based upon historical experience and represents the period of time between when the options are granted and when they are expected to be exercised. The risk-free interest rate is
based on the yield from U.S. treasury bonds with an equivalent term to the expected term of the options. The Company has historically not paid dividends and has no plans to pay dividends in the foreseeable future.
F-21
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The fair value of options granted and Employee Stock Purchase Plan in 2015, 2014 and 2013 is
estimated at the date of grant using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Employee Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
25.14
|
%
|
|
|
29.30
|
%
|
|
|
30.14
|
%
|
Risk-free interest rate
|
|
|
1.59
|
%
|
|
|
1.48
|
%
|
|
|
1.72
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term (years)
|
|
|
5.59
|
|
|
|
5.51
|
|
|
|
6.00
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
21.89
|
%
|
|
|
21.47
|
%
|
|
|
26.98
|
%
|
Risk-free interest rate
|
|
|
0.07
|
%
|
|
|
0.06
|
%
|
|
|
0.06
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected term (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
v.
|
Fair value of financial instruments:
|
The Company measures its investments in money market
funds classified as cash equivalents, marketable securities and its foreign currency derivative contracts at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
|
|
|
|
|
|
|
Level 1 -
|
|
Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market,
valuation of these products does not entail a significant degree of judgment.
|
|
|
|
|
|
Level 2 -
|
|
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
|
|
|
|
Level 3 -
|
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.
F-22
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company accounts for comprehensive income in accordance with ASC
No. 220, Comprehensive Income. Comprehensive income generally represents all changes in shareholders equity during the period except those resulting from investments by, or distributions to, shareholders. The Company
determined that its items of other comprehensive income relate to gains and losses on hedging derivative instruments and unrealized gains and losses on available-for-sale marketable securities.
The following table shows the components of accumulated other comprehensive income (loss), net of taxes, for the year ended December 31,
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
Unrealized
gains (losses)
on marketable
securities
|
|
|
Unrealized
gains (losses)
on cash flow
hedges
|
|
|
Total
|
|
Beginning balance
|
|
$
|
969
|
|
|
$
|
(2,039
|
)
|
|
$
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
|
(5,209
|
)
|
|
|
716
|
|
|
|
(4,493
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
*)(19)
|
|
|
|
**)1,332
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(5,228
|
)
|
|
|
2,048
|
|
|
|
(3,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(4,259
|
)
|
|
$
|
9
|
|
|
$
|
(4,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
The reclassification out of accumulated other comprehensive income during the year ended December 31, 2015 for realized gains on marketable securities are included within financial income, net.
|
**)
|
The reclassification out of accumulated other comprehensive income during the year ended December 31, 2015 for realized losses on cash flow hedges are included mostly within research and development expenses as
well as other operating expenses.
|
The Company repurchases its ordinary shares from time to time on the open
market and holds such shares as treasury shares. The Company presents the cost to repurchase treasury stock as a separate component of shareholders equity.
The Company reissues treasury shares under the stock purchase plan, upon exercise of options and upon vesting of restricted stock units.
Reissuance of treasury shares is accounted for in accordance with ASC No. 505-30 whereby gains are credited to additional paid-in capital and losses are charged to additional paid-in capital to the extent that previous net gains are included
therein; otherwise to retained earnings.
F-23
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company is currently involved in various claims and legal
proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues
a liability for the estimated loss.
|
z.
|
Impact of recently issued accounting standards:
|
In May 2014, the Financial Accounting
Standards Board (FASB) issued an ASU No. 2014-09 on revenue from contracts with customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance. In 2015, the FASB issued guidance to defer the effective date to fiscal years beginning after December 15, 2017 with early adoption for fiscal years beginning after December 15, 2016.
The Company is currently evaluating the method of adoption, as well as the effect that adoption of this ASU will have on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 related to balance sheet classification of deferred taxes. The new guidance
requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted. The Company early adopted this guidance on a retrospective basis as of December 31, 2015. As a result, the Companys current deferred tax assets as of December 31, 2014 in an amount
of $34,175 were reclassified to noncurrent assets to conform to the current year presentation.
February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a
discounted basis; and a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after
December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement.
F-24
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15,
2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
On February 17, 2015, the Company completed the acquisition of Hyperwise Ltd, a privately-held Israeli-based company.
Under the acquisition method of accounting, the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values. In addition, the transaction included additional consideration
related to compensation for post combination services which was recorded as prepaid expenses and will be recognized over the requisite service period.
On April 2, 2015, the Company completed the acquisition of Lacoon Mobile Security Ltd, a privately held Israeli based company. Under the
acquisition method of accounting, the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values. In addition, the transaction included additional consideration related to
compensation for post combination services which was recorded as prepaid expenses and will be recognized over the requisite service period.
These acquisitions were not significant individually or in the aggregate.
NOTE 4:-
|
MARKETABLE SECURITIES
|
Marketable securities with contractual maturities of up to one year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
Government and corporate debentures - fixed interest rate
|
|
$
|
994,600
|
|
|
$
|
3,088
|
|
|
$
|
(752
|
)
|
|
$
|
996,936
|
|
|
$
|
882,051
|
|
|
$
|
3,433
|
|
|
$
|
(141
|
)
|
|
$
|
885,343
|
|
Government-sponsored enterprises debentures
|
|
|
46,230
|
|
|
|
25
|
|
|
|
(17
|
)
|
|
|
46,238
|
|
|
|
154,619
|
|
|
|
183
|
|
|
|
(5
|
)
|
|
|
154,797
|
|
Government and corporate debentures - floating interest rate
|
|
|
41,690
|
|
|
|
24
|
|
|
|
(7
|
)
|
|
|
41,707
|
|
|
|
3,001
|
|
|
|
8
|
|
|
|
|
|
|
|
3,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,082,520
|
|
|
$
|
3,137
|
|
|
$
|
(776
|
)
|
|
$
|
1,084,881
|
|
|
$
|
1,039,671
|
|
|
$
|
3,624
|
|
|
$
|
(146
|
)
|
|
$
|
1,043,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 4:- MARKETABLE SECURITIES (Cont
.)
Marketable securities with contractual maturities of over one year through five years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair
value
|
|
Government and corporate debentures - fixed interest rate
|
|
$
|
1,947,588
|
|
|
$
|
1,439
|
|
|
$
|
(8,654
|
)
|
|
$
|
1,940,373
|
|
|
$
|
1,916,756
|
|
|
$
|
2,905
|
|
|
$
|
(4,519
|
)
|
|
$
|
1,915,142
|
|
Government-sponsored enterprises debentures
|
|
|
366,700
|
|
|
|
109
|
|
|
|
(1,243
|
)
|
|
|
365,566
|
|
|
|
390,468
|
|
|
|
256
|
|
|
|
(990
|
)
|
|
|
389,734
|
|
Government and corporate debentures - floating interest rate
|
|
|
25,303
|
|
|
|
11
|
|
|
|
(66
|
)
|
|
|
25,248
|
|
|
|
65,512
|
|
|
|
102
|
|
|
|
(19
|
)
|
|
|
65,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,339,591
|
|
|
$
|
1,559
|
|
|
$
|
(9,963
|
)
|
|
$
|
2,331,187
|
|
|
$
|
2,372,736
|
|
|
$
|
3,263
|
|
|
$
|
(5,528
|
)
|
|
$
|
2,370,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their
related fair values were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Investments with
continuous unrealized
losses for less than 12
months
|
|
|
Investments with
continuous unrealized
losses for 12 months or
greater
|
|
|
Total Investments with
continuous unrealized
losses
|
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
Government and corporate debentures - fixed interest rate
|
|
$
|
2,138,546
|
|
|
$
|
(9,027
|
)
|
|
$
|
68,084
|
|
|
$
|
(379
|
)
|
|
$
|
2,206,630
|
|
|
$
|
(9,406
|
)
|
Government-sponsored enterprises debentures
|
|
|
308,026
|
|
|
|
(1,252
|
)
|
|
|
5,992
|
|
|
|
(8
|
)
|
|
|
314,018
|
|
|
|
(1,260
|
)
|
Government and corporate debentures - floating interest rate
|
|
|
26,688
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
26,688
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,473,260
|
|
|
$
|
(10,352
|
)
|
|
$
|
74,076
|
|
|
$
|
(387
|
)
|
|
$
|
2,547,336
|
|
|
$
|
(10,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
Investments with
continuous unrealized
losses for less than 12
months
|
|
|
Investments with
continuous unrealized
losses for 12 months or
greater
|
|
|
Total Investments with
continuous unrealized
losses
|
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
Government and corporate debentures - fixed interest rate
|
|
$
|
1,199,879
|
|
|
$
|
(2,994
|
)
|
|
$
|
257,258
|
|
|
$
|
(1,666
|
)
|
|
$
|
1,457,137
|
|
|
$
|
(4,660
|
)
|
Government-sponsored enterprises debentures
|
|
|
177,953
|
|
|
|
(487
|
)
|
|
|
89,350
|
|
|
|
(508
|
)
|
|
|
267,303
|
|
|
|
(995
|
)
|
Government and corporate debentures - floating interest rate
|
|
|
17,102
|
|
|
|
(14
|
)
|
|
|
5,003
|
|
|
|
(5
|
)
|
|
|
22,105
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,394,934
|
|
|
$
|
(3,495
|
)
|
|
$
|
351,611
|
|
|
$
|
(2,179
|
)
|
|
$
|
1,746,545
|
|
|
$
|
(5,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015 and 2014, interest receivable amounted to $ 17,754 and $ 17,864
respectively, and is included within other current assets in the balance sheets.
F-26
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 5:-
|
FAIR VALUE MEASUREMENTS
|
In accordance with ASC No. 820, the Company
measures its money market funds, marketable securities and foreign currency derivative contracts at fair value. Money market funds and marketable securities are classified within Level 1 or Level 2. This is because these assets are valued using
quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of
similar instruments.
The Companys financial assets measured at fair value on a recurring basis, excluding accrued interest
components, consisted of the following types of instruments as of the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Fair value measurements using input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
21,085
|
|
|
$
|
|
|
|
$
|
21,085
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and corporate debentures - fixed interest rate
|
|
|
|
|
|
|
2,937,309
|
|
|
|
2,937,309
|
|
Government-sponsored enterprises debentures
|
|
|
|
|
|
|
411,804
|
|
|
|
411,804
|
|
Government and corporate debentures - floating interest rate
|
|
|
|
|
|
|
66,955
|
|
|
|
66,955
|
|
Foreign currency derivative contracts
|
|
|
|
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
21,085
|
|
|
$
|
3,416,024
|
|
|
$
|
3,437,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
Fair value measurements using input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
107,400
|
|
|
$
|
|
|
|
$
|
107,400
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and corporate debentures - fixed interest rate
|
|
|
|
|
|
|
2,800,485
|
|
|
|
2,800,485
|
|
Government-sponsored enterprises debentures
|
|
|
|
|
|
|
544,531
|
|
|
|
544,531
|
|
Government and corporate debentures - floating interest rate
|
|
|
|
|
|
|
68,604
|
|
|
|
68,604
|
|
Foreign currency derivative contracts
|
|
|
|
|
|
|
(2,942
|
)
|
|
|
(2,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
107,400
|
|
|
$
|
3,410,678
|
|
|
$
|
3,518,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 6:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cost:
|
|
|
|
|
|
|
|
|
Computers and peripheral equipment
|
|
$
|
53,937
|
|
|
$
|
48,159
|
|
Office furniture and equipment
|
|
|
7,332
|
|
|
|
6,636
|
|
Building
|
|
|
46,707
|
|
|
|
39,935
|
|
Leasehold improvements
|
|
|
8,769
|
|
|
|
7,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,745
|
|
|
|
102,707
|
|
Accumulated depreciation
|
|
|
68,053
|
|
|
|
61,158
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
48,692
|
|
|
$
|
41,549
|
|
|
|
|
|
|
|
|
|
|
NOTE 7:-
|
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Goodwill, beginning of the year
|
|
$
|
727,875
|
|
|
$
|
727,875
|
|
Acquisitions
|
|
|
84,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of the year
|
|
$
|
812,012
|
|
|
$
|
727,875
|
|
|
|
|
|
|
|
|
|
|
F-28
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 7:-
|
GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)
|
|
b.
|
Other intangible assets, net:
|
Net other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31,
|
|
|
|
life
|
|
|
2015
|
|
|
2014
|
|
Original amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
8
|
|
|
$
|
17,464
|
|
|
$
|
1,929
|
|
Trademarks and trade names
|
|
|
15 - 20
|
|
|
|
25,520
|
|
|
|
25,520
|
|
Customer relationships
|
|
|
5 - 6
|
|
|
|
2,097
|
|
|
|
2,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,081
|
|
|
|
29,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
|
|
|
|
2,560
|
|
|
|
753
|
|
Trademarks and trade names
|
|
|
|
|
|
|
14,510
|
|
|
|
12,934
|
|
Customer relationships
|
|
|
|
|
|
|
2,003
|
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,073
|
|
|
|
15,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
|
|
|
|
14,904
|
|
|
|
1,176
|
|
Trademarks and trade names
|
|
|
|
|
|
|
11,010
|
|
|
|
12,586
|
|
Customer relationships
|
|
|
|
|
|
|
94
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,008
|
|
|
$
|
14,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated future amortization expense of other intangible assets as of December 31, 2015 is as
follows:
|
|
|
|
|
2016
|
|
$
|
3,853
|
|
2017
|
|
|
3,759
|
|
2018
|
|
|
3,759
|
|
2019
|
|
|
3,734
|
|
2020
|
|
|
3,518
|
|
Thereafter
|
|
|
7,385
|
|
|
|
|
|
|
|
|
$
|
26,008
|
|
|
|
|
|
|
NOTE 8:-
|
EMPLOYEES AND PAYROLL ACCRUALS
|
As of December 31, 2015 and 2014, employees and payroll accruals include a total amount of $ 2,568 and $ 3,214,
respectively, related to payroll accrued for the benefit of certain related parties since 2002 until 2007.
F-29
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 9:-
|
DEFERRED REVENUES
|
Deferred revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Subscriptions
|
|
$
|
285,998
|
|
|
$
|
227,610
|
|
Software updates and maintenance
|
|
|
607,153
|
|
|
|
546,998
|
|
Other
|
|
|
12,632
|
|
|
|
9,405
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
905,783
|
|
|
$
|
784,013
|
|
|
|
|
|
|
|
|
|
|
The majority of the deferred revenues are recognized within one year or less and presented as current deferred
revenues in the balance sheet. The remaining deferred revenues which are recognized for a period above one year and up to five years are shown as long term deferred revenues.
NOTE 10:-
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Income taxes payable
|
|
$
|
17,388
|
|
|
$
|
6,559
|
|
Accrued products and licenses costs
|
|
|
44,417
|
|
|
|
36,907
|
|
Marketing expenses payable
|
|
|
19,208
|
|
|
|
12,703
|
|
Legal accrual
|
|
|
57,970
|
|
|
|
50,416
|
|
Other accrued expenses
|
|
|
48,004
|
|
|
|
44,576
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,987
|
|
|
$
|
151,161
|
|
|
|
|
|
|
|
|
|
|
F-30
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 11:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
Certain facilities of the Company are rented under operating lease
agreements, which expire on various dates, the latest of which is in 2020. The Company recognizes rent expense under such arrangements on a straight-line basis.
Aggregate minimum lease commitments under non-cancelable operating leases as of December 31, 2015, were as follows:
|
|
|
|
|
2016
|
|
$
|
8,889
|
|
2017
|
|
|
5,087
|
|
2018
|
|
|
3,404
|
|
2019
|
|
|
1,074
|
|
2020
|
|
|
100
|
|
|
|
|
|
|
|
|
$
|
18,554
|
|
|
|
|
|
|
Rent expenses for the years ended December 31, 2015, 2014 and 2013, were $ 8,287, $ 6,570 and
$ 6,224 respectively.
The Company operates its business in various countries, and accordingly attempts
to utilize an efficient operating model to structure its tax payments based on the laws in the countries in which the Company operates. This can cause disputes between the Company and various tax authorities in different parts of the world.
Further, the Company is the defendant in various other lawsuits, including employment-related litigation claims, construction claims and other
legal proceedings in the normal course of its business. Litigation and governmental proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their
merit. While the Company intends to defend the aforementioned matters vigorously, it believes that a loss in excess of its accrued liability with respect to these claims is not probable.
F-31
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME
|
The Company elected to apply the Preferred Enterprise regime under the Law for
the Encouragement of Capital Investment (the Investment Law). Under the Preferred Enterprise regime, the Companys entire preferred income is subject to tax rates as follows: 2013 - 12.5% and 2014 and thereafter - 16%. The election
is irrevocable.
Income not eligible for Preferred Enterprise benefits are taxed at a regular rate, as follows: 2015 and 2014 26.5%
and for 2013 - 25%.
On January 4, 2016, an amendment to the Israeli tax ordinance was enacted such that commencing January 1,
2016, the Israeli regular tax rate will be reduced from 26.5% to 25%. The effect of the change in tax rates will result in a decrease in deferred tax balances in immaterial amounts.
Prior to 2012, most of the Companys income was exempt from tax or subject to reduced tax rates under the Investment Law. Upon
distribution of exempt income, the distributing company will be subject to corporate reduced tax rates ordinarily applicable to such income under the Investment Law.
Reduced income under the Investment Law including the Preferred Enterprise Regime will be freely distributable as dividends, subject to a
15%-20% withholding tax (or lower, under an applicable tax treaty). However, upon the distribution of a dividend from Preferred Income to an Israeli company, no withholding tax will be remitted.
Pursuant to a temporary tax relief initiated by the Israeli government, a company that elected by November 11, 2013 to pay a reduced
corporate tax rate as set forth in the temporary tax relief with respect to undistributed exempt income generated under the Investment Law accumulated by the company until December 31, 2011 (Trapped Earnings) is entitled to
distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investments in Israel over five-year period. A company that has
elected to apply the temporary tax relief cannot withdraw from its election.
F-32
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME (Cont.)
|
On November 11, 2013, the Company reached a settlement agreement with the Israeli Tax
Authorities (ITA) which provided (i) the full settlement of all disputes with the ITA with respect to the tax years 2002 through 2011, and (ii) the release of all the Companys Trapped Earnings through the year ended
December 31, 2011. In accordance with the Investments Law and the temporary tax relief, the Company is obligated to invest approximately $ 111,000 during five years period in the following forms (i) production assets (as defined
therein), (ii) research and development activities in Israel and/or (iii) employment payments for new employees (other than office holders) added after 2011. Any amount not invested in the five years period, should be paid at the end of
the 5 years, linked to the Israeli CPI and bears 4% annual interest since the election date.
|
2.
|
Foreign Exchange Regulations:
|
Under the Foreign Exchange Regulations, Check Point Ltd.
calculates its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into New Israeli Shekels according to the exchange rate as of December 31st of each year.
|
b.
|
Income taxes of non-Israeli subsidiaries:
|
Non-Israeli subsidiaries are taxed according to the
tax laws in their respective countries of residence.
The Company does not provide deferred tax liabilities when it intends to reinvest
earnings of foreign subsidiaries indefinitely. Undistributed earnings of foreign subsidiaries that are considered to be permanently reinvested amounted to $ 178,636 and unrecognized deferred tax liability related to such earning amounted to $
27,909 as of December 31, 2015.
F-33
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME (Cont.)
|
|
c.
|
Deferred tax assets and liabilities:
|
Deferred taxes 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, 2015 and 2014, the Companys deferred taxes were in respect of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Carry forward tax losses
|
|
$
|
191,561
|
|
|
$
|
213,880
|
|
Employee stock based compensation
|
|
|
27,517
|
|
|
|
23,950
|
|
Other
|
|
|
60,887
|
|
|
|
46,356
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance
|
|
|
279,965
|
|
|
|
284,186
|
|
Valuation allowance
|
|
|
(192,332
|
)
|
|
|
(213,690
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
87,633
|
|
|
|
70,496
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(8,045
|
)
|
|
|
(7,901
|
)
|
Undistributed earnings of subsidiary
|
|
|
(11,435
|
)
|
|
|
(11,435
|
)
|
Other
|
|
|
(2,682
|
)
|
|
|
(3,121
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
(22,162
|
)
|
|
|
(22,457
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
65,471
|
|
|
$
|
48,039
|
|
|
|
|
|
|
|
|
|
|
The Companys subsidiaries in the U.S. have provided valuation allowance in respect of deferred tax
assets resulting from carry forward of net operating loss related to excess tax benefits from options exercised prior to the adoption of ASC No. 718.
Through December 31, 2015, the U.S. subsidiaries had a U.S. federal loss carry-forward of approximately $ 531,643 expiring beginning
2018, mainly resulting from tax benefits related to employees stock option exercises that can be carried forward and offset against taxable income. Excess tax benefits related to employee stock option exercises for which no compensation
expense was recognized will be credited to additional paid-in capital when realized. Through December 31, 2015, the U.S. subsidiaries had a U.S. state net loss carry forward of approximately $ 96,955, which expire between fiscal 2016 and
fiscal 2024, and are subject to limitations on their utilization. Through December 31, 2015, the U.S. subsidiaries had research and development tax credits of approximately $ 15,924, which expire between fiscal 2019 and fiscal 2034 and are
subject to limitations on their utilization.
F-34
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME (Cont.)
|
|
d.
|
Income before taxes on income is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Domestic
|
|
$
|
817,164
|
|
|
$
|
784,710
|
|
|
$
|
743,125
|
|
Foreign
|
|
|
56,626
|
|
|
|
45,106
|
|
|
|
52,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
873,790
|
|
|
$
|
829,816
|
|
|
$
|
795,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e.
|
Taxes on income are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Current
|
|
$
|
203,771
|
|
|
$
|
182,537
|
|
|
$
|
143,008
|
|
Deferred
|
|
|
(15,847
|
)
|
|
|
(12,292
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,924
|
|
|
$
|
170,245
|
|
|
$
|
143,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
170,883
|
|
|
$
|
154,921
|
|
|
$
|
130,109
|
|
Foreign
|
|
|
17,041
|
|
|
|
15,324
|
|
|
|
12,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,924
|
|
|
$
|
170,245
|
|
|
$
|
143,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Domestic taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
175,828
|
|
|
$
|
165,476
|
|
|
$
|
124,522
|
|
Deferred
|
|
|
(4,945
|
)
|
|
|
(10,555
|
)
|
|
|
5,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,883
|
|
|
|
154,921
|
|
|
|
130,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
27,943
|
|
|
|
17,061
|
|
|
|
18,486
|
|
Deferred
|
|
|
(10,902
|
)
|
|
|
(1,737
|
)
|
|
|
(5,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,041
|
|
|
|
15,324
|
|
|
|
12,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
187,924
|
|
|
$
|
170,245
|
|
|
$
|
143,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME (Cont.)
|
|
f.
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
235,705
|
|
|
$
|
205,420
|
|
Increases (decreases) related to tax positions taken during prior years
|
|
|
12,051
|
|
|
|
(14,550
|
)
|
Increases related to tax positions taken during the current year
|
|
|
36,352
|
|
|
|
44,835
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
284,108
|
*)
|
|
$
|
235,705
|
|
|
|
|
|
|
|
|
|
|
*)
|
As of December 31, 2015, unrecognized tax benefit in an amount of $893 was presented net from deferred tax asset.
|
Substantially all the balance of unrecognized tax benefits, if recognized, would reduce the Companys annual effective tax rate.
During the years ended December 31, 2015, 2014 and 2013, the Company recorded $ 7,534, $ 6,214 and $ 20,857, respectively
for interest expense related to uncertain tax positions. As of December 31, 2015 and 2014, the Company had accrued interest liability related to uncertain tax positions in the amounts of $ 17,413 and $ 9,879, respectively, which is
included within income tax accrual on the balance sheets.
The Companys U.S. subsidiaries file federal and state income tax returns
in the U.S. All of the U.S subsidiaries tax years are subject to examination by the U.S. federal and most U.S. state tax authorities due to their carry forward tax losses and overall credit carry-forward position, except for Check Point Inc.
that the assessment statue period for tax years 2005 through 2011 was expired.
The Company believes that it has adequately provided for
any reasonably foreseeable outcomes related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Companys income tax provisions and accruals. Such differences could have a
material effect on the Companys income tax provision and net income in the period in which such determination is made.
|
g.
|
Reconciliation of the theoretical tax expenses:
|
Reconciliation between the theoretical tax
expenses, assuming all income is taxed at the statutory rate in Israel and the actual income tax as reported in the statements of income is as follows:
F-36
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 12:-
|
TAXES ON INCOME (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income before taxes as reported in the statements of income
|
|
$
|
873,790
|
|
|
$
|
829,816
|
|
|
$
|
795,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in Israel
|
|
|
26.5%
|
|
|
|
26.5%
|
|
|
|
25%
|
|
Decrease in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Preferred Enterprise status *)
|
|
|
(7%)
|
|
|
|
(5%)
|
|
|
|
(6%)
|
|
Others, net
|
|
|
2%
|
|
|
|
(1%)
|
|
|
|
(1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
21.5%
|
|
|
|
20.5%
|
|
|
|
18%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) Basic earnings per share amounts of the benefit resulting
from the Preferred Enterprise status
|
|
$
|
0.31
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share amounts of the benefit resulting from the Preferred Enterprise status
|
|
$
|
0.30
|
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13:-
|
SHAREHOLDERS EQUITY
|
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.
Dividends declared on ordinary shares will
be paid in New Israeli Shekels. Dividends paid to shareholders outside Israel will be converted into U.S. dollars, on the basis of the exchange rate prevailing at the date of payment.
On January 29, 2015, the Companys board of directors approved
and authorized the repurchase of up to additional $ 1,500,000 of the Companys ordinary shares and not more than $250,000 per quarter. Under the share repurchase programs, share purchases may be made from time to time depending on market
conditions, share price, trading volume and other factors and will be funded by available working capital. As of December 31, 2015, the Company repurchased ordinary shares for an aggregate amount of $ 4,822,805. During 2015, 2014 and 2013
the Company repurchased 12,032,899, 11,207,320 and 10,148,834 shares for an aggregate amount of $ 985,735, $ 764,543 and $ 537,829, respectively.
F-37
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 13:-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
c.
|
Stock Options, RSUs and PSUs:
|
In 2005, the Company adopted two new equity incentive plans,
which were subsequently amended in January 2014: the 2005 United States Equity Incentive Plan and the 2005 Israel Equity Incentive Plan together are referred to as the Equity Incentive Plans.
Under the Equity Incentive Plans, the Company may grant options to employees, officers and directors at an exercise price equal to at least
the fair market value of the ordinary shares at the date of grant and are granted for periods not to exceed seven years. The Company grants under the Equity Incentive Plans options, Restricted Stock Units (RSUs) and Performance RSUs
(PSUs) and can also grant a variety of other equity incentives. Options granted under the Equity Incentive Plans generally vest over a period of four to five years of employment. Options, RSUs and PSUs that are cancelled or forfeited
before expiration become available for future grants. The number of PSUs granted to sales employees is equal to the amount of compensation earned (based on the employees level) divided by the fair value of the ordinary share at the grant date.
RSUs and PSUs vest over a four year period of employment from the grant date. PSUs are subject to certain performance criteria; accordingly, compensation expense is recognized for such awards when it becomes probable that the related performance
condition will be satisfied.
Under the Equity Incentive Plans, the Companys non-employee directors receive an automatic annual
option grant.
Following the amendments to the Equity Incentive Plans in January 2014, on December 31st of each year, the number of
Reserved and Authorized Shares under the Equity Incentive Plans shall be automatically reset to equal 10% of the number of ordinary shares issued and outstanding as of year-end. As of December 31, 2015 the number of ordinary shares reserved
under the Equity Incentive Plans equals 17,490,152.
A summary of the Companys stock option activity and related information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options in
thousands
|
|
|
Weighted
average
exercise
price
|
|
|
Aggregate
intrinsic
value
|
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
Outstanding at beginning of year
|
|
|
12,928
|
|
|
$
|
47.72
|
|
|
$
|
398,893
|
|
Granted
|
|
|
2,425
|
|
|
$
|
82.90
|
|
|
|
|
|
Exercised
|
|
|
(2,614
|
)
|
|
$
|
31.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
*)12,739
|
|
|
$
|
57.69
|
|
|
$
|
305,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
7,798
|
|
|
$
|
50.82
|
|
|
$
|
239,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
As of December 31, 2015, approximately 12.6 million options are vested and expected to vest. Options expected to vest reflect an estimated forfeiture rate for purposes of determining related compensation
expense.
|
F-38
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 13:-
|
SHAREHOLDERS EQUITY (Cont.)
|
The total intrinsic value of options exercised during the years 2015, 2014 and 2013 was $
131,603, $ 89,957 and $ 90,352, respectively.
The weighted average fair values at grant date of options granted for the
years ended December 31, 2015, 2014 and 2013; with an exercise price equal to the market value at the date of grant were $ 22.39, $ 19.55 and $ 16.17, respectively.
The options outstanding as of December 31, 2015, have been separated into ranges of exercise price, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Exercise
price
|
|
Number of options
(in thousands)
|
|
Weighted average
remaining
contractual life
(years)
|
|
Weighted average
exercise price
|
|
Number of options
(in thousands)
|
|
Weighted average
remaining
contractual life
(years)
|
|
Weighted average
exercise price
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
26.47-35.79
|
|
1,718
|
|
1.47
|
|
29.65
|
|
1,688
|
|
1.47
|
|
29.54
|
42.85-49.50
|
|
1,829
|
|
4.43
|
|
49.31
|
|
1,159
|
|
4.42
|
|
49.29
|
51.98-53.67
|
|
3,625
|
|
2.89
|
|
53.31
|
|
3,305
|
|
2.84
|
|
53.27
|
55.15-74.51
|
|
3,142
|
|
4.95
|
|
63.52
|
|
1,226
|
|
5.01
|
|
63.77
|
80.67-83.59
|
|
2,425
|
|
6.35
|
|
82.90
|
|
420
|
|
6.44
|
|
83.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.47-83.59
|
|
12,739
|
|
4.09
|
|
57.69
|
|
7,798
|
|
3.31
|
|
50.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys RSUs activity is as follows:
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
|
Number in thousands
|
|
Outstanding at beginning of year
|
|
|
802
|
|
Granted
|
|
|
*)373
|
|
Vested
|
|
|
(268
|
)
|
Forfeited
|
|
|
(95
|
)
|
|
|
|
|
|
Outstanding as of December 31,
|
|
|
812
|
|
|
|
|
|
|
*)
|
Includes 54 thousands replacements for restricted share units assumed upon acquisitions.
|
F-39
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 13:-
|
SHAREHOLDERS EQUITY (Cont.)
|
The weighted average fair values at grant date of RSUs granted for the years ended
December 31, 2015, 2014 and 2013 were $ 83.23, $ 65.08 and $ 48.64, respectively.
The total fair value of shares vested
during the years 2015, 2014 and 2013 was $ 22,485, $ 18,414 and $ 17,738, respectively.
A summary of the Companys PSUs
activity is as follows:
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
|
Number in thousands
|
|
Outstanding at beginning of year
|
|
|
94
|
|
Granted
|
|
|
101
|
|
Vested
|
|
|
(18
|
)
|
Forfeited
|
|
|
(21
|
)
|
|
|
|
|
|
Outstanding as of December 31,
|
|
|
156
|
|
|
|
|
|
|
The weighted average fair values at grant date of PSUs granted for the year ended December 31, 2015 and
2014 were $ 83.48 and $64.03, respectively.
The total fair value of shares vested during 2015 was $ 1,523. During 2014 and 2013 no PSUs
were vested.
As of December 31, 2015 the Company had a commitment to grant PSUs at the value of up to $22,232.
As of December 31, 2015, the Company had approximately $ 120,717 of unrecognized compensation expense related to non-vested stock
options and non-vested RSUs and PSUs, expected to be recognized over a weighted average period of 1.82 years and $ 9,879 of unrecognized compensation expense related to PSUs that will be fixed in number during 2016.
F-40
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 13:-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
d.
|
Employee Stock Purchase Plan (ESPP):
|
The Company reserved a total of 6,000,000
ordinary shares for issuance under the ESPP. As of December 31, 2015, 5,523,283 ordinary shares had been issued under the ESPP. Eligible employees may use up to 15% of their salaries to purchase ordinary shares but no more than 1,250 shares per
participant on any purchase date. The ESPP is implemented through 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 subscription
date of each offering period or on the purchase date.
During 2015, 2014 and 2013, employees purchased 277,571, 312,588 and 354,487
ordinary shares at average prices of $ 60.99, $ 51.48 and $ 42.14 per share, respectively.
In 1996, the Company adopted an
ESPP, which was subsequently amended in 2015. According to the amendments, commencing the purchase period that begins February 1, 2016, 500,000 ordinary shares are authorized for issuance under the US ESPP and 1,000,000 ordinary shares are
authorized for issuance under the rest of the world (ROW) ESPP.
In accordance with ASC No. 718, the ESPP is compensatory and as such
results in recognition of compensation cost. For the years ended December 31, 2015, 2014 and 2013, the Company recognized $ 4,517, $ 4,187 and $ 3,973, respectively, of compensation expense in connection with the ESPP.
NOTE 14:-
|
EARNINGS PER SHARE
|
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Net income
|
|
$
|
685,866
|
|
|
$
|
659,571
|
|
|
$
|
652,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding (in thousands)
|
|
|
179,218
|
|
|
|
188,487
|
|
|
|
195,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options, RSUs and PSUs (in thousands)
|
|
|
4,401
|
|
|
|
3,813
|
|
|
|
3,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average ordinary shares outstanding (in thousands)
|
|
|
183,619
|
|
|
|
192,300
|
|
|
|
199,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per ordinary share
|
|
$
|
3.83
|
|
|
$
|
3.50
|
|
|
$
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per ordinary share
|
|
$
|
3.74
|
|
|
$
|
3.43
|
|
|
$
|
3.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 15:-
|
GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA
|
|
a.
|
Summary information about geographical areas:
|
The Company operates in one reportable segment
(see Note 1 for a brief description of the Companys business). The total revenues are attributed to geographic areas based on the location of the Companys channel partners which are considered as end customers, as well as direct
customers of the Company.
The following table presents total revenues for the years ended December 31, 2015, 2014 and 2013, and
property and equipment, net as of December 31, 2015 and 2014, by geographic area:
1. Revenues based on the channel partners
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Americas, principally U.S.
|
|
$
|
791,568
|
|
|
$
|
729,933
|
|
|
$
|
647,533
|
|
Europe
|
|
|
595,850
|
|
|
|
550,811
|
|
|
|
533,717
|
|
Asia, Middle-East and Africa
|
|
|
242,420
|
|
|
|
215,072
|
|
|
|
212,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,629,838
|
|
|
$
|
1,495,816
|
|
|
$
|
1,394,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Israel
|
|
$
|
44,138
|
|
|
$
|
37,455
|
|
U.S.
|
|
|
3,005
|
|
|
|
2,857
|
|
Rest of the world
|
|
|
1,549
|
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,692
|
|
|
$
|
41,549
|
|
|
|
|
|
|
|
|
|
|
F-42
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 15:-
|
GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA (Cont.)
|
|
b.
|
Summary information about product lines:
|
The Companys products can be classified by
three main product lines. The following table presents total revenues for the years ended December 31, 2015, 2014 and 2013 by product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Product and licenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network security Gateways
|
|
$
|
485,778
|
|
|
$
|
469,097
|
|
|
$
|
441,805
|
|
Other *)
|
|
|
70,014
|
|
|
|
51,216
|
|
|
|
55,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,792
|
|
|
|
520,312
|
|
|
|
496,930
|
|
Subscriptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Network security Gateways
|
|
|
318,624
|
|
|
|
265,021
|
|
|
|
217,088
|
|
Software updates and maintenance
|
|
|
755,422
|
|
|
|
710,483
|
|
|
|
680,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,629,838
|
|
|
$
|
1,495,816
|
|
|
$
|
1,394,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Comprised of Endpoint security, Mobile security and Security management products, each consists of less than 10% of products and licenses revenues.
|
F-43
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
U.S. dollars in
thousands (except share and per share data)
NOTE 15:-
|
GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME DATA (Cont.)
|
|
c.
|
Financial income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
67,581
|
|
|
$
|
65,497
|
|
|
$
|
71,107
|
|
Realized gain on sale of marketable securities
|
|
|
16
|
|
|
|
288
|
|
|
|
2,311
|
|
Foreign currency re-measurement gain and others
|
|
|
|
|
|
|
|
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,597
|
|
|
|
65,785
|
|
|
|
74,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of marketable securities premium and accretion of discount, net
|
|
|
29,622
|
|
|
|
33,021
|
|
|
|
37,903
|
|
Foreign currency re-measurement loss
|
|
|
485
|
|
|
|
1,844
|
|
|
|
|
|
Others
|
|
|
3,417
|
|
|
|
2,158
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,524
|
|
|
|
37,023
|
|
|
|
39,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,073
|
|
|
$
|
28,762
|
|
|
$
|
34,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44