20-F 1 d112235d20f.htm 20-F 20-F
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
20-F
 
 
 
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                
to
                
OR
 
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
                
Commission file number
000-28584
 
 
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
 
 
ISRAEL
(Jurisdiction of incorporation or organization)
5 Shlomo Kaplan Street Tel Aviv 6789159, Israel
(Address of principal executive offices)
John Slavitt, Esq.
General Counsel
Check Point Software Technologies, Inc.
959 Skyway Road, Suite 300
San Carlos, CA 94070 U.S.A.
Tel: (650)
628-2000
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
 Title of each class
 
Trading symbol
(s)
 
 Name of each exchange on which registered 
Ordinary shares, NIS 0.01 nominal value
 
CHKP
 
NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2020. 137,151,930 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  ☒    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  ☒
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  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large Accelerated filer ☒         Accelerated filer ☐
      Non-accelerated
filer ☐       Emerging growth company   ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ☒
  
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
  
Other ☐
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  ☒
 
 
 
Currency of Presentation and Certain Defined Terms
In this Annual Report on Form
20-F,
or the Annual Report, 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 and references to “Euro” are to the legal currency of the European Union. 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.
Forward-Looking Statements
In addition to historical fact, this Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, and include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements concerning the following:
 
  •  
our expectations for our business, trends related to our business and the markets in which we operate and into which we sell products;
 
  •  
the effects of increased competition in our market;
 
  •  
our ability to timely and effectively scale and adapt our existing technology and infrastructure to meet current and future market demands;
 
  •  
the effects on our business of the global
COVID-19
pandemic;
 
  •  
our ability to develop or acquire new and more technologically advanced products, and to successfully commercialize these products;
 
  •  
our ability to protect our proprietary technology and intellectual property;
 
  •  
our ability to increase adoption of our products and to maintain or increase our market share;
 
  •  
our ability to maintain our growth;
 
  •  
future amounts and sources of our revenue;
 
  •  
our future costs and expenses;
 
  •  
the adequacy of our capital resources;
 
  •  
our plans to recalibrate the Infinity portfolio of products and our expectations to provide security for all organizations;
 
  •  
our expectations with respect to share repurchases by us and dividend payments by us;
 
  •  
the effects on our business of evolving laws and regulations, including government export or import controls and U.S. tax regulations, and the potential economic effects of “Brexit”;
 
  •  
our ongoing relationships with our current and future customers and channel partners, suppliers, contract manufacturers and distributors; and
 
  •  
our other expectations, beliefs, intentions and strategies.
These statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict and which may cause our actual results to differ materially and adversely 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. All forward-looking statements included in this Annual Report are based on information available to us on the date of the filing. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to update or revise any of the forward-looking statements after the date of the filing, except as required by applicable law.
 
2
TABLE OF CONTENTS
 
    
PART I
       
Item 1.    Identity of Directors, Senior Management and Advisers      4  
Item 2.    Offer Statistics and Expected Timetable      4  
Item 3.    Key Information      4  
Item 4.    Information on Check Point      19  
Item 4A.    Unresolved Staff Comments      31  
Item 5.    Operating and Financial Review and Prospects      31  
Item 6.    Directors, Senior Management and Employees      39  
Item 7.    Major Shareholders and Related Party Transactions      50  
Item 8.    Financial Information      51  
Item 9.    The Offer and Listing      51  
Item 10.    Additional Information      51  
Item 11.    Quantitative and Qualitative Disclosures about Market Risk      62  
Item 12.    Description of Securities Other than Equity Securities      63  
    
PART II
       
Item 13.    Defaults, Dividend Arrearages and Delinquencies      63  
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds      63  
Item 15.    Controls and Procedures      63  
Item 16A.    Audit Committee Financial Expert      65  
Item 16B.    Code of Ethics      65  
Item 16C.    Principal Accountant Fees and Services      65  
Item 16D.    Exemptions from the Listing Standards for Audit Committees      66  
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers      66  
Item 16F.    Change in Registrant’s Certifying Accountant      66  
Item 16G.    Corporate Governance      66  
Item 16H.    Mine Safety Disclosure      67  
    
PART III
       
Item 17.    Financial Statements      67  
Item 18.    Financial Statements      67  
Item 19.    Exhibits      67  
 
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
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:
 
  •  
the continued expansion of Internet usage and the number of organizations adopting or expanding intranets;
 
  •  
the continued adoption of “cloud” infrastructure by organizations;
 
  •  
the ability of the infrastructures implemented by organizations to support an increasing number of users and services;
 
  •  
the continued development of new and improved services for implementation across the Internet and between the Internet and intranets;
 
  •  
the adoption of data security measures as it pertains to data encryption and data loss prevention technologies;
 
  •  
continued access to mobile API’s, APPs and application stores with Apple, Google and Microsoft;
 
  •  
government regulation of the Internet and governmental and
non-governmental
requirements and standards with respect to data security and privacy; and
 
  •  
general economic conditions in the markets in which we, our customers and our suppliers operate.
In 2020, global and regional economies around the world and financial markets remained volatile as a result of a multitude of factors, including economic and political uncertainty, terrorism, governmental instability 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 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, results of operations 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. and Palo Alto Networks, Inc. and other companies in the network security space. We also compete with several other companies, including Microsoft Corporation, McAfee, Inc., International Business Machines Corporation, Hewlett-Packard Enterprise Company and FireEye, Inc., with respect to specific products that we offer.
 
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In addition, 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.
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, results of operations 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 within the market may result in price reductions, reduced gross margins and operating margins, reduced net income, and loss of market share, any or all of which may materially adversely affect our business, results of operations 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 results of operations 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, results of operations and financial condition may be materially adversely affected.
 
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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”.
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 results of operations. 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.
Our business, results of operations and financial condition have been and may continue to be adversely affected by the
COVID-19
pandemic.
We operate our business primarily from Israel, we sell our products and have operations worldwide. For example, 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 United States or elsewhere, or where our channel partners are located, could have a material adverse impact on our business, results of operations and financial condition. In addition, acts of terrorism could cause disruptions to 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, pandemics or by manmade problems, such as power disruptions or terrorism, could delay our research and development efforts. To the extent any of the foregoing causes disruptions or result in delays or cancellations of customer orders, our research and development efforts or the deployment of our products, our business and results of operations would be materially and adversely affected.
The
COVID-19
pandemic and efforts to mitigate its impact have significantly curtailed the movement of people, goods and services worldwide, including in the geographic areas in which we conduct our business operations and from which we generate our revenue. It has also caused societal, economic and financial market volatility, resulting in business shutdowns and reduced business activity. To the extent the
COVID-19
pandemic continues or additional lock downs occur it may have a negative impact on our business and results of operations, primarily as a result of:
 
  •  
restricting our sales operations and marketing efforts, reducing the effectiveness of such efforts in some cases and delaying or lengthening our sales cycles; and
 
  •  
delaying collections or resulting in an inability to collect accounts receivable, including as a result of customer insolvency.
The
COVID-19
pandemic may cause us to continue to experience the foregoing challenges in our business in the future and could have other effects on our business, including disrupting our ability to develop new offerings and enhance existing offerings, market and sell our products and services and conduct business activities generally.
In light of the uncertain and rapidly evolving situation relating to the spread of
COVID-19,
we have taken precautionary measures intended to reduce the risk of the virus spreading to our employees, our customers and the communities in which we operate, and we may take further actions as required by government entities or that we determine are in the best interests of our employees, customers, partners and third-party service providers. In particular, governmental authorities have instituted
shelter-in-place
policies or other restrictions in many jurisdictions in which we operate, which policies require most of our employees to work remotely. Even once
shelter-in-place
policies or other governmental restrictions are lifted, we expect to take a measured and careful approach to have employees returning to offices and travel for business. These precautionary measures and policies could negatively impact product innovation and development and employee and organizational productivity, training and collaboration or otherwise disrupt our business operations.
 
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In addition, the
COVID-19
pandemic has disrupted and may continue to disrupt the operations of our customers and partners, particularly our customers in industries, including travel and entertainment that have been especially impacted by the pandemic. Other disruptions or potential disruptions resulting from the
COVID-19
pandemic include restrictions on our personnel and the personnel of our partners to travel and access customers, delays in product development efforts and additional government requirements or other incremental mitigation efforts that may further impact our business and results of operations. The extent to which the
COVID-19
pandemic continues to impact our business and results of operations will also depend on future developments that are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the disease, the duration and spread of the outbreak, the scope of travel restrictions imposed in geographic areas in which we operate, mandatory or voluntary business closures, the impact on businesses and financial and capital markets and the extent and effectiveness of the development of vaccines and other actions taken throughout the world to contain the virus or treat its impact. An extended period of global supply chain and economic disruption as a result of the
COVID-19
pandemic could have a material negative impact on our business, financial condition and results of operations, though the full extent and duration is uncertain. To the extent the
COVID-19
pandemic continues to adversely affect our business and financial condition, it is likely to also have the effect of heightening many of the other risks described in this “Risk Factors” section.
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.
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 market’s 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, including the recent acquisitions of Odo Security in 2020 and of ForceNock, Cymplify and Protego in 2019, 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.
 
7
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 the current shareholders’ percentage of ownership;
 
  •  
incur substantial debt;
 
  •  
assume contingent liabilities; or
 
  •  
expend significant cash.
These financing activities or expenditures could harm our business, results of operations 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, with respect to the businesses we recently acquired and additional businesses we may acquire in the future, 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 businesses due to a number of factors, including:
 
  •  
unanticipated costs or liabilities associated with the acquisition;
 
  •  
incurrence of acquisition-related costs;
 
  •  
diversion of management’s 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;
 
  •  
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 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 security 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 security subscriptions represent an additional revenue source as well as our cloud initiatives. 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”.
Risks Related to Our Dependence on Third-Parties
We are dependent on a small number of distributors
We derive our sales primarily through indirect channels. During 2020, 2019 and 2018, we derived approximately 57%, 55% and 53%, respectively, of our sales from our ten largest distributors. In 2020, 2019 and 2018, our two largest distributors accounted for approximately 39%, 37% and 36% of our sales, respectively. 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, results of operations and financial condition could be materially adversely affected.
 
8
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, results of operations 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. Although we do not manufacture in China, some of our component parts are sourced from China. 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. Such risks could become exacerbated to the extent such suppliers and subcontractors are materially disrupted by quarantines, factory slowdowns or shutdowns, border closings, and travel restrictions resulting from the global coronavirus outbreak. While we continue to monitor the global effects of the coronavirus outbreak on the supply chains in which we rely, any material supply chain disruption could negatively impact our business, financial condition and results of operations. 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. We are already seeing delays which 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 have been dependent on their ability to perform over a period of years.
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. Further, in the event significant numbers of employees of our third-party developers or owners of technologies must miss work due to the coronavirus outbreak or otherwise, and such third-party developers and owners are otherwise unable to provide such technology or services to us, our ability to provide our products and services could be disrupted. This includes mandated government shutdowns. Our suppliers and licensors may not be required or may not be able to indemnify us 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, results of operations and financial condition.
Failures of the third-party servers, cloud service providers and other third-party hardware, software and infrastructure on which we rely could adversely affect our business
We rely on servers, cloud service providers and other third-party hardware, software and infrastructure to support our operations. The owners and operators of the data centers and cloud services with which we are engaged do not guarantee uninterrupted or error-free services. Problems faced by our third-party hosting providers, including technological or business-related disruptions, could adversely impact our business and results of operations.
Our servers, data centers and other facilities are also vulnerable to damage or interruption from fires, natural disasters, terrorist attacks, power loss, telecommunications failures, pandemics or similar catastrophic events. For example, the coronavirus outbreak has caused many third-party service providers to shut down their business, and it is possible that providers of our cloud infrastructure services could face similar disruptions in their business or facility shutdowns. Disruptions to these servers or facilities could interrupt our ability to provide our products and services and materially adversely affect our business and results of operations.
 
9
Risks Related to Tax, Legal and Regulatory Matters
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. We attempt to utilize an efficient operating model and accordingly to pay taxes based on the laws in the countries in which we operate. Nonetheless, various tax authorities in different parts of the world may disagree with our operating sale model. This may lead to disputes and to tax assessments, which can have a negative effect on our tax liabilities.
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 results of operations. 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. 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”.
Uncertainties in the interpretation and application of worldwide tax reforms, complex tax laws and regulations could materially affect our tax obligations and effective tax rate
The 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017 and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations. We address these tax changes by third-party advices and tax opinions.
The base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) may have adverse consequences to our tax liabilities. The BEPS project contains changes to numerous international tax principles, amongst for example, by signing up to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the “MLI”) which currently has been signed by over 85 jurisdictions, including Israel and the inclusion in tax treaties of one, or both, of a
“limitation-on-benefit”
(“LOB”) rule. These changes, when adopted by individual countries, could adversely affect our provision for income taxes.
The OECD is also currently working on further initiatives by “Addressing the Tax Challenges Arising from the Digitalization of the Economy” (BEPS 2.0) that may further change current international tax principles. We will evaluate the potential impact of these changes on our business models once final rules will be set out. Therefore, as of today, it remains difficult to predict the magnitude of the effect of such initiatives new rules on our financial results.
Indirect taxes including Digital Service tax (DST) measures as adopted unilaterally in certain countries could also adversely affect our tax obligations.
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources
In the past, following periods of volatility in the market price of a public company’s 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 in the future could result in substantial costs and a diversion of management’s attention and resources.
 
10
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 results of operations.
Risks Related to Our Intellectual Property
We may not be able to successfully protect our intellectual property rights, which could cause substantial harm to our business
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.
In addition to patents, we rely on trade secret and other rights to protect our unpatented proprietary intellectual property and technology. Despite our efforts to protect our proprietary technologies and our intellectual property rights, unauthorized parties, including our employees, consultants, service providers or customers, may attempt to copy aspects of our products or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants, and other service providers, and generally limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements and arrangements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot be certain that the steps taken by us will prevent misappropriation of our intellectual property or technology or infringement of our intellectual property rights.
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.
 
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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.
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 and operating expenses, reduce the sales of our products, and may have a material and adverse effect on our business.
Due to the global nature of our business, we must comply with various anti-bribery regimes and any failure to do so could adversely affect our business
The global nature of our business creates various domestic and local regulatory challenges. The U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.K. Bribery Act 2010 (the “U.K. Bribery Act”), and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign government officials and other persons for the purpose of obtaining or retaining business. In addition, companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. Further, changes in laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations.
As a result, we are exposed to a risk of violating anti-bribery laws in the countries where we operate. Although we have internal policies and procedures, including a code of ethics and proper business conduct, reasonably designed to promote compliance with anti-bribery laws, we cannot assure that our employees or other agents will not engage in prohibited conduct and render us responsible under the FCPA, the U.K. Bribery Act or any similar anti-bribery laws in other jurisdictions. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, results of operations, cash flows, financial condition, reputation and ability to win future business or maintain existing contracts.
Other General Risks and Risks Related to the Ownership of Our Ordinary Shares
We are exposed to various legal, business, political, economic, health-related and other risks associated with our international operations; these risks could increase our costs, reduce future growth opportunities and affect our results of operations
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. For example, in the event of significant numbers of our employees or the employees of our channel partners having to miss work due to a widespread health situation or pandemic such as the coronavirus, we or our channel partners may not be able to quickly source replacement or temporary workers, which could adversely affect our operations, particularly in regions where such health situations are most severe or local regulations require a shut down. To the extent that we are unable to do so effectively, our growth is likely to be limited and our business, results of operations and financial condition may be materially adversely affected.
 
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Our international sales and operations subject us to many potential risks inherent in international business activities, including, but not limited to:
 
  •  
technology import and export license requirements;
 
  •  
costs of localizing our products for foreign countries, and the lack of acceptance of localized products in foreign countries;
 
  •  
varying economic and political climates;
 
  •  
trade restrictions, including as a result of trade disputes or other disputes between countries or regions in which we sell and operate;
 
  •  
imposition of or increases in tariffs or other payments on our revenues in these markets;
 
  •  
greater difficulty in protecting intellectual property;
 
  •  
difficulties in managing our overseas subsidiaries and our international operations;
 
  •  
declines in general economic conditions;
 
  •  
political instability and civil unrest which could discourage investment and complicate our dealings with governments;
 
  •  
widespread health emergencies or pandemics, such as the coronavirus;
 
  •  
difficulties in complying with a variety of foreign laws and legal standards and changes in regulatory requirements;
 
  •  
expropriation and confiscation of assets and facilities;
 
  •  
difficulties in collecting receivables from foreign entities or delayed revenue recognition;
 
  •  
recruiting and retaining talented and capable employees;
 
  •  
differing labor standards;
 
  •  
increased tax rates;
 
  •  
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;
 
  •  
fluctuations in currency exchange rates and the impact of such fluctuations on our results of operations and financial position; and
 
  •  
the introduction of exchange controls and other restrictions by foreign governments.
These difficulties could cause our revenues to decline, increase our costs or both. This is also specifically tied to currency exchange rates which have an impact on our financial statements based on currency rate fluctuations.
Our actual or perceived failure to adequately protect personal data could subject us to sanctions and damages and could harm our reputation and business
A variety of state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy and data protection related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. Compliance with these laws and regulations can be costly and can delay or impede the development and offering of new products and services.
For example, the General Data Protection Regulation, which became applicable on May 25, 2018, adopts more stringent requirements for data processors and controllers. Such requirements include more fulsome disclosures about the processing of personal information, data retention limits and deletion requirements, mandatory notification in the case of a data breach and elevated standards regarding valid consent in some specific cases of data processing. The General Data Protection Regulation also includes substantially higher penalties for failure to comply, inter alia, a fine up to 20 million Euros or up to 4% of the annual worldwide turnover, whichever is greater, can be imposed. These more stringent requirements on privacy user notifications and data handling require us to adapt our business and incur additional costs. Additionally, California passed the California Consumer Privacy Act (“CCPA”), which became effective on January 1, 2020. The CCPA provides new data privacy rights for consumers and new operational requirements for companies. California voters also passed the California Privacy Rights Act (“CPRA”) into law on November 3, 2020, which will not take substantial effect until January 1, 2023. The CPRA will significantly modify the CCPA, including adding new privacy rights and increasing regulation on online advertising. Additionally, the CCPA, eventually the CPRA, and other legal and regulatory changes are making it easier for certain individuals to
opt-out
of having their personal data processed and disclosed to third parties through various
opt-out
mechanisms, which could result in an increase to our operational costs to ensure compliance with such legal and regulatory changes. Further, starting on January 1, 2021, as a result of the United Kingdom’s exit from the European Union, the United Kingdom has brought the GDPR into domestic United Kingdom law with the Data Protection Act 2018 which will remain in force. The United Kingdom Data Protection Act 2018 mirrors the fines under the GDPR.
 
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Our actual or alleged failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement actions, significant penalties or other legal action against us or our customers or suppliers, which could result in negative publicity, increase our operating costs, subject us to claims or other remedies and have a material adverse effect on our business and results of operations.
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, 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. 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 standard.
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 Company’s internal control over financial reporting.
In connection with our Annual Report for fiscal 2020, our management assessed our internal control over financial reporting, and determined that our internal control over financial reporting was effective as of December 31, 2020, and our independent auditors have expressed an unqualified opinion over the effectiveness of our internal control over financial reporting as of December 31, 2020. 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.
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 February 28, 2021, our directors and executive officers owned approximately 18.5% of the voting power of our outstanding ordinary shares, or 21.7% of our outstanding ordinary shares if the percentage includes options currently exercisable or exercisable within 60 days of February 28, 2021. 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
Our articles of association allow us to indemnify, exculpate and insure our directors and senior officers to the fullest extent permitted under the Israeli Companies Law. As such, we have entered into agreements with each of our directors and senior officers to indemnify, exculpate and insure 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:
 
  •  
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.
 
  •  
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
 
  •  
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.
 
  •  
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:
 
  •  
in an action brought against the director or senior officer by us, on our behalf or on behalf of a third party,
 
  •  
in a criminal action in which the director or senior officer is found innocent, or
 
  •  
in a criminal action in which the director or senior officer is convicted, but in which proof of criminal intent is not required.
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 $4,000 million as of December 31, 2020. The performance of the debt capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations, changes in interest rates and credit spreads, market liquidity and various other factors, including, without limitation, rating agency downgrades that may impair their value, or unexpected changes in the financial markets’ healthiness worldwide.
We expect that market conditions will continue to fluctuate and the fair value of our investments may be affected accordingly. Moreover, in case we would like to liquidate some of our investments and turn them into cash – we are dependent on market conditions and liquidity opportunities, which may be impacted by global economic trends, including, without limitation, the economic effects of the
COVID-19
pandemic.
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 may execute 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 and subject to our investment policy. Our investment portfolio is invested primarily in fixed-income securities and is affected primarily by changes in interest rates and credit spreads. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. We expect that the market-related effects of the
COVID-19
Pandemic, as well as the sustained low interest rate environment, will continue to have an impact across our investment portfolio. Any significant decline in our financial income or the value of our investments due to changes in interest rates, interest rate expectations, 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.
We generally buy and hold our fixed income securities, while limiting credit risk by setting a maximum concentration limit per issuer as well as setting minimum credit rating requirement. Our fixed income investment portfolio consist primarily of government bonds, securities issued by government agencies 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 in fixed maturity securities as
available-for-sale.
Changes in the fair value of investments classified as
available-for-sale
are not recognized as 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 the cumulative changes in the fair value of our fixed income securities as part of our income, our reported net income for the year ended December 31, 2020, would have increased by $39 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 2020, we incurred approximately 55% of our expenses in foreign currencies, primarily Israeli Shekels and Euros. As such, changes in exchange rates may have a material adverse effect on our business, results of operations 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 2020, 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 and Euros. As of December 31, 2020, our total outstanding forward contracts that hedge against these fluctuations in foreign currency exchange rates was $38 million.
 
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In addition, we entered into forward contracts to hedge the impact of fluctuations in exchange rates on assets and liabilities denominated in Israeli Shekels and other currencies. As of December 31, 2020, the total amount of outstanding forward contracts that did not qualify for hedge accounting, was $396 million. We may use derivative financial instruments, such as foreign exchange forward contracts, put and call options, and others, to mitigate the risk of fluctuations changes in foreign exchange rates on cash flows receivables and payables and denominated in certain foreign currencies. We may not be able to purchase derivative instruments adequate to fully protect us 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 generate 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.
Changes in currency rates around the globe, including, without limitation, the economic effects of the
COVID-19
or “Brexit” could have an adverse impact on our business and results of operations. These changes may have an impact on some of our expenses which are paid in local currencies (non US dollar), as well as an impact on our
non-US
customers which have their budgets in
non-US
dollar currencies.
On December 24, 2020, the European Union and the UK announced that they had reached a new bilateral trade and cooperation agreement governing their future relationship (the
“EU-UK
Trade and Cooperation Agreement”) which was formally approved by the European Council on December 29, 2020 and by the UK parliament on December 30, 2020. The
EU-UK
Trade and Cooperation Agreement became effective on a provisional basis from January 1, 2021, subject to ratification by the EU following consent by the European Parliament. As of the date of this report, the European Parliament has not yet approved the agreement. The potential consequences if the European Parliament were to fail to approve the
EU-UK
Trade and Cooperation Agreement are unclear. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate, and those laws and regulations may be cumbersome, difficult or costly in terms of compliance. Any of these effects of Brexit, among other factors, could adversely affect our business, financial condition, results of operations and cash flows.
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.
 
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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 extensive hostilities along Israel’s border with the Gaza Strip, which included 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, results of operations 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.
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 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, results of operations 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, 2020, our effective tax rate was 13%. 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.
Any of the following could have a material effect on our overall effective tax rate:
 
  •  
Some programs may be discontinued,
 
  •  
We may be unable to meet the requirements for continuing to qualify for some programs,
 
  •  
These programs and tax benefits may be unavailable at their current levels, or
 
  •  
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 11 to our Consolidated Financial Statements.
 
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Your rights and responsibilities as a shareholder are, and will continue to be, governed by Israeli law which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies
The rights and responsibilities of the holders of our ordinary shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.- based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
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.
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 we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports
As a foreign private issuer, we are exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act. We are also exempt from the provisions of Regulation FD, which prohibits issuers from making selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, although pursuant to the Companies Law, we disclose the annual compensation of our five most highly compensated office holders (as defined under the Israeli Companies Law) on an individual basis, including in this Annual Report.
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 issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s 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 Nasdaq’s corporate governance rules.
 
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ITEM 4.
INFORMATION ON CHECK POINT
Check Point Heritage and Vision
Since its inception, our sole focus has been on making the world a safer place to live and work. For the last 25 years, we have worked to fulfill our vision of making the Internet secure, reliable, and available for corporations and consumers.
Early on, we pioneered the first commercially available firewall, followed by a steady stream of industry-first cyber security solutions. As an example, our technology provides protection against both known and unknown cyber security threats across a wide range of environments: physical and virtual networks, cloud and mobile surroundings, critical infrastructures, and the ‘Internet of Things’ (IoT). Check Point has identified the evolving different generations of both cyber-attacks and security products. Today, we find ourselves in an increasingly complex threat landscape with organizations experiencing the 5th generation of cyber-attacks. The security deployed by most businesses is generationally behind and incapable of protecting against such attacks.
If you look back at the early 2020, “New year predictions,” you will undoubtedly find no references to an unprecedented global pandemic shut down and the beginning of living life in a new normal. But it did happen. And with this new normal, came a “new everything.”
With the rapid shift to more cloud instances, the popularity of network-connected smartphones, in addition to the shift to remote work, organizations had to quickly adapt their security measures. Organizations had to make sure they were secured at all times, from connected remote places. This has become the new perimeter.
Today, business data continually transfers between
Bring-Your-Own-Devices,
SaaS applications such as SalesForce.com and running on multi-cloud environments including AWS and Azure. With remote work as the new standard, remote employees are often more prone to careless behaviour and
non-compliance
to corporate policies. The organization’s attack surface has also become wider. This “Perfect Storm” has generated a surge of sophisticated 5th generation cyberattacks. As organizations adapted to remote work, and all its digital implications, cybercriminals used the global crisis to launch large-scale cyber exploits, clearly with the characteristics of a Cyber Pandemic.
Modern organizations need to recalibrate their cyber security approach around three main elements: securing their corporate networks and datacenters, securing cloud environments and lastly, securing employees – wherever they are.
Our mission is to provide any organization with the ability to conduct their business on the internet with the highest level of security. We address organizations’ most imminent cyber security needs based on three core principles:
 
  1.
Prevention-first approach
– deploy
pre-emptive
user protections to eliminate threats before they reach the users
 
  2.
Gold Standard Management
– single pane of glass to manage the entire security estate
 
  3.
Consolidated Solution
– Realize complete, preemptive protection against the most advanced threats while achieving better operational efficiency
 
19
Today, we are one the largest pure cyber security vendors globally. Our pledge to our customers and partners is to “secure your everything”, where there are no limits to the innovation needed to protect everyone living in a digital world.
Secure Your Everything with Check Point Infinity
To make our vision a reality, in 2021 we will recalibrate the Infinity portfolio of products. Based on our core principles, the focus on these technologies and capabilities is expected to provide uncompromised security for all organizations.
 
  1.
Check Point Infinity
A fully consolidated cyber security architecture that protects against 5th generations of cyber-attacks across all networks, endpoint, cloud, Workloads, IoT and mobile. It leverages Nano Agent technology that is open-source and lightweight to ensure the latest security is delivered anywhere without the requirement of upgrades. Infinity is the only consolidated security architecture to support over 50 types of assets across network, endpoint, mobile, cloud, workloads, and IoT, while achieving the highest level of security with over 60 adaptive threat prevention security practices delivered as a service. Through advanced threat prevention, business-oriented policy management, and cloud-based threat intelligence, Infinity delivers a solid foundation for a sustainable, effective risk management strategy.
 
  2.
Quantum: Enterprise network security for perimeter and datacenter
Deliver the highest levels of security and performance to manage datacenter environments. Check Point Quantum Security Gateways deliver superior security beyond any Next Generation Firewall (NGFW) and are designed to manage the most complex policy requirements. Powered with over 60 security services, these gateways are the best at preventing the 5th generation of cyber attacks. In 2021 we will continue to leverage Maestro, our unique and disruptive scalable performance solution, we will focus on improving the stability and simplicity, we will accelerate data center firewalls with an innovative technology to deliver super-fast firewall solution and augment our gateways with
SD-WAN.
 
  3.
CloudGuard: Automatically secure your cloud
CloudGuard sets the gold standard for securing critical cloud workloads, both public and private. It offers cloud posture management, serverless security, and a new generation of Web Application Firewalls powered by contextual AI that secures APIs, Web applications as well as hosted and on premise web servers. CloudGuard provides consolidated security and threat prevention across all cloud environments, assets, and workloads. Aligned with the agile nature of cloud development and deployment, CloudGuard delivers the ultimate solution for both cloud security practitioners and for Cloud DevOps, from the initial DevSecOps phase (Shift Left), through cloud network security into cloud applications security, as well as securing containers and serverless functions which are based on our acquisition of Protego in 2019.
 
  4.
Harmony: Highest level of security for remote users and access
Check Point Harmony protects remote employees, devices and internet connectivity from malicious attacks, while ensuring secure, remote
zero-trust
access at any scale to any corporate application. Check Point Harmony is first to market in providing endpoint and secure connectivity (SASE), as a consolidated, unified cloud-based solution including the easiest and most secure remote Access (based on the Odo acquisition), Safe Internet Browsing with the market’s lower TCO, End Point and mobile security and email security. The solution delivers the broadest coverage of attack vectors with the industry’s leading,
AI-driven
threat prevention.
 
  5.
Infinity-Vision: Unified management and XDR
Achieve gold standard unified security management and 100% breach prevention. Manage your entire security estate with the Check Point Infinity Portal, a cloud-based Security
Management-as-a-Service
(SMaaS). Deliver unified policy, Monitoring and intelligence from a single point. Expose, investigate and shut down attacks faster, with 99.9% precision with SOC and XDR capabilities used by Check Point Research.
For the last three decades, we have set the standard for cyber security. We now have an opportunity, once again, to pioneer and redefine the role of cyber security in today’s society. With Check Point Infinity, the only consolidated cyber security solution across cloud, networks, endpoints, mobile and IoT, we are best positioned to make the world a safer place in 2021 and beyond.
 
20
Check Point Technology Leadership in 2020
During 2020 we received recognitions and awards for our activities.
Gartner
 
  ●  
Leader, Magic Quadrant for Network Firewalls
 
  ●  
Market Guide Cloud Workload Protection Platforms
IDC
 
  ●  
Leader, MarketScape Worldwide Mobile Threat Management
Frost & Sullivan
 
  ●  
Leadership Award: Frost Radar Best Practices for Growth, Innovation & Leadership “SandBlast Mobile”
Miercom
 
  ●  
SandBlast Mobile a Security Leader in Mobile Threat Defense Industry Assessment
Forrester
 
  ●  
Strong Performer, The Forrester Wave: Enterprise Firewalls
NSS Labs
 
  ●  
Recommended Rating AA for Advanced Endpoint Protection Test 2020
Business Highlights
In January 2019, we acquired 100% of the share capital of ForceNock Security Ltd. (ForceNock), a privately held Israeli company. Founded in 2017, ForceNock developed a Web Application and API Protection (WAAP) technology, which utilizes machine learning, behavioral and reputation-based security engines. We plan to integrate ForceNock’s technology into our Infinity total protection architecture.
In November 2019, we acquired 100% of the share capital of Cymplify, a privately held Israeli company, and a developer of a new IoT cyber security technology. The new technology is intended to be integrated into the
Infinity
architecture.
In December 2019, we acquired 100% of the share capital of Protego, a new serverless security technology company. With this acquisition, we are now able to offer a consolidated security solution for cloud workload protection (CWPP) and security posture management (CSPM), delivering continuous serverless security with
best-in-class
run time protection and application hardening.
In September 2020, we acquired 100% of the share capital of Odo Security Ltd., a privately held Israeli company, and a developer of a new cloud-based technology that delivers secure remote access. The technology was integrated with Check Point’s Infinity architecture threat prevention capabilities to provide a secure solution to address the growing needs that enterprises have to enable secure remote access for their employees to any application.
Further details regarding the important events in the development of our business since the beginning of 2019 are provided in
“Item 5 – Operating and Financial Review and Prospects” under the caption “Overview”.
We are 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 Shlomo Kaplan Street Tel Aviv 6789159, Israel. The telephone number of our registered office is
972-3-753-4555.
Our company’s website is www.checkpoint.com. The contents of our website are not incorporated by reference into this Annual Report.
This Annual Report is available on our website. 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.
 
21
Market Landscape – Protecting the world from 5
th
Generation of Cyber Security Attacks and a Cyber Pandemic
Over the last 28 years, the technologies behind cyber-attacks and the ensuing preventative measures have advanced rapidly. During 2020, we witnessed an unprecedented number of cyber-attacks against organizations across all industries carried out as large-scale, multi-vector mega attacks, inflicting major damage on businesses and their reputations. As a result, heavy fines were levied in some cases where companies failed to protect sensitive data.
Looking back, we identified the evolving different generations of both cyber-attacks and security products. Today, we find ourselves in an increasingly complex threat landscape with organizations experiencing the 5th generation of cyber-attacks. The security deployed by most businesses is generationally behind and incapable of protecting against such attacks. Specifically, while we are facing the 5th generation of attacks, most businesses possess only 2nd or 3rd generation security. Let us look at the generations of attacks and associated security:
 
  •  
Generation 1 – Late 1980s, virus attacks on stand-alone PCs affected all businesses and drove the rise of anti-virus products.
 
  •  
Generation 2 – Mid 1990s, attacks from the internet affected all business and drove the creation of the firewall.
 
  •  
Generation 3 – Early 2000s, exploiting vulnerabilities in applications affected most businesses and drove the rise in intrusion prevention systems (IPS) products.
 
  •  
Generation 4 – Approximately 2010, rise of targeted, unknown, evasive, polymorphic attacks affected most businesses and drove the increase in behavior analysis technologies such as sandboxing products.
 
  •  
Generation 5 – Approximately 2018-2020, the large-scale and multi-vector mega attacks using advanced attack technologies. These are fast-moving attacks so detection-only is not enough. These attacks targeted traditional attack vectors and expanded to mobile and cloud. Advanced threat prevention is required.
While it may be commonplace for businesses to avoid cutting-edge IT technologies in critical operations, lagging generationally behind in security protection leaves the business fully exposed to advanced attacks. Such attacks not only impact operations, but the exposure of critical information that can also damage reputations and jeopardize the viability of a business. Today, even 4th generation security is simply not enough to properly protect against today’s 5th generation of attacks on today’s IT environments, cloud deployments, and mobile devices.
The
COVID-19
pandemic created a tectonic shift in IT environments. With the rapid shift to more cloud instances, the popularity of network connected smartphones, and the shift to remote work—organizations had to quickly adapt their security measures to the new normal work environment. Organizations had to ensure ‘anywhere and everywhere’ security, including the safe connection to remote places.
The “new norm” workspace has expanded organization perimeters. Business data continually transfers between
Bring-Your-Own-Devices
(BYOD), SaaS applications such as SalesForce.com and running on multi-cloud environments, including AWS and Azure public clouds. With remote work as the new standard, remote employees can be prone to careless behaviour and
non-compliance
to corporate policies. An organization’s attack surface has also become much wider, creating a “Perfect Storm” and the surge of sophisticated 5th generation cyberattacks. As organizations have adapted to remote work, and all its digital implications, cybercriminals have seized the global crisis to launch large-scale cyber exploits with clear characteristics of a Cyber Pandemic.
Most organizations attempt to battle advanced threats with second- or third-generation security, which only protects against viruses, application attacks, and payload delivery. Networks, virtualized data centers, cloud environments and mobile devices are all left exposed. Modern organizations need to recalibrate their cyber security approach around three main elements: securing their corporate networks and datacenters, securing cloud environments and lastly, securing employees – wherever they are.
The Check Point Software mission is to provide any organization with the ability to conduct their business on the internet with the highest level of security. We address organizations’ most imminent cyber security needs based on three core principles:
 
  1.
Prevention-first approach
- deploy
pre-emptive
user protections to eliminate threats before they reach the users
 
  2.
Gold Standard Management
– single pane of glass to manage the entire security estate
 
  3.
Consolidated Solution
- Realize complete, preemptive protection against the most advanced threats while achieving better operational efficiency
 
22
Product Strategy and Offerings
We strive to bring the most innovative, highest-quality products to the market. In this way, we can provide exceptional value to our customers, allowing organizations of all sizes to proactively protect their networks against sophisticated 5
th
generation of cyber threats. Our product strategy of driving innovation through research and development and strategic partnerships allows us to blaze new trails with market-leading products and solutions. Our strategy helps enterprises transition their corporate security strategies from not just detecting threats but to preventing them, while enabling businesses to adopt advanced IT technologies and services, including Endpoint and Mobile, cloud and workloads, IoT and 5G solutions.
To make our vision a reality, in 2021 we will recalibrate the Infinity portfolio of products focusing on those technologies and capabilities that will provide uncompromised security based on our core principles.
Check Point Infinity Architecture
Check Point Infinity is a fully consolidated cyber security architecture that protects against 5
th
generation of cyber-attacks across all networks, endpoint, cloud, Workloads, IoT and mobile. It leverages Nano Agent technology that is open-source and lightweight to ensure the latest security is delivered anywhere without the requirement of upgrades. consolidated security architecture to support over 50 types of assets across Network, Endpoint, Mobile, Cloud, Workloads, and IoT, while achieving the highest level of security with over 60 adaptive threat prevention security practices delivered as a service.
The architecture is designed to resolve the complexities of growing connectivity and inefficient security. Check Point Infinity leverages unified threat intelligence and open interfaces, enabling all environments to stay protected against targeted attacks. As a result, it provides comprehensive threat prevention which seals security gaps, enables automatic and immediate threat intelligence sharing across all security environments and a consolidated security management for an efficient security operation. Check Point Infinity delivers protection against current and potential attacks, today and in the future.
The Check Point Infinity Total Protection business model enables enterprises to benefit from the most advanced threat prevention technologies available. This model allows organizations to use all of Check Point’s security technologies, protecting their networks, endpoint, mobile devices, cloud, and IoT through an annual security subscription based on the number of enterprise users.
Quantum – Secure the Network
In order to serve the different needs and demands of our customers, we offer a wide portfolio of security gateways and software platforms that support everything from small business (SMB) to large enterprise data center and telco-grade environments. On each security gateway, we offer the full expanse of Check Point’s network security portfolio from industry-leading next generation firewall, IPS, VPN, WAF, SSL, and Data Security (DLP) to a wide set of threat prevention technologies blocking known and unknown advanced 5
th
generation cyber-attacks. Check Point‘s security gateways are available as a cloud service, software-only products that can run on standard hardware, or dedicated security gateway hardware appliances.
In 2020, we introduced a number of innovative security gateways and software solutions. In early 2019, we introduced the Maestro Security Orchestrator, the industry’s first truly hyperscale network security solution. Maestro enables a single gateway to expand to the hyperscale capacity and performance of 52 gateways in minutes. Maestro provides any size business the power, flexibility, scalability and resilience of cloud-level security platforms on premises. This enables enterprises to seamlessly expand their security gateways to hyperscale capacity with over one Terabit of threat prevention performance. Maestro enables enterprises to meet the performance demands of any networking environment including the high data rate,
ultra-low
latency performance required for cloud data centers and 5G networks. Along with Maestro, we announced the 6000 family of security gateways to leverage the new unprecedented hyperscale threat prevention performance. The 6500 and 6800 security gateways combine our award-winning Threat Prevention suite with the power to inspect
SSL-encrypted
network traffic without compromising on performance or uptime.
In 2020, we introduced a complete new lineup of our security gateways – Quantum.
Check Point’s range of new Quantum Security Gateways deliver an industry-leading combination of advanced security protections, with over 2x the performance and half the energy consumption of rival
high-end
appliances. All of the Quantum Security Gateway models are now bundled with Check Point’s award-winning SandBlast Zero Day Protection that includes more than 60 security services focused on threat prevention, out of the box. This includes a 100 percent block score for malware prevention for email and web, exploit resistance and post-infection catch rate, as seen in the NSS Labs’ recent Breach Prevention Systems (BPS) Group Test. The Quantum Security Gateways also feature lightning fast
SSL-encrypted
traffic inspection for maximum security.
 
23
The key highlights of the Quantum Security Gateway range include:
 
  •  
Hyperscale-ready with up to 1.5
Tera-bps
of Threat Prevention Performance
 
  •  
Latest CPU models, modularity and easy customization through multiple expansion slots
 
  •  
100% Enterprise Solid State Drives (SSD), second power supply unit, and
lights-out
management for optimum reliability and availability.
In late 2020, we launched the 1570R rugged security gateway to protect networks in critical infrastructure, such as Industrial Control Systems (ICS) and SCADA systems, against all types of advanced Gen V cyber-threats. The 1570R delivers unrivalled performance, threat prevention security technology, ease of deployment and control, and reliability to the most demanding industrial settings such as power plants, automated factories, and maritime fleets.
Check Point Threat Prevention Technologies & Products
To continuously improve our ability to block and prevent cyber-attacks before they occur, the Check Point SandBlast family of advanced threat prevention and
zero-day
protections now includes more than 60 different innovative technologies that combat the growing frequency and sophistication of cyber security threats.
SandBlast technologies are deployed as part of our advanced threat prevention suite for network perimeters (SandBlast Network), endpoints (SandBlast Agent), web browsers (SandBlast Web), and mobile (SandBlast Mobile). We expanded our threat prevention capabilities with the Anti-Ransomware agent, preventing the most evasive
zero-day
ransomware, web sandboxing (an early detonation technology that detects highly evasive
zero-day
exploits in Adobe Flash objects), Image Extraction, a feature that sanitizes suspicious images; and a capability called Malware DNA, which provides analysts with attack forensics based on families of malware and behaviors.
CloudGuard – Secure the Cloud
The growth and popularity of the public cloud continues to drive more data beyond traditional IT security protections and into data center environments that are no longer owned, managed, or controlled by corporate IT. Security is often cited as a key barrier to the wide-spread adoption of an enterprise cloud. Traditional security approaches do not meet the complex requirements of the dynamic nature of the cloud leaving a business exposed to a whole host of new threats. Managing security and compliance in the cloud requires a new breed of cloud natively integrated tools that prevent sophisticated cyber security attacks, prevent catastrophic misconfigurations and actively protect applications and workloads, in an agile cloud environment. Check Point combines its long history of innovation in threat prevention security, combined with, visibility and agile tools lead our customers safely into the cloud.
As part of the Check Point Infinity Architecture, the Check Point CloudGuard cloud security product suite delivers threat prevention to all of the leading cloud providers and applications with agile cloud security.
The Check Point CloudGuard portfolio offers a comprehensive threat prevention security, cloud visibility, cloud security posture management and workload protection solutions for enterprise cloud networks, data, and applications:
 
  1)
CloudGuard IaaS provides a unified management pane for cyber security policy enforcement across cloud and
on-premise
environments. CloudGuard IaaS integrates with a large number of public and private cloud infrastructure and workload platforms, including VMware NSX, Cisco ACI, Amazon Web Services (AWS), Microsoft Azure cloud, and the Google Cloud Platform (GCP).
 
  2)
CloudGuard SaaS supports cloud-based applications such as Salesforce, Office 365, and Box to work at protecting cloud services against the most sophisticated malware and
zero-day
attacks. CloudGuard Dome9, based on Dome9’s platform that we acquired in 2018, extends public cloud capabilities allowing enterprise organizations to easily manage network security and compliance automation at any scale across AWS, Azure and GCP. Log.ic, provides cloud security analytics within AWS, Azure and GCP, helping enterprises provide context and logic around log data. With CloudGuard Log.ic, enterprises are able to visualize cybersecurity anomalies and take action, remediating any regulatory violations or resolve incidence of compromise, where detected in the cloud.
 
  3)
CloudGuard Workload is a solution that is integrated in the DevOps CI/CD pipeline, providing you continuous application security runtime assessment for code in any type of workloads.
 
  4)
CloudGuard Connect, introduced in August of 2019, transforms branch cloud security by delivering enterprise grade security to branches as a cloud service, with
top-rated
threat prevention, quick and easy deployment in minutes, and unified management saving up to 40% in security operating expenses.
 
24
  5)
CloudGuard Edge, also introduced in August 2019, complements CloudGuard Connect by providing
on-premise
branch office security solution. CloudGuard Edge provides
top-rated
threat prevention running as a virtual machine (VM) seamless integrated into leading
SD-WAN
devices or universal Customer Premise Equipment (uCPE) servers. This enables enterprises who need an on premises security solution to satisfy data privacy, compliance, or data location requirements.
The combination of CloudGuard portfolio solutions provide a holistic approach to delivering a complete cyber security threat prevention and cloud security management strategy across cloud data and control planes. Furthermore, Check Point supports single-click and agile deployment models aligned with the dynamic nature of cloud services for its customers.
In 2020, we introduced CloudGuard Cloud Native Security, a fully-automated cloud platform that enables customers to seamlessly protect all of their cloud deployments and workloads, and manage security through a single pane of glass. CloudGuard streamlines and simplifies cloud security, preventing the most advanced cyber-attacks from impacting organizations’ cloud environments, and enables them to take full advantage of the speed and agility of cloud.
 
  •  
Fully integrated security with advanced threat prevention: Prevents APTs and
zero-days
from infecting clouds and workloads with unified security, and workload runtime protection, including firewalling, IPS, Application Control, IPsec VPN, Antivirus and
Anti-Bot,
powered by the industry’s leading real-time, cloud-based threat intelligence.
 
  •  
High-fidelity cloud security posture management: CloudGuard gives unified,
at-a-glance
visibility across organizations’ multi-cloud environments, enabling continuous analysis and control of their cloud security posture from CI/CD to production
 
  •  
Automated security for any workload in any cloud: CloudGuard delivers true cloud-agnostic security, enabling organizations to automatically secure any workload, anywhere with auto-provisioning, auto-scaling and automated policy updates. It enables holistic, single-console security management as well as run time protection for serverless and container based applications, in multi-cloud environments.
Harmony – Securing Users and Access
Check Point Harmony delivers the highest levels of security for remote users and access. It is the first unified solution to enable secure connectivity to any resource anywhere and give total endpoint protection for users on any device.
The unified solution provides multi-layered protection for remote users against known and
zero-day
attacks and across all threat vectors. It protects users regardless of where they reside, the devices they use (company-owned/BYOD/Mobile /PC/Tablet), and the application they access (including the internet, SaaS applications, corporate applications in data centers or public clouds as well as Remote desktops, and the intranet).
Harmony unifies these six security products to deliver complete remote users security:
 
  •  
Complete endpoint Protection:
 Harmony Endpoint protects users’ PCs from ransomware, phishing, and malware, and minimizes breach impact with autonomous detection and response capability.
 
  •  
Mobile Threat Defense (MTD)
 – Harmony Mobile protects employees’ mobile devices against malicious apps and network or OS attacks.
 
  •  
Email and Office security:
 Harmony Email & Office secures users’ email clients and gives complete protection for Microsoft Office 365, Exchange, Google G Suite and more.
 
  •  
Secure Internet Browsing:
 Provides secure, fast, and private web browsing by inspecting all SSL traffic directly on the endpoint without adding latency or
re-routing
traffic through a secure web service. Harmony Browse blocks
zero-day
malware downloads, access to phishing websites and prevents the reuse of corporate passwords. It also keeps users’ browsing private, ensuring compliance with data privacy regulations. Harmony Browse is easily deployed as a nano-agent in users’ browsers
 
  •  
Secure remote access from any device, anywhere:
 Harmony Connect provides Secure Access Service Edge (SASE) and delivers a secure and easy way to connect any user or branch to any resource, anywhere, without compromising security. Powered by 11 cloud-delivered security services (including Next generation firewall, secure web gateway, DNS security) to ensure secure connectivity at local-level speed.
 
25
  •  
Clientless Zero Trust Network Access (ZTNA)
 – Harmony Connect provides employees & contractors secure and easy access to any corporate application (including web application, remote desktop, SSH remote terminal), simply from a web browser using any device (even mobile and home PC).
Infinity-Vision - Check Point Security Management
A significant part of our product strategy addresses the need for scalable and consolidated security management. As part of Check Point’s Infinity architecture, we enable customers of all sizes - from single offices to hundreds and thousands of offices
-to
manage and tailor their security policy to express their business needs from a single pane of glass. With Check Point’s R80 security management software, administrators can consolidate security management in an
all-in-one,
single scalable server for full threat visibility and control across networks, endpoints, cloud and mobile.
In 2020, we released R81 - the industry’s most advanced threat prevention and security management software for data centers, cloud, mobile, endpoint and IoT.
R81 platform delivers the highest levels of security with most efficient security administration and management. It provides high levels of security with autonomous threat prevention. It is the first to bring an
AI-driven
security policy system designed to prevent against zero day attacks. R81’s new Infinity threat prevention policy enables security teams to implement, in a single click, security best practices that are automatically and continuously updated.
R81 allows rapid response to changing security needs with super-fast policy installation: Reducing policy installation by 90% to as little as 10 seconds. Moreover, security administrators can upgrade hundreds of remote gateways to the new release with a click of a button.
Another highlight of the platform is automatic optimization of gateway performance. This functionality    automatically allocates hardware and core resources on the gateway to optimize its operation and provide higher levels of performance and security.
Finally, the R81 ensures optimal security for SSL traffic. It utilizes the latest standards for secure connectivity (TLS 1.3 and HTTP/2). A dedicated policy layer allows the administrator to easily control the decision to inspect or bypass network traffic.
In
mid-2020,
we introduced
Smart-1
Cloud taking the best security management and putting it in the cloud. This offers the industry’s most advanced threat prevention and security management software for data centers, cloud, mobile, endpoint and IoT.
Smart-1
Cloud provides three key benefits:
 
  •  
Always the latest security management – newest features, automatically updated
 
  •  
On-demand
Expansion – seamlessly support more gateways and storage
 
  •  
Zero Maintenance – no installation, no upgrades
In 2020, we launched Infinity SOC, which unifies threat prevention, detection, investigation and remediation in a single platform to give unrivaled security and operational efficiency. Infinity SOC is used daily by the Check Point research cyber analysts, to expose and investigate the world’s most dangerous and sophisticated cyber-attacks. It uses
AI-based
incident analysis to filter millions of irrelevant logs and alerts, helping enterprise security teams to expose and shut down cyber-attacks with
best-in-class
speed and precision.
 
26
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,
  
    
2020
     
2019
     
2018
  
    
(in millions)
  
Category of Activity:
      
Products and licenses
    $ 513.6      $ 510.8      $ 525.6  
Security subscriptions
      671.1        610.3        542.3  
Software updates and maintenance
      880.2        873.7        848.6  
  
 
 
     
 
 
     
 
 
  
Total revenues
    $ 2,064.9      $ 1,994.8      $ 1,916.5  
  
 
 
     
 
 
     
 
 
  
Sales and Marketing
At the heart of Check Point’s strategy to drive revenue is the commitment to address current and future customer requirements for enterprises of all sizes. To make our vision a reality, in 2021 we have recalibrated our Infinity portfolio of products to focus on those technologies and capabilities that will provide uncompromised security based on our three core principles. Check Point has taken over 80 products and technologies and organized them into three main pillars: Harmony – Secure remote users and access, CloudGuard – Automatically Secure the cloud, and Quantum - Enterprise Network Security For Perimeter And Datacenter.
Further, we accomplish this in multiple ways:
• Through a global network of thousands of partners, which spans
two-tier
distributors, value-added resellers, global systems integrators, telecommunications companies and managed service providers.
• Spearheaded by our
pre-sales
and marketing support and account management teams, Check Point works closely with the partner ecosystem to capture customer needs and match them with the right solutions.
• As part of our
pre-sales
support to our channel partners community, we employ technical consultants and systems engineers who work closely with partners and customers to assist them with
pre-sale
product configuration, use, and application support.
• Through technology partnerships with hardware and software suppliers such as IBM, Hewlett-Packard, VMware, Symantec, Apple, Google, Amazon, and Microsoft, Check Point uses integration to better meet diverse customer needs.
To drive awareness and demand for Check Point solutions, we create messaging and communications strategies to target users and business decision makers. These efforts include global media campaigns, thought-leadership programs, digital marketing, social media, as well as press and analyst relations. We promote our innovation and technology agenda globally through frequent product launches supported by targeted demand generation programs.
As of December 31, 2020, we had 2,427 employees and subcontractors that majority of them dedicated to pre sales and marketing support located in various jurisdictions.
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; (ii) professional services in implementing, upgrading and optimizing Check Point products, such as design planning and security implementation; and (iii) certification and educational training on Check Point products.
Our technical assistance centers in the United States, Israel, Canada, Japan, India, China and Australia offer support worldwide,
24-hour
service, seven days per week. As of December 31, 2020, we had 867 employees and subcontractors in our technical services organization.
 
27
Our support solutions include both indirect and direct offerings. Channel partners provide customers with installation, training, maintenance and support, while we provide technical support to our channel partners. Alternatively, our customers may select to receive support directly from us. In addition, due to increasing 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 also offer ThreatCloud Managed Security Services and Incident Response Services. These services are focused on helping our partners and customers maximize the effectiveness of advanced protections, 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. This becomes especially true as we find ourselves facing 5 generation cyber-attacks. Today’s attacks are the most advanced and impactful we have ever seen and yet the security deployed by most businesses is generationally behind and based on patchwork solutions that simply detect. Check Point continues its focus in 2020 on 5 generation cyber security, which emphasizes prevention through a consolidated architecture that unifies all network, virtual, cloud, remote office and mobile operations.
We work closely with existing and potential customers, distribution channels and major resellers, who provide significant feedback for product development and innovation. We work with these audiences to understand the challenges they face, to ensure each new generation of security we introduce keeps them well protected as the threats evolve. Our product development efforts are focused on providing unified security architecture, named the Check Point Infinity Generation V Architecture, which 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 today’s 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.
As of December 31, 2020, we had 1,510 employees and subcontractors 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 Related to Our Business and Our Market – We may not be able to successfully compete, which could adversely affect our business and results of operations”.
Environmental, Social and Governance (ESG) Practices
Since Check Point’s inception, our sole focus has been on making the world a safer place to live and work. For the last 25 years, we have worked to fulfill our vision of making the Internet secure, reliable, and available for corporations and consumers. As a global brand with material social and economic influence, we recognize that our success can only be built alongside the success of our stakeholders – including, our channel partners, customers, suppliers and employees. We aim to achieve high ESG standards while continuing to develop our business and executing on our strategy.
We promote and support fair social and economic opportunities in the global market. We recognize that there are systemic and cultural biases, caused by age, gender, ethnicity, orientation, religion, or ability - and we know these biases can reduce the accessibility to opportunities on a global scale. It is our mission to shrink these accessibility gaps worldwide.
We value and celebrate diversity within our community. The work environment we created seeks to foster an inclusive culture, where our employees feel empowered, challenged, and in possession of the tools to thrive at work and in their personal lives. We are continuously learning and looking at ways to improve on creating an environment that is an inclusive place of work.
 
28
Proprietary Rights
Check Point relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The company relies on trade secret and copyright laws to protect its software, documentation, and other written materials. Further, Check Point generally enters into confidentiality agreements with employees, consultants, customers and potential customers, and limits access and distribution of materials and information that the company considers proprietary.
We have 84 issued patents in the U.S. and in other regions and 26 pending patent applications 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 Related to Our Business and Our Market – We may not be able to successfully protect our intellectual property rights”.
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. (1)
    Indonesia
Check Point Holding (Singapore) PTE Ltd. – U.S. Branch (2)
    United States of America (New York)
Israel Check Point Software Technologies Ltd. China (3)
    China
Check Point Holding AB (4)
    Sweden
Check Point Advanced Threat Prevention Ltd.
    Israel
Check Point Mobile Security Ltd.
    Israel
Check Point Software Technologies South Africa PTY. Ltd
    South Africa
Check Point Software (Kenya) Ltd.
    Kenya
Check Point Software Technologies B.V Nigeria Ltd. (5)
    Nigeria
Check Point Public Cloud Security Ltd.
    Israel
Check Point Web Applications and API Protection Ltd.
    Israel
Protego Labs, Inc.
    Delaware
Check Point IOT Security Ltd.
    Israel
Check Point Serverless Security Ltd. (6)
    Israel
Check Point Secure Remote Access Ltd.
    Israel
Check Point Software Technologies (Sweden) AB. (7)
    Sweden
Zone Labs, L.L.C. (8)
    United States of America (California)
 
(1)
Representative office of Check Point Holding (Singapore) PTE Ltd.
(2)
Branch of Check Point Holding (Singapore) PTE Ltd.
(3)
Representative office of Check Point Software Technologies Ltd.
(4)
Subsidiary of Check Point Holding (Singapore) PTE Ltd. (former name: Protect Data AB)
(5)
Subsidiary of Check Point Holding (Singapore) PTE Ltd. and Check Point Yazilim Teknolojileri Pazarlama A.S.
(6)
Subsidiary of Protego Labs, Inc
(7)
Subsidiary of Check Point Holding AB
(8)
Subsidiary of Check Point Software Technologies Inc.
 
29
Check Point Software Technologies (Netherlands) B.V. acts as a holding company. It wholly owns all or substantially all of the share capital of 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
    Italy
Check Point Software Technologies Mexico S.A. de C.V.
    Mexico
Check Point Software Technologies (Beijing) Co., Ltd.
    China
Check Point Software Technologies (New Zealand) Limited
    New Zealand
Check Point Software Technologies Norway A.S.
    Norway
Check Point Software Technologies (Philippines) Inc.
    Philippines
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.
    South 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.
    Turkey
Check Point Software Technologies (UK) Ltd.
    United Kingdom
 
(1)
Representative office of Check Point Software Technologies (Hong Kong) Ltd.
 
30
Property and Equipment
We lease offices in various locations throughout the world. The breakdown in the various geographies is as follows:
 
Location
   
Space (square feet)
Israel
    355,000*)
Americas
    133,000   
Europe, Middle East and Africa
    65,000   
Asia Pacific
    37,000   
 
*)
Our international headquarters are located in Tel Aviv, Israel. We occupy our headquarters pursuant to a long-term lease on the land 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 contains approximately 332,000 square feet of office space. In addition, we lease approximately 23,000 square feet of additional space substantially all in Tel Aviv, Israel.
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
For discussion related to our financial condition, changes in financial condition, and the results of operations for 2019 compared to 2018, refer to Part I, Item 5. Operating and Financial Review and Prospects, in our Annual Report on Form
20-F
for the fiscal year ended December 31, 2019, which was filed with the U.S. Securities and Exchange Commission on April 2, 2020.
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 by offering a multilevel security architecture that defends enterprises’ cloud, network, mobile device information and IOT 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.
 
31
We derive our sales primarily through indirect channels. During 2020, 2019 and 2018, we derived approximately 57%, 55%, and 53%, respectively, of our sales from our ten largest channel partners. In 2020, 2019 and 2018, our two largest distributors accounted for approximately 39%, 37% and 36% of our sales, respectively. 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,
  
    
2020
    
2019
    
*2018
  
Region:
       
Americas, principally U.S.
      45 %      46 %      47 % 
Europe, Middle East and Africa
      43 %      42 %      42 % 
Asia-Pacific
      12 %      12 %      11 % 
 
*
Starting 2019, Middle East and Africa are part of the “Europe Middle East and Africa” region, while before it was part of “Asia Pacific, Middle East and Africa” region. 2018 figures were reclassified to present the updated revenue distribution by geography.
For information on the impact of foreign currency fluctuations, please refer to “Item 11 – Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk”.
COVID-19
Pandemic
In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus
(COVID-19)
to be a pandemic. The
COVID-19
pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of
non-essential
businesses. To protect the health and well-being of our employees, partners, and third-party service providers, we have implemented work-from-home requirements, made substantial modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats for the foreseeable future. Our focus remains on the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology to our employees,
end-customers
and partners to help them do their best work while remote.
The ultimate duration and extent of the impact from the
COVID-19
pandemic depends on future developments cannot be accurately forecasted at this time. These developments include the severity and transmission rate of the disease, the actions of governments, businesses and individuals in response to the pandemic, the extent and effectiveness of containment actions, the impact on economic activity and the impact of these and other factors. See Risk Factors for further discussion of the possible impact of the
COVID-19
pandemic on our business.
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,
 
  •  
Credit loss of trade receivables
 
  •  
Impairment of marketable securities; and
 
  •  
Loss Contingencies.
 
32
In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s 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, security 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, Original Equipment Manufacturers (“OEMs”), system integrators and Managed Security Service Providers (“MSPs”), all of whom are considered end users.
Security subscriptions provide customers with access to its suite of security solutions and is sold as a service.
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
end-user
customers, through primarily telephone access to technical support personnel as well as hardware support services.
We recognize revenues under the core principle that transfer of control to our customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. Therefore, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when (or as) we satisfy a performance obligation.
We recognize revenues from sales of products and licenses, under Topic 606, upon shipment when control of the promised goods is transferred to the customer, or upon electronic transfer of the Certificate Key to the customer.
We recognize revenues from security subscriptions and software updates and maintenance ratably over the term of the agreement due to the continuous transfer of control to the customer over the period.
Our arrangements typically contain multiple deliverables, such as products and licenses, security subscriptions and software updates and maintenance, which are generally capable of being distinct and accounted for as separate performance obligations. We evaluated the criteria to be distinct under Topic 606, and concluded that the products and the licenses were distinct and distinct in the context of the contract from the security subscription and the software updates and maintenance, as the customer can benefit from the products and licenses without the services and the services are separately identifiable within the arrangement. We allocate the transaction price to each performance obligation based on relative standalone selling price basis, by using the prices charged for a performance obligation when sold separately.
Deferred revenues represent mainly the unrecognized revenue billed for security 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, rebates, stock rotations and other rights provided to customers on product and service related sales subject to varying limitations. We estimate and record these reductions based on our historical sales returns experience, analysis of credit memo data, rebate plans, 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 “deferred revenues” and “accrued expenses and other liabilities” on our consolidated balance sheets.
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.
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 2020, 2019 and 2018.
 
33
Accounting for income tax    
We are subject to income taxes in Israel, the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate, or upon lapse of statute of limitations. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Credit loss of trade receivables
We make estimates of expected credit and collectability trends for the allowance for credit losses based upon our assessment of various factors, including historical experience, the age of the trade receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers.
On January 1, 2020, we adopted Accounting Standards Update
No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Upon adoption, we changed our impairment model to utilize a current expected credit losses (CECL) model in place of the incurred loss methodology for financial instruments measured at amortized cost, including our accounts receivables.
Impairment of marketable securities
We classify all of our debt securities as
available-for-sale
(“AFS”).
Available-for-sale
debt 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.
On January 1, 2020, we adopted Accounting Standards Update
No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Upon adoption, we modified our impairment model for
available-for-sale
(“AFS”) debt securities and discontinued using the concept of “other than temporary” impairment on AFS debt securities. Each reporting period, we evaluate whether declines in fair value below amortized cost are due to expected credit losses, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Allowance for credit losses on AFS debt securities are recognized in our consolidated statements of income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders’ equity.
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.
Loss Contingencies
We are currently involved in various claims and legal proceedings. We review the status of each matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.
Manufacturing Partner and Supplier Liabilities
We purchase manufactured products from its original design manufacture (“ODM”). We generally do not own the manufactured products. ODM’s provide services of design, manufacture, orders fulfillment and support with a full
turn-key
solution to meet our detailed requirements. If the actual demand is significantly lower than forecast, we records a liability for its commitment in excess of the actual demand. As of December 31, 2020 and 2019, we have not accrued any significant liability in respect with this exposure.
 
34
Results of Operations
The following table presents information concerning our results of operations in 2020 and 2019:
 
    
Year Ended December 31,
  
    
2020
     
2019
  
    
(in millions)
  
Revenues:
      
Products and licenses
    $ 513.6      $ 510.8  
Security subscriptions
      671.1        610.3  
Software updates and maintenance
      880.2        873.7  
  
 
 
     
 
 
  
Total revenues
      2,064.9        1,994.8  
  
 
 
     
 
 
  
Operating expenses (*):
      
Cost of products and licenses
      96.8        90.7  
Cost of security subscriptions
      26.4        24.6  
Cost of software updates and maintenance
      96.7        94.5  
Amortization of technology
      6.6        5.6  
  
 
 
     
 
 
  
Total cost of revenues
      226.5        215.4  
  
 
 
     
 
 
  
Research and development
      252.8        239.2  
Selling and marketing
      569.9        552.7  
General and administrative
      111.5        105.7  
  
 
 
     
 
 
  
Total operating expenses
      1,160.7        1,113.0  
  
 
 
     
 
 
  
Operating income
      904.2        881.8  
Financial income, net
      66.6        80.6  
  
 
 
     
 
 
  
Income before taxes on income
      970.8        962.4  
Taxes on income
      124.2        136.7  
  
 
 
     
 
 
  
Net income
    $ 846.6      $ 825.7  
  
 
 
     
 
 
  
 
(*)
Including
pre-tax
charges for stock-based compensation, amortization of intangible assets and acquisition related expenses in the following items:
 
    
Year Ended December 31,
  
    
2020
     
2019
  
    
(in millions)
  
Amortization of intangible assets and acquisition related expenses
      
Amortization of technology
    $ 6.6      $ 5.6  
Research and development
      4.1        6.9  
Selling and marketing
      7.3        1.8  
  
 
 
     
 
 
  
Total amortization of intangible assets and acquisition related expenses
    $ 18.0      $ 14.3  
  
 
 
     
 
 
  
Stock-based compensation
      
Cost of products and licenses
    $ 0.4      $ 0.2  
Cost of software updates and maintenance
      4.1        4.2  
Research and development
      23.5        18.9  
Selling and marketing
      36.8        28.8  
General and administrative
      47.7        54.6  
  
 
 
     
 
 
  
Total stock-based compensation
    $ 112.5      $ 106.7  
  
 
 
     
 
 
  
 
35
The following table presents information concerning our results of operations as a percentage of revenues for the periods indicated:
 
    
Year Ended December 31,
  
    
2020
    
2019
  
Revenues:
     
Products and licenses
      25 %      26 % 
Security subscriptions
      32       30  
Software updates and maintenance
      43       44  
  
 
 
    
 
 
  
Total revenues
      100 %      100 % 
  
 
 
    
 
 
  
Operating expenses:
     
Cost of products and licenses
      5       5  
Cost of security subscriptions
      1       1  
Cost of software updates and maintenance
      5       5  
Amortization of technology
      — *)      — *) 
  
 
 
    
 
 
  
Total cost of revenues
      11       11  
  
 
 
    
 
 
  
Research and development
      12       12  
Selling and marketing
      28       28  
General and administrative
      5       5  
  
 
 
    
 
 
  
Total operating expenses
      56       56  
  
 
 
    
 
 
  
Operating income
      44       44  
Financial income, net
      3       4  
  
 
 
    
 
 
  
Income before taxes on income
      47       48  
Taxes on income
      6       7  
  
 
 
    
 
 
  
Net income
      41       41  
  
 
 
    
 
 
  
 
*)
Less than 1%.
Revenues
We derive our revenues mainly from the sale of products and licenses, security subscriptions and software updates and maintenance. Our revenues were $2,065 million in 2020 and $1,995 million in 2019.
Total revenues in 2020 increased by 4% compared to 2019. Product and license revenues increased from $511 million in 2019 to $514 million in 2020. We continued to deliver increasingly more of our latest security offerings as subscriptions resulting in increased sales of our security subscription packages, including advance threat protection, cloud, Infinity and mobile solutions. As a result, security subscription revenues increased by $61 million, or 10%, from $610 million in 2019 to $671 million in 2020. Software updates and maintenance revenues increased by $6 million, or 1%, from $874 million in 2019 to $880 million in 2020, primarily as a result of renewals of existing and sales of new maintenance contracts.
Cost of Revenues
Total cost of revenues was $227 million in 2020 and $215 million in 2019. Cost of revenues includes cost of product and licenses, cost of security 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 security subscriptions is comprised of costs paid to third parties, hosting and infrastructure costs and cost of customer support related to these services. Our cost of software updates and maintenance include mainly the cost of post-sale customer support.
Cost of products and licenses was $97 million in 2020 and $91 million in 2019.
Cost of security subscriptions was $26 million in 2020 and $25 million in 2019.
Cost of software updates and maintenance was $97 million in 2020 and $95 million in 2019.
In 2020 amortization of technology was $7 million compared to $6 million in 2019. The increase in 2020 is attributed to the acquisitions made during 2020 and 2019.
 
36
Research and Development
Research and development expenses were $253 million in 2020 and $239 million in 2019, and represented 12% of the revenues in each of the years 2020 and 2019. Research and development expenses consist primarily of salaries and other related expenses for personnel as well as the cost of facilities and deprecation of capital equipment.
The $14 million increase in 2020, consisted of $2.9 million due to U.S. dollar weakened against the Israeli Shekel, is primarily a result of an increase in compensation and related expenses for personnel and in our cloud infrastructure expenses, offset by a decrease in travel and entertainment and other related expenses due to
COVID-19
pandemic.
The majority of our personnel engaged in research and development are located in Israel, where compensation-related expenses are paid in Israeli Shekels, 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 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 $570 million in 2020 and $553 million in 2019, which represented 28% of revenues in each of the years 2020 and 2019.
The $17 million increase in 2020, consisted of $1.2 million due to fluctuations of various currencies against the U.S. dollar, is primarily a result of an increase in compensation expenses for personnel and
co-op
activities, offset by a decrease in travel, entertainment, and other related expenses due to
COVID-19.
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.
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 $111 million in 2020 and $106 million in 2019, and represented 5% of revenues in each of the years 2020 and 2019. In 2020, there was an increase of $5 million in general and administrative expenses, which related mostly to an increase in compensation expenses for personnel, and to a decrease in travel, entertainment and other related expenses due to
COVID-19.
Operating Income Margin
We had an operating margin of 44% in each of the years 2020 and 2019.
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 Related to Our Business and Our Market”.
Financial Income, Net
Net financial income consists primarily of interest earned on cash equivalents and marketable securities. Net financial income was $67 million in 2020 and $81 million in 2019. As we generally hold debt securities until maturity, our current portfolio’s 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 decrease in net financial income in 2020 was primarily due to a decrease in U.S interest rates compared to 2019. In 2020 and 2019 no impairment in our marketable securities 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 $124 million in 2020 and $137 million in 2019. Our effective tax rate was 13% in 2020 compared to 14% in 2019. The lower effective tax rate in 2020 compared to 2019 is attributed substantially to the lower provisions on uncertain tax positions and included tax benefit from lapse of statute of limitation on certain provisions. See Note 11 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”.
 
37
Liquidity and Capital Resources
During 2020 and 2019, 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 $4,000 million as of December 31, 2020 and $3,948 million as of December 31, 2019. Our cash and cash equivalents and short-term investments were $1,688 million as of December 31, 2020 and $1,580 million as of December 31, 2019. Our long-term interest bearing investments were $2,312 million as of December 31, 2020 and $2,369 million as of December 31, 2019. Our financial assets are held and managed through the parent company in Israel and our subsidiaries in Singapore, Canada and the U.S.
We generated net cash from operations of $1,161 million in 2020 and $1,104 million in 2019. Net cash from operations for 2020 and 2019 consisted primarily of net income adjusted for
non-cash
activity. The increase in our cash from operations derived mostly from the increase in our deferred revenues compared to 2019.
We used net cash in investing activities of $98 million in 2020 compared to generated net cash from investing activities of $60 million in 2019. In 2020, net cash used for investing activities was primarily due to higher investment in short-term bank deposits compared to 2019. Our net cash paid for acquisitions of subsidiaries amounted to $23 million in 2020 and $38 million in 2019. Our capital expenditures amounted to $19 million in 2020 and $26 million in 2019, consisted primarily of computer equipment, software and leasehold improvements.
Net cash used in financing activities was $1,086 million in 2020 and $1,189 million in 2019. In 2020 and 2019, 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 2020 and 2019, we repurchased ordinary shares in the amount of $1,298 million and $1,278 million, respectively. We
re-issued
the repurchased shares to settle exercises of options and awards of restricted share units to our employees and directors. Proceeds from such activities were $217 million and $95 million in 2020 and 2019, 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 bank deposits and marketable securities (which aggregated $4,000 million as of December 31, 2020) 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.
 
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Our directors and executive officers as of March 31, 2021, were as follows:
 
Name
   
            Position                
     
Independent
Director (1)
   
Outside
Director
(2)
   
Member
of Audit
Committee
   
Member of
Compensation
Committee
   
Member of
Nominating
Committee
Gil Shwed    Chief Executive Officer                 
   and Director                 
Jerry Ungerman    Chairman of the Board      ✓            
Tal Payne    Chief Financial and                 
   Operations Officer                 
Dorit Dor    Vice President of                 
   Products                 
Dan Yerushalmi    Chief Customer Officer                 
Guy Gecht (3)    Lead Independent Director      ✓    ✓    ✓    ✓   
Yoav Chelouche (3)    Director      ✓    ✓    ✓    ✓   
Rupal Hollenbeck (1)    Director      ✓            
Dan Propper    Director      ✓            
Ray Rothrock (3)    Director      ✓    ✓    ✓    ✓    ✓
Tal Shavit    Director      ✓             ✓
Eyal Waldman (1)    Director      ✓            
Shai Weiss    Director      ✓             ✓
 
(1)
“Independent Director” under the Nasdaq Global Select Market regulations and the Israeli Companies Law (see explanation below).
(2)
“Outside Director” as required by the Israeli Companies Law (see explanation below).
(3)
“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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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 company’s 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 Forum’s Global Leader for Tomorrow for his commitment to public affairs and leadership in areas beyond immediate professional interests, and the Academy of Achievement’s 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 University’s 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. In 2018, Gil was awarded the prestigious Israel Prize for his contributions to the Israeli technology industry.
Jerry Ungerman
serves as the chairman of the board of directors since August 2020, after serving as Vice Chairman of our board of directors from 2005 until August 2020. 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 extensive experience in 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.
Tal Payne
has been 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 Point’s 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. Ms. Payne is a board member of SolarEdge Technologies, Inc. and ironSource Ltd.
Dr.
 Dorit Dor,
Vice President of Products at Check Point, manages all product and development functions from concept to delivery. Since joining the company in 1995, Dr. Dor has served in several pivotal roles in Check Point’s R&D organization. She has been instrumental to the organization’s 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. In 1993, she won the Israel National Defense Prize. In 2019 Dr. Dor was named as one of Israel’s most influential women by Forbes Israel, for her leadership role in one of the world’s leading tech industries.
Dan Yerushalmi
, Chief Customer Officer at Check Point, manages worldwide sales field operations and engineering, channel sales and strategic technologies, focusing on customer experience. Mr. Yerushalmi has served as a
c-suite
leader in large-scale enterprises in technology, banking, and telecom. Prior to joining Check Point in 2018, he was the first Executive Vice President, group Chief Technology Officer and Chief Operations Officer of Israel’s largest Bank – Bank Leumi Ltd from 2013 to 2017. He also served as President of EMEA for Advertising and Media and Regional Vice President & Client Business Executive at Amdocs, a multinational technology corporation from 1993 to 2012. In 2016, he was named one of the leading Chief Technology Officers by CIO 100 magazine.
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. He serves on boards of directors of certain Aviv companies. Prior to joining Aviv Venture Capital, Mr. Chelouche served as a 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 was also a board member and until 2015
co-Chairman
of IATI-Israel Advanced Technology Industries, an Israeli nonprofit organization that researches, develops and advocates policies that promote Israel’s high tech ecosystem through activities in training, tuition, business development, public relations and public policy advocacy. Mr. Chelouche has been a board member of Tower Semiconductor Ltd. since July 2016. He was until May 2018 and again since February 2019 an external director of the Tel Aviv Stock Exchange (TASE). Mr. Chelouche earned B.A. in Economics and Statistics from Tel Aviv University, and an M.B.A. from INSEAD University in Fontainebleau, France.
 
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Guy Gecht
has served on our board of directors since 2006 and as our Lead Independent Director since August 2020. Mr. Gecht has also served as one of our outside directors under the Israeli Companies Law since 2006. Mr. Gecht served as 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 from January 2000 until October 2018. 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. In 2019, Mr. Gecht joined the board of directors of Logitech. He holds a B.S. in Computer Science and Mathematics from
Ben-Gurion
University in Israel.
Rupal Hollenbeck
has served on our Board of Directors since January 2021. She was most recently Senior Vice President & Chief Marketing Office at Oracle, a post which she held until January, 2020. Prior to joining Oracle in 2018, Ms. Hollenbeck was with Intel Corporation for over 23 years, with her most recent role being Corporate Vice President and General Manager of Global Data Center Sales. Prior to that she was Vice President and General Manager of Intel China and throughout her time at Intel has worked in Arizona, California, Singapore, and Beijing. An advocate for professional women around the world, she started several women’s initiatives while at Intel, including serving as
co-chair
of the Board of Intel’s Network of Executive Women in Asia. She is currently a Founding LP in the Neythri Futures Fund, as well as a Founding Circle Member of Neythri.org, a non-profit organization dedicated the professional advancement of South Asian women. Ms. Hollenbeck is also an Adjunct Professor at California State University East Bay, teaching a Women in Leadership course in the College of Business & Economics. Ms. Hollenbeck holds a BS in Finance and International Studies from Boston College, and a Master of International Management from the Thunderbird School of Global Management in Arizona.
Dan Propper
has served on our board of directors since 2006. Mr. Propper is the Chairman of the Board of Directors 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 Israel’s 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., Vitania Ltd. and a number of private companies. Mr. Propper is also a member of the board of governors of the Technion, Tel Aviv 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. In 2018, Mr. Propper was appointed the Czech Republic Honorary Consul in Jerusalem.
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 and as a director under Roku, Inc. 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 of RedSeal, Inc., a cybersecurity analytics company. Mr. Rothrock served as the Chief Executive Officer of RedSeal, Inc. from February 2014 until May 2020. Mr. Rothrock is a director of Nasdaq-listed Roku, Inc, and a number of private companies. Mr. Rothrock is a member of the Massachusetts Institute of Technology Corporation, and a Trustee of the University of Texas and Texas A&M Investment Management Company. 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.
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 such company’s 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.
Eyal Waldman
has served on our board of directors since November 2020. Mr. Waldman has been the
Co-founder,
President, CEO and Board member of Mellanox Technologies since March 1999, up to it being acquired by NVIDIA in April 2020. Between March 1999 until June 2013, Mr. Waldman served as Mellanox’s chairman of the board. From March 1993 to February 1999, Mr. Waldman served as Vice President of Engineering and was a
Co-founder
of Galileo Technology, Ltd., a semiconductor company, which was acquired by Marvell Technology Group, Ltd. in January 2001. From August 1989 to March 1993, Mr. Waldman held several design and architecture related positions at Intel Corporation, a manufacturer of computer, networking and communications products, and was awarded with the “IAA Intel achievement” award and the “Employee of the year” award. Mr. Waldman also serves and previously served on the board of directors of several private companies. Mr. Waldman holds a Bachelor of Science degree in Computer Engineering and a Master of Science degree in Electrical Engineering from the Technion – Israel Institute of Technology. In June 2016, Mr. Waldman was awarded an Honorary Doctorate by the Technion.
 
41
Shai Weiss
has served on our board of directors since 2018. Mr. Weiss is the Chief Executive Officer of Virgin Atlantic, one of the most innovative airlines in the world. Mr. Weiss joined Virgin Atlantic as Executive Vice President and Chief Financial Officer in July 2014 from Virgin Management Ltd, where he had been an Investment Partner since 2012 and was a Founding Partner of Virgin Green Fund. Prior to joining Virgin Group, he held several senior management positions at ntl:Telewest (now Virgin Media), the UK and Europe’s largest cable operator. Mr. Weiss was part of the turn-around of ntl with roles including Managing Director of Consumer Products, Director of Operations, and Director of Financial Planning for the Consumer division. Mr. Weiss was also behind the merger between Virgin Mobile UK and ntl:Telewest and the
re-brand
to Virgin Media. Prior to ntl, Mr. Weiss established the European office of early-stage technology venture fund JVP and was a senior associate with Morgan Stanley. He holds an M.B.A. degree from Columbia University and a BBA degree from City University of New York, Baruch College.
Of the individuals mentioned above, only Gil Shwed owned more than one percent of our outstanding shares as of December 31, 2020. 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, Jerry Ungerman, Rupal Hollenbeck, Dan Propper, Dr. Tal Shavit, Eyal Waldman and Shai Weiss will expire at our 2021 annual meeting of shareholders. The terms of Yoav Chelouche and Guy Gecht will expire at our 2021 annual meeting of shareholders, and the term of Ray Rothrock will expire at our 2023 annual meeting of shareholders.
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 including a director and an executive officer who left the company during 2020 was approximately $2.8 million for the year ended December 31, 2020. These amounts include $0.2 million that were set aside or accrued to provide for severance and retirement insurance policies in 2020. 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 director who is also an officer 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 in 2020 (i) to our five most highly compensated executive officers as of the date of this Annual Report (referred to as the “Covered Executives”) and (ii) to our
non-executive
directors.
Cash Compensation
Mr.
 Gil Shwed, Chief Executive Officer and Director.
Cash compensation expenses recorded in 2020 consisted of $19.8 thousands in salary expenses, and $18.1 thousands in benefit costs. Mr. Shwed requested to forego his salary and bonus for 2019, as he has done for the past several years. Following consideration of Mr. Shwed’s request, our compensation committee and board of directors have determined that Mr. Shwed will not receive a bonus for 2020, and did not receive any cash compensation for 2020 except for an amount equal to the minimum wage required under Israeli law.
Dr.
 Dorit Dor, Vice President, Products.
Compensation expenses recorded in 2020 included $410.6 thousands in salary expenses and $99.7 thousands in benefit costs.
Ms.
 Tal Payne, Chief Financial Officer
 & Chief Operating Officer.
Compensation expenses recorded in 2020 included $466.6 thousands in salary expenses and $112.3 thousands in benefit costs.
Mrs.
 Sharon Schusheim, Vice President,
Information Systems
Compensation expenses recorded in 2020 included $276.2 thousands in salary expenses and $70.7 thousands in benefit costs.
Mr.
 Dan Yerushalmi, Chief Customer Officer
. Compensation expenses recorded in 2020 included $410.6 thousands in salary expenses and $99.7 thousands in benefit costs.
 
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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 company’s executive compensation policy, we also paid cash bonuses upon compliance with predetermined 2020 performance parameters set by the Compensation Committee and the Board of Directors. The 2020 cash bonus expenses for Dr. Dor, Ms. Payne, Mr. Schusheim and Mr. Yerushalmi were $309.4 thousands, $423.8 thousands, $100.4 thousands and $251.1 thousands, respectively. As noted above, Mr. Shwed did not receive a cash bonus for 2020. The cash compensation amounts paid 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 $40.0 thousands for the services provided to our board of directors and an annual cash retainer of $7.5 thousands for each committee membership. In addition, we pay the chairman of our board of directors and the lead independent director an annual cash retainer of $20.0 thousands
,
the chair of our audit committee an annual cash retainer of $7.5 thousands and the chair of each of our nominating committee and compensation committee an annual cash retainer of $2.5 thousands. Only directors who are not officers receive compensation for serving as directors.
Equity-based Compensation
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 25,000 ordinary shares and restricted share units (RSUs) with a value of $200.0 thousands on the date of the initial election or appointment, vesting in equal annual installments over a four-year period. On the date of 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 15,000 ordinary shares and RSUs with a value of $50.0 thousands, 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.
On August 3, 2020, following the approval of our Compensation Committee, Board of Directors and the company’s shareholders at the 2020 Annual General Meeting, we granted Mr. Gil Shwed, our Chief Executive Officer and Director, options to purchase 0.5 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 gradually over a period of four years.
During 2020, we granted our executive officers and directors options to purchase an aggregate of approximately 1.0 million shares and approximately 0.1 million RSUs under our equity incentive plans. The exercise price of these options range between
$91.78-$122.41,
and their expiration dates range between March 2027 and November 2027.
All options granted to directors and executive officers in 2020 were granted with an exercise price equal to 100% of the closing price of the ordinary shares on the Nasdaq Global Select Market on the applicable date of grant.
We recorded equity-based compensation expenses in our financial statements for the year ended December 31, 2020 for Mr. Shwed, Dr. Dor, Ms. Payne, Mr. Schusheim and Mr. Yerushalmi of $32.5 million, $4.5 million, $4.9 million, $1.1 million and $1.5 million, respectively. Assumptions and key variables used in the calculation of such amounts are described in Note 2w 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 company’s executive compensation policy and were approved by the company’s Compensation Committee and Board of Directors, and, in the case of the equity-based compensation granted to the Chief Executive Officer, also by the company’s shareholders in accordance with the Israeli Companies Law.
As of December 31, 2020, our executive officers and directors held options to purchase an aggregate of approximately 8.4 million shares and held 0.2 million RSUs under our stock option and equity incentive plans. The exercise prices of these options range between $65.42 and $122.41, and their expiration dates range between May 2021 and November 2027.
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.
 
43
Composition of Board of Directors
Our board of directors currently consists of ten members, including two outside directors in accordance with the requirements of the Israeli Companies Law. See “Outside and Independent Directors”. Under our articles of association, the number of directors on our board is to be no less than six and no more than twelve. 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.
As permitted under the Israeli Companies Law, 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, 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 company’s audit committee and compensation committee (including one outside director serving as the chair of the audit committee and the compensation committee), and at least one outside director must serve on each committee of the board of directors. As of December 31, 2020, Yoav Chelouche, Guy Gecht and Ray Rothrock are our outside directors under the Israeli Companies Law. Yoav Chelouche’s and Guy Gecht’s term of office will expire in 2021, and Ray Rothrock’s term of office will expire in 2023.
In 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 amended 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);
provided
, that the company complies with the applicable Nasdaq independent director requirements and the Nasdaq Audit Committee and Compensation Committee composition requirements.
Accordingly, Check Point is eligible to adopt the relief provided by the amended Israeli regulations. To date, Check Point has elected not to adopt such relief.
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 consist of 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.
 
44
Our board of directors has determined that each of Yoav Chelouche, Guy Gecht, Rupal Hollenbeck, Dan Propper, Ray Rothrock, Tal Shavit, Jerry Ungerman, Eyal Waldman and Shai Weiss is an independent director 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, a compensation committee and a 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 committee’s 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 committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary (if they are not a controlling shareholder or relative) may participate in the committee’s 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 and each of whom is financially literate and one of whom has accounting or related financial management expertise. Yoav Chelouche is the chairman of the audit committee. Guy Gecht and Ray Rothrock serve as the other members of our audit committee. The audit committee has adopted a written audit committee charter as required by the Nasdaq regulations.
The audit committee’s 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 auditor’s audit plan and to establish and monitor whistleblower procedures.
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 committee’s 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 committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
In addition, the Nasdaq rules also require us to maintain a compensation committee consisting of at least two independent directors. Each of the members of the compensation committee is required to be independent under Nasdaq rules relating to compensation committee members, which are different from the general test for independence of board and committee members. Each of the members of our compensation committee satisfies those requirements. Ray Rothrock is the chairman of the compensation committee. Yoav Chelouche and Guy Gecht serve as the other members of our compensation committee. The compensation committee has adopted a written compensation committee charter.
 
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The compensation committee’s 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. Shai Weiss is the chairman of the nominating committee. Ray Rothrock and Tal Shavit serve as the other members of our nominating committee. The nominating committee has adopted a written nominating committee charter.
Employees
As of December 31, 2020, we had 5,314 employees which includes 116 subcontractors. Over the past three years, the number of our employees by function was as follows:
 
    
As of December 31,
  
Function
   
2020
     
2019
     
2018
  
Research, development and quality assurance
      1,500        1,515        1,528  
Marketing, pre sale, sales and business development
      2,317        2,335        2,301  
Customer support
      851        789        755  
Information systems, administration, finance and operation
      530        513        486  
  
 
 
     
 
 
     
 
 
  
Total
      5,198        5,152        5,070  
  
 
 
     
 
 
     
 
 
  
Over the past three years, the number of our employees by geographic area was as follows:
 
    
As of December 31,
  
Function
   
2020
     
2019
     
2018
  
Israel
      2,259        2,260        2,229  
United States
      1,580        1,211        1,206  
Rest of the World
      1,359        1,681        1,635  
  
 
 
     
 
 
     
 
 
  
Total
      5,198        5,152        5,070  
  
 
 
     
 
 
     
 
 
  
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.
 
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Share Ownership
The following table shows information regarding beneficial ownership by our directors and executive officers as of February 28, 2021. 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 28, 2021.
 
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
      28,704,024        20.6 %      Ordinary shares        3,740,000      $
 84.77 - $122.41
       
06/06/2023-08/03/2027
  
All directors and officers as a group (13 persons including Mr. Shwed)
      30,492,412        21.7 %      Ordinary shares        5,398,215      $
 83.59 - $122.41
       
06/08/2022-08/02/2027
  
 
(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 28, 2021.
(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.
(3)
Number of options immediately exercisable or exercisable and restricted share units that vest within 60 days from February 28, 2021.
 
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Equity Incentive Plans
The following table summarizes our equity incentive plans, which have outstanding awards as of December 31, 2020:
 
Plan
   
Outstanding
options &
RSU’s
     
Options
outstanding
exercise price
     
Date of expiration
     
Options
exercisable
  
2005 United States Equity Incentive Plan
      1,623,376       
$65.42-$122.41
       
05/27/2021-08/02/2027
        672,048  
2005 Israel Equity Incentive Plan
      9,476,623       
$72.76-$122.41
       
01/20/2022-10/31/2027
        4,802,130  
Dome9 Equity Incentive Plan
      4,453        $
4.98-$
21.97  		       
05/03/2026-06/27/2028
        2,805  
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, July 2018 and August 2020. We refer to the plans, as amended, 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 amendments to the Equity Plans in July 2018, commencing December 31, 2018, 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 sum of (i) the number of ordinary shares issued and outstanding on such date and (ii) the number of ordinary shares reserved and authorized under the Equity Plans for outstanding awards granted under the Equity Plans as of such date (provided, however, that in no event shall the number of Reserved and Authorized Shares be less than the number of ordinary shares reserved and authorized under the Equity Incentive Plans for outstanding awards granted under the Equity Incentive 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.
Accordingly, as of December 31, 2020, the number of Reserved and Authorized Shares under both Equity Plans together was reset to equal 14,825,712.
As of December 31, 2020, we had granted options to purchase an aggregate of 41,429,512 ordinary shares under the Equity Plans and the Dome9 Equity Incentive Plan combined, of which options to purchase 9,427,370 ordinary shares were outstanding on that date. The option exercise prices of the outstanding options as of December 31, 2020 range between $4.98 and $122.41 per share. As of December 31, 2020, we had granted an aggregate of 9,115,622 RSUs and PSUs under the Equity Plans combined, of which 1,677,082 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.
 
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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 recipient’s 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 as prescribed by Israeli law; (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 Israel’s 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 recipient’s 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
Dome9 Security Ltd. 2011 Share Option Plan and the 2016 Equity Incentive Subplan
In connection with our acquisition of Dome9 Security Ltd. in October 2018, we assumed certain outstanding Dome9 share options under the Dome9 Security Ltd. 2011 Share Option Plan and the 2016 Equity Incentive Subplan, or the Dome9 Equity Plan, which were converted into options to purchase 47,816 of our ordinary shares.
As of December 31, 2020, options to purchase 4,453 ordinary shares were outstanding under the Dome9 Equity Plan on that date. The options generally have terms of between seven and ten years. The option exercise prices range from
$4.98-$21.97
per share. No further options can be granted under the Doem9 Equity Plan.
 
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Employee Stock Purchase Plans
In 1996, we adopted an Employee Stock Purchase Plan, which was subsequently amended and restated in 2015, and further amended in May 2019. 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 full time employees and employees employed on a part-time employment basis of 80% or more (as well as employees of some of our subsidiaries) to purchase ordinary shares through payroll deductions.
According to the amendments, 750,000 ordinary shares are authorized for issuance under the US ESPP (out of which 468,944 ordinary shares had been issued through December 31, 2020) and 2,000,000 ordinary shares are authorized for issuance under the rest of the world (ROW) ESPP (out of which 1,048,006 ordinary shares had been issued through December 31, 2020).
Each ESPP has
six-month
offering periods, with purchases occurring in January and July. 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.
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 employee’s 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, 2020, 2019 and 2018, for each person who, to the best of our knowledge, beneficially owned more than 5% of our outstanding ordinary shares as December 31, 2020:
 
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, 2020
    
December 31, 2019
    
December 31, 2018
  
Gil Shwed
      28,704,010        20.4 %      29,163,983        19.5 %      27,811,458        17.6 % 
Massachusetts Financial Services Company (3)
      8,084,127        5.89 %      8,764,230        5.76 %      12,658,864        8.15 % 
 
(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.
(3)
As of December 31, 2020, based on information contained in a Schedule 13G/A filed by Massachusetts Financial Services Company with the Securities and Exchange Commission on February 11, 2021, as of December 31, 2019, based on information contained in a Schedule 13G/A filed by Massachusetts Financial Services Company with the Securities and Exchange Commission on February 14, 2020, as of December 31, 2018, based on information contained in a Schedule 13G/A filed by Massachusetts Financial Services Company with the Securities and Exchange Commission on February 13, 20198. The address for Massachusetts Financial Services Company is 111 Huntington Avenue, Boston, Massachusetts 02199.
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, 2020, there were 119 holders of record of our ordinary shares in the United States, representing approximately 83.83% 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.
 
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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.
ITEM 8. FINANCIAL INFORMATION
Consolidated Financial Statements
You can find our financial statements in “Item 18 – Financial Statements”.
Dividend policy
We currently do not intend to distribute any amounts as dividend in the near-term. 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 were obligated to meet certain conditions which included investment 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. We believe we met those conditions. For amounts distributed as dividends from earnings from 2012 onwards, 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 us and various tax authorities in different parts of the world.
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”.
ITEM 10. ADDITIONAL INFORMATION
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 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 the Israeli Companies Law. For the complete text of our articles of association, see “Item 19 – Exhibits”.
 
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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. As of February 28, 2021, 135,290,660 ordinary shares were issued and outstanding.
Please refer to Exhibit 2.1 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
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 holder’s 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 holder’s 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 company’s 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 director’s 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 holds 5% or more of the shares, 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 of 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 company’s 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 company’s 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 the board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. The transaction shall not be approved if it is adverse to the company’s 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 company’s 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 would be required as well.
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 defined as any shareholder who has the ability to direct the company’s 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.
 
52
Under the Israeli Companies Law, a shareholder has a duty to act in good faith toward the company and the other shareholders, and to refrain from abusing his or her power in the company, which includes, among other things, voting in the general meeting of shareholders on the following matters:
 
  •  
any amendment to the articles of association,
 
  •  
an increase of the company’s authorized share capital,
 
  •  
a merger, or
 
  •  
approval of interested party transactions that require shareholder approval.
In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote, and any shareholder who can appoint or prevent the appointment of an office holder under the company’s articles of association, 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 Israeli Companies Law. In addition, according to the Israeli Companies Law, the policy must be reviewed and readopted at least once every three years.
The adoption of the compensation policy requires the approval of the compensation committee, the board of directors and our shareholders, in that order. The shareholder’s 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:
 
  •  
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.
In accordance with the Israeli Companies Law, our policy was last readopted in June 2019 by the compensation committee, the board of directors and our shareholders.
Under the Israeli 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:
 
  •  
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.
 
53
  •  
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:
 
  •  
no financial liability was imposed on the office holder in lieu of criminal proceedings, or
 
  •  
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.
 
  •  
Reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a court:
 
  •  
in an action brought against the office holder by us, on our behalf or on behalf of a third party,
 
  •  
in a criminal action in which the office holder is found innocent, or
 
  •  
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, excluding litigation expenses, must be limited to foreseeable events in light of the company’s 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 negligence of the office holder; and 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 that the exculpation can be made, either 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 company’s 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 the act or omission were committed intentionally or recklessly (excluding mere negligence), or 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 2020, the list of entities to which we contributed included, among others, the Tel Aviv University and the Yeholot Association. Gil Shwed, our founder and Chief Executive Officer, is a Governor of the Board of Governors of Tel Aviv University, the Chairman of the Board of Trustees of the Youth University of Tel Aviv University, the founder of
Tel-Aviv
University’s Check Point Institute for Information Technology 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
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.
 
54
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 website (
www.checkpoint.com
), rather than mail it to shareholders.
Material Contracts
None.
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 that are 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 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 23% since 2018.
However, as discussed below, the rate is effectively reduced for income derived from our Technological preferred enterprise.
Law for the Encouragement of Capital Investments, 1959 (“Investment Law”)
We elected to apply the Preferred Enterprise regime under the Law for the Encouragement of Capital Investment (the “Investment Law”). Under the Preferred Enterprise regime, our entire preferred income is subject to tax rates as follows: 2013—12.5% and 2014 and thereafter—16%. The election is irrevocable.
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 it will continue to do so.
Among other changes, the new Law includes, Amendment 73 to the Investment Law (“Amendment 73”). Amendment 73 prescribes special tax tracks for technological enterprises. One of the tracks is for Technological preferred enterprise—an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property. The special tax tracks under Amendment 73 are subject to rules issued by the Minister of Finance. On May 1, 2017, the Israeli Finance Minister signed tax regulations implementing the Organisation for Economic
Co-operation
and Development’s (OECD’s) “nexus approach,” a base erosion and profit shifting (BEPS) requirement for intellectual property (IP) preferential tax regimes. The proposed regulations are subject to approval by the Parliament’s Finance Committee. On May 16, 2017 the Knesset Finance Committee approved the regulations effective as of January 1, 2017.
We have derived, and expect to continue to derive, a substantial portion of our operating income from our Technological preferred enterprise. We are, therefore, eligible for reduced tax rates for an unlimited period.
To prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our potential tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes.
 
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These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.
Prior to 2012, most of our 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/Technological preferred enterprise Regime will be freely distributable as dividends, subject to a 15% or 20% withholding tax (or at lower rate, under an applicable tax treaty). However, upon the distribution of a dividend from Preferred/ Technological preferred Income to an Israeli company, no withholding tax will be remitted.
Our tax assessments through the 2015 tax year are considered final.
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018.
At December 31, 2017, we
re-measured
certain of our U.S. deferred tax assets and liabilities, based on the new rates at which they are expected to reverse in the future.
The Tax Act, among other things (i) lowered the statutory corporate income tax rate (the federal tax rate) from 35% to 21%; (ii) limits the tax deduction for interest expense to 30% of adjusted taxable income; (iii) implemented a “base erosion anti-abuse tax”; (iv) repealed the alternative minimum tax, or AMT, for corporations; (v) changed a taxpayer’s ability to either utilize or refund the AMT credits previously generated; (vi) changed the attribution rules relating to shareholders of certain “controlled foreign corporations”;
(vii) limits the deduction for net operating losses carried forward from taxable years beginning after December 31, 2017 to 80% of current year taxable income and eliminates net operating loss carrybacks; (viii) allows immediate deductions for certain investments rather than deductions for depreciation over time; and (ix) limits various business deductions and credits. As of today, we believe that the overall impact of the Tax Act could still materially affect our tax obligations and effective tax rate.
See also Item 3 “Key Information – Risk factors” – Risks Related to Our Business and Our Market – 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”.
U.S. Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide economic relief to companies and individuals through changes in the U.S. Tax Code. The CARES Act, among other things (i) temporarily suspended with retroactive effect the taxable income limitation and carryback limitation on a taxpayer’s use of net operating losses (NOLs) imposed by the Tax Act allowing NOLs (whether arising in or carried forward to taxable years beginning in 2018, 2019, or 2020) to fully offset the taxpayer’s taxable income for taxable years beginning before January 1, 2021; (ii) provides that NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, generally may be carried back five years; (iii) allows NOLs arising in a taxable year beginning in 2017 and ending in 2018 to be carried back for two years; (iv) temporarily changes the Section 163(j) business interest expense limitation allowing taxpayers (at their election) to use their adjustable taxable income “ATI” for their last taxable year beginning in 2019 for purposes of computing the Section 163(j) interest expense limitation for their first taxable year beginning in 2020; (v) increases the business interest expense limitation from 30% of ATI to 50% of ATI for taxable years beginning in 2019 and 2020; (vi) accelerates the alternative minimum tax credit recovery schedule for corporate taxpayers; (vii) provides for the reinstatement of the accelerated cost recovery for qualified improvement property to be eligible for 100% first year bonus depreciation under Section 168(k); (viii) created an employee retention tax credit for employers negatively affected by the coronavirus pandemic; and (ix) permitted employers to defer a share of the employer portion of social security tax payments. The only impact to financial statements for CARES Act the year ended December 31, 2020 relates to the acceleration of the Alternative Minimum Tax Credit. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund for the entire remaining balance of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the Tax Act. The company claimed the remaining $3.2 million of Alternative Minimum Tax Credits as a refund on its 2019 U.S. Corporate income tax return.
 
56
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 31 of each year.
Dividends, if any, paid to the holders of our shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our 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
The Israeli tax 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 47% tax in 2018, 2019 and in 2020, 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 deduct 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, an additional tax was imposed in a rate of 3% (“the surtax”). Accordingly, and as of December 31, 2020 the marginal tax rate of an individual can reach 50% if the employee’s taxable income for the year exceeded NIS 651,600.
(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, we may not deduct 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, whichever route is selected). As of January 1, 2013, an additional tax was imposed in a rate of 3% (“the surtax”). Accordingly, and as of December 31, 2020 the marginal tax rate of an individual can reach 50% if the employee’s taxable income for the year exceeded NIS 651,600.
(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 47% in 2018, 2019 and in 2020, 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% on the capital profit upon the sale of the underlying shares/shares, and we may not deduct expenses pertaining to the capital gain for tax purposes but may deduct expenses pertaining to the profit at the allotment date. As of January 1, 2013, an additional tax was imposed in a rate of 3% (“the surtax”). Accordingly, and as of December 31, 2020 the marginal tax rate of an individual can reach 50% if the employee’s taxable income for the year exceeded NIS 651,600.
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.
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 47% in 2018, 2019 and in 2020) on the profit upon the sale of the underlying shares/shares. As of January 1, 2013, the surtax is imposed. Accordingly, the marginal tax rate of an individual increased by 3% if the employee’s taxable income in 2018 exceeded NIS 641,880, and is increased by 3% if the employee’s annual taxable income in 2019 exceeds NIS 649,560 and is increased by 3% if the employee’s annual taxable income in 2020 exceeds NIS 651,600 (as updated from time to time). Hence, the employee’s marginal tax rate can reach 50%.
 
57
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 subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income or income from capital gains), which are subject to tax at a rate which does not exceed 15% in the foreign corporation’s jurisdictions may be deemed distributed as a dividend to the Israeli parent company and consequently is subject to Israeli taxation. This tax regime will not apply where the subsidiary’s dividend income is derived from taxable profits that were subject to tax exceeding 15%. 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.
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, Preferred Enterprise or Technological 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 (,(apply on Approved Enterprise or Privileged Enterprise which are not considered Foreign Investors Company only if the dividend is distributed during the benefits period or within the following 12 years). 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 Preferred Enterprise or Technological preferred enterprise will be subject to tax in Israel at the rate of 25% (or to a reduced tax rate if is distributing to a foreign shareholder based on an applicable tax treaty), except that dividends distributed to an individual who is deemed “a substantial shareholder” will be subject to tax at the rate of 30% ( or at a lower rate based on an applicable tax treaty).
Under the United States-Israel tax treaty, the maximum tax on dividends paid to a holder of shares of our capital stock 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% or 15%, depends on the nature of the taxable income, 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
According to Israeli domestic tax law, capital gains from the sale of our shares by
non-Israeli
shareholders (including United States residents) 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.
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.
United States Federal Income Tax Considerations
The following discussion describes certain material U.S. federal income tax considerations relating to the direct or indirect ownership or disposition of our shares by a shareholder who is:
 
  •  
An individual citizen or resident (as defined for U.S. federal income tax purposes) of the United States;
 
  •  
A domestic partnership;
 
  •  
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;
 
  •  
An estate, if the estates income is subject to U.S. federal income taxation; or
 
58
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”. We refer to any of the above as a “U.S. Shareholder”.
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. This discussion generally considers only U.S. Shareholders who will hold our 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:
 
  •  
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);
 
  •  
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;
 
  •  
U.S. Shareholders that are
tax-exempt
organizations and pension funds;
 
  •  
U.S. Shareholders that are former citizens or long-term residents of the United States;
 
  •  
U.S. Shareholders that are partnerships or entities treated as partnerships or other pass-through entities and persons who own our shares through such entities, and
non-U.S.
individuals or entities;
 
  •  
U.S. Shareholders that are real estate investment trusts or regulated investment companies;
 
  •  
U.S. Shareholders who own 10% or more of our outstanding voting shares, either directly or by attribution;
 
  •  
U.S. Shareholders who hold our shares as part of a hedging, straddle, integrated, or conversion transaction;
 
  •  
U.S. Shareholders who acquire their shares of our capital stock in a “compensatory transaction”;
 
  •  
U.S. Shareholders whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar; and
 
  •  
Any aspect of U.S. estate, gift, state, or local tax law, or any
non-U.S.
tax law.
The following summary does not address all of the tax consequences of owning or disposing of our 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 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 Company’s Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Shareholder, as defined above, may be required to include in gross income the amount of any distributions made with respect of our shares (and any Israeli taxes withheld on such distributions) 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 calculate earnings and profits under United States federal income tax principles.
Certain
non-corporate
U.S. Shareholders may qualify for preferential rates of taxation with respect to dividends on our capital 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 our 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.
 
59
U.S. Income Tax Treatment of Dividends
Any distributions in excess of earnings and profits will be treated first as
non-taxable
return of capital, reducing a U.S. Shareholder’s tax basis in our shares to the extent of the distributions, and then as capital gain from a sale or exchange of our 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 our 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. A 10% or more U.S. shareholder may have additional concerns not noted here.
Credit for Israeli Taxes
Subject to certain conditions and limitations, a U.S. Shareholder of an Israeli corporation may be eligible for a foreign tax credit to offset a portion of the U.S. tax liability assessed on Israeli sourced income when repatriated to the U.S. The U.S. Internal Revenue Code provides a foreign tax credit limitation on the amount of foreign tax credits that may be used during each taxable year. This limitation requires detailed knowledge of the mechanics of the rules proscribed in the code and support regulations. Under no circumstances, can foreign tax credits be used to offset a U.S. tax assessment on U.S. source income, and the credit may not exceed the U.S. tax assessment on foreign income.
A U.S. Shareholder may elect to claim a foreign tax credit on its U.S. federal income tax return for foreign taxes paid or accrued, alternatively, the U.S. Shareholder may elect to claim a deduction for Israeli income tax withheld or paid, but only if the shareholder elects to do so for all foreign income taxes of the same year. Special rules for determining a U.S. Shareholder ’s 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 Our Shares
The sale or exchange of our shares may 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 our shares. If a U.S. Shareholder’s holding period for our shares exceeds one year at the time of the disposition, the amount of the shareholder’s 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 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 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 may 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 shares, subject to certain limitations and exceptions.
 
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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:
 
  •  
75% or more of our gross income in the taxable year is passive income, or
 
  •  
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.
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.