# OR
PURSUANT TO SECTION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
**OR**
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the transition period from to
Commission file number 0-28584
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
3A Jabotinsky Street, Ramat-Gan 52520, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ISRAEL
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock
as of the close of the period covered by the annual report: 242,824,021 ordinary shares, NIS 0.01 nominal
3A Jabotinsky Street, Ramat-Gan 52520, Israel
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 Item 18 X
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
(202) 659-0779 Fax
csdc@rcigroup.com
---
## Information on the Company ....................................................9
## Operating and Financial Review and Prospects ...................................19
Item 6. Directors, Senior Management and Employees....................................25
Item 7. Major Shareholders and Related Party Transactions ...............................30
Item 8. Financial Information..........................................................31
Item 9. The Offer and Listing..........................................................31
Item 10. Additional Information ........................................................32
Item 11. Quantitative and Qualitative Disclosures About Market Risk.......................42
Item 12. Description of Securities Other than Equity Securities .............................44
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................................45
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds........45
Item 15. Reserved.....................................................................45
Item 16. Reserved.....................................................................45
PART III
Item 17. Financial Statements...........................................................46
Item 18. Financial Statements...........................................................46
Item 19. Exhibits......................................................................46
Signatures ................................................................................47
RCI Group Inc.
## PART III
---
## ITEM 3. KEY INFORMATION
## The following selected consolidated statements of income data for the years ended December 31,
## 1999, 2000 and 2001, and the selected consolidated balance sheet data as of December 31, 2000 and 2001 have been derived from the audited consolidated financial statements of Check Point Technologies Ltd. (together with its subsidiaries, the ‘‘Company’’ or ‘‘Check Point’’) set forth elsewhere in this Form 20-F. These financial statements have been prepared in accordance with generally accepted
## accounting principles in the United States (‘‘U.S. GAAP’’). The selected consolidated statement of income data for the years ended December 31, 1997 and 1998 and the selected consolidated balance sheet
data as of December
## consolidated financial statements not accordance with U.S. GAAP. The selected consolidated financial statements set forth below should be
read in conjunction with and are qualified by reference to the Company’s consolidated financial
statements and the related notes as well as ‘‘Item 5 — Operating and Financial Review and Prospects’’
included elsewhere in this Annual Report on Form 20-F.
On December 20, 1999, the Company’s Board of Directors approved a two-for-one stock split in the
form of a stock dividend effective January 23, 2000. On June 29, 2000 the Company’s Board of Directors
approved a two-for-one stock split in the form of a stock dividend effective July 14, 2000. On January 18,
2001, the Company’s Board of Directors approved a three-for-two stock split in the form of a stock
dividend effective February 1, 2001. All share and per share numbers herein reflect adjustments resulting
from these stock splits.
Year Ended December 31,
**1997(*) 1998(*) 1999 2000 2001**
**(in thousands, except share data)**
**Consolidated Statement of Income Data:**
Revenues................................... $ 86,352 $141,941 $219,567 $425,283 $527,643
Cost of revenues............................. 6,839 13,623 22,423 35,265 26,571
Gross profit................................. 79,513 128,318 197,144 390,018 501,072
Operating expenses:
Research and development, net ................ 7,105 10,629 18,923 30,309 33,221
Sales and marketing ......................... 26,611 39,966 68,229 110,003 109,086
General and administrative................... 7,766 10,886 13,069 20,409 22,002
Total operating expenses ....................... 41,482 61,481 100,221 160,721 164,309
66,837 96,923 229,297
| | Year Ended December 31, | | | | |
| --- | --- | --- | --- | --- | --- |
| | 1997(*) | 1998(*) | 1999 | 2000 | 2001 |
| | (in thousands, except share data) | | | | |
| Consolidated Statement of Income Data: | | | | | |
| Revenues | $86,352 | $141,941 | $219,567 | $425,283 | $527,643 |
| Cost of revenues | 6,839 | 13,623 | 22,423 | 35,265 | 26,571 |
| Gross profit | 79,513 | 128,318 | 197,144 | 390,018 | 501,072 |
| Operating expenses: | | | | | |
| Research and development, net | 7,105 | 10,629 | 18,923 | 30,309 | 33,221 |
| Sales and marketing | 26,611 | 39,966 | 68,229 | 110,003 | 109,086 |
| General and administrative | 7,766 | 10,886 | 13,069 | 20,409 | 22,002 |
| Total operating expenses | 41,482 | 61,481 | 100,221 | 160,721 | 164,309 |
| Operating income | 38,031 | 66,837 | 96,923 | 229,297 | 336,763 |
| Financial income, net | 4,556 | 4,406 | 12,962 | 29,147 | 44,760 |
| Capital gain | - | 2,581 | - | - | - |
| Income before taxes on income | 42,587 | 73,824 | 109,885 | 258,444 | 381,523 |
| Taxes on income | 2,309 | 3,947 | 14,104 | 37,231 | 59,603 |
| | 40,278 | 69,877 | 95,781 | 221,213 | 321,920 |
| Equity in losses of an affiliate | 760 | - | - | - | - |
| Net Income | $39,518 | $69,877 | $95,781 | $221,213 | $321,920 |
| Basic net earnings per share(1) | $0.19 | $0.33 | $0.43 | $0.95 | $1.34 |
| Shares used in computing basic net earnings per Share(1) | 203,622 | 212,610 | 222,930 | 232,611 | 240,008 |
| Diluted net earnings per share(1) | $0.17 | $0.30 | $0.39 | $0.84 | $1.25 |
| Shares used in computing diluted net earnings per share(1) | 228,312 | 232,170 | 246,456 | 262,515 | 258,075 |
---
computing net earnings per share.
(*) Reported financial results reflect the acquisition in April 1998 of MetaInfo Inc., which was accounted for as a pooling-of-interest
transaction, and all amounts for periods prior to the date of such acquisition have been restated.
| | December 31, | | | | |
| --- | --- | --- | --- | --- | --- |
| | 1997(*) | 1998(*) | 1999(in thousands) | 2000 | 2001 |
| Balance Sheet Data: | | | | | |
| Working capital | $60,817 | $80,872 | $198,204 | $313,218 | $364,193 |
| Total Assets | 124,964 | 212,235 | 394,346 | 777,639 | 1,142,908 |
| Shareholder's equity | 100,025 | 175,707 | 292,508 | 549,283 | 915,728 |
within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange
Act’’), including, without limitation, statements regarding the Company’s expectations, beliefs,
intentions, goals, plans, investments or strategies regarding the future and any assumptions underlying
any of the foregoing. Forward-looking statements include statements in (i) ‘‘Item 4 — Information on
the Company’’ regarding the Company’s belief as to increased acceptance of Internet technologies,
expansion of connectivity services, acceleration of the use of networks, increasing demands on enterprise
## security systems, the impact of the Company’s relationship with technology partners on its sales goals, the VPN-1 products to the
development of future products and (ii) ‘‘Item 5 — Operating and Financial Review and Prospects’’
regarding, among other things, future sources of revenue, ongoing relationships with current and future
end-user customers and resellers, future costs and expenses, and adequacy of capital resources.
Forward-looking statements involve risks and uncertainties, as well as assumptions, that, if they never
materialize or prove incorrect, could cause the Company’s actual results to differ materially from such
results discussed in these statements. Many of these risks and uncertainties are described in the risk
factors set forth below in this section and elsewhere in this Form 20-F. All forward-looking statements
included in this document are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward-looking statements.
**Competition**
The market for enterprise security and virtual private networking (VPN) products and services is
intensely competitive and the Company expects competition to increase in the future. The Company’s
principal network security competitors include Cisco Systems and Nortel Networks. Other competitors
include Lucent Technologies, Microsoft Corp., NetScreen Technologies Inc., SonicWALL Inc., Symantec
Inc., WatchGuard Technologies Inc., and Secure Computing. The Company expects additional
competition from other emerging and established companies. There can be no assurance that the
Company’s current and potential competitors, including its current technology partners, will not develop
network security products that may be more effective than the Company’s current or future products or
that the Company’s technologies and products will not be rendered obsolete by such developments. In
particular, the
barriers.
Some of the Company’s current and potential competitors have longer operating histories, greater
name recognition, access to larger customer bases and significantly greater financial, technical and
marketing resources than the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than the Company. In addition, certain of the Company’s
competitors may determine, for strategic reasons, to consolidate, to substantially lower the price of their
enterprise security products or to bundle their products with other products, such as hardware products
2
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
In the future, vendors of operating system software or networking hardware may enhance their
products to include functionality that is currently provided by the Company’s VPN-1/FireWall-1 family
of products. The widespread inclusion of the functionality of the Company’s software as standard features
of operating system software or networking hardware could render the VPN-1/FireWall-1 family of
products obsolete and unmarketable, particularly if the quality of such functionality were comparable to
that of the Company’s products. Furthermore, even if the network security functionality provided as
standard features by operating systems software or networking hardware is more limited than that of the
Company’s VPN-1/FireWall-1 software, there can be no assurance that a significant number of customers
would not elect to accept more limited functionality in lieu of purchasing additional software. In the event
of any of the foregoing, the Company’s business, operating results and financial condition will be
materially and adversely affected. See ‘‘Item 4 — Information on the Company.’’
**Rapid Technological Change**
The enterprise security and VPN industry is characterized by rapid technological advances, changes
in customer requirements, frequent new product introductions and enhancements and evolving industry
standards in computer hardware and software technology. As a result, the Company must continually
change and improve its products in response to changes in operating systems, application software,
computer and communications hardware, networking software, programming tools and computer
language technology. The introduction of products embodying new technologies and the emergence of
new industry standards may render existing products obsolete or unmarketable. In particular, the market
for Internet and intranet applications is relatively new and is rapidly evolving. The Company’s future
## operating results will depend upon the Company’s ability to enhance its current products and to develop and introduce new products on a timely basis that address the increasingly sophisticated needs of its
end-users and that keep pace with technological developments, new competitive product offerings and
emerging industry standards. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements that respond to technological change
and evolving industry standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these products, or that any new
products and product enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company does not respond adequately to the need to develop and
introduce new products or enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company’s business, operating results and financial
condition will be materially adversely affected. See ‘‘Item 4 — Information on the Company.’’
**Potential Fluctuations in Future Operating Results; Potential Decline in Margins**
The quarterly operating results of the Company can vary significantly due to several factors, any of
which could have a material adverse effect on the Company’s operating results, and there can be no
assurance that the Company will continue to be profitable on a quarterly or annual basis. The factors
which can cause fluctuations in operating results include seasonal trends in customer purchasing, the
volume and timing of orders and the ability to fulfill orders, the level of product and price competition,
the Company’s ability to develop new and enhanced products and control costs, the mix of products and
goods sold, the mix of distribution channels through which products are sold, the Company’s ability to
## 3
---
Since late 2000 there has been a global recession and a resulting decline in economic conditions. If
general economic and industry conditions fail to improve or continue to deteriorate, demand for the
Company’s products could be adversely affected, as could the financial health of the Company’s suppliers
and resellers. In addition, the September 11, 2001 terrorist attacks on the United States and the
subsequent military response by the United States in Afghanistan have had, and the Company expects
that they could continue for some time to have, a negative effect on the global economy and the business
of the Company and its customers. Any similar acts of violence or war may further negatively affect the
Company’s industry, revenue and profitability and could also result in a disruption of the Company’s
business or the businesses of the Company’s customers.
The Company’s revenues are subject to seasonal fluctuations related to the slowdown in spending
activities in Europe for the quarter ending September 30 and the year-end purchasing cycles of many
end-users of the Company’s products. The Company believes that, in the absence of exceptional factors
such as new product introductions, it will continue to encounter quarter-to-quarter seasonality that could
result in proportionately lower sales in the quarters ending September 30 and March 31 relative to sales
in the quarters ending June 30 and December 31.
The Company operates with virtually no backlog and, therefore, the timing and volume of orders
within a given period and the ability to fulfill such orders determines the amount of revenues within a
given period. The Company’s sales are principally derived through indirect channels, which make
revenues from such sales difficult to predict. Furthermore, the Company’s expense levels are based, in
part, on expectations as to future revenues. If revenue levels are below expectations, operating results are
likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenues
due to the relatively small amount of the Company’s expenses, which vary with its revenues. As a result,
the Company believes that period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance. If the Company’s
operating results are below the expectations of public market analysts and investors, the price of the
Company’s ordinary shares would likely be materially adversely affected. See ‘‘Item 5 — Operating and
Financial Review and Prospects.’’
The Company may experience a decline in operating margins as it expands its customer and
technical services organization. The Company also expects that it will experience increasing competition
and pricing pressure, which may result in lower operating margins. In 2002, the Company intends to
continue to make investments in the further development and expansion of its sales and marketing
organization, including the expansion of its field organization both in the United States and additional
countries in Europe, Asia, and Latin America. In addition, the Company expects to further expand its
research and development organization and make additional investments in its general and
administrative infrastructure. As a result, the Company expects operating margins to decrease from
historical levels. The amount and timing of these additional expenditures are likely to result in
fluctuations in operating margins. See ‘‘Item 5 — Operating and Financial Review and Prospects.’’
**Risks Associated with Emerging Network Security, Internet and Intranet Markets**
The markets for the Company’s products are rapidly evolving. There can be no assurance that the
Internet or common public protocols will continue to be used to facilitate communications or that the
market for enterprise security systems in general will continue to expand. Continued growth of this
market will depend, in large part, upon the continued expansion of Internet usage and the number of
organizations adopting or expanding intranets, upon the ability of their respective infrastructures to
4
---
## Introductions
The Company expects that it will continue to be dependent upon a limited number of resellers for
a significant portion of its revenues. If anticipated orders from these resellers fail to materialize, the
Company’s business, operating results and financial condition will be materially adversely affected.
The Company has derived substantially all of its revenues, and expects to continue to derive the vast
majority of its revenues in the foreseeable future, from sales of its FireWall-1 product and VPN-1 product
family, including related software subscriptions, support and technical services and training programs.
## During the first quarter of 2001, the Company announced the Check Point Next Generation release of VPN-1/FireWall-1, which the Company began shipping in the third quarter of 2001. The Company’s future financial performance will depend in significant part on the successful development, introduction,
marketing and customer acceptance of new products and enhancements and new features for its existing
product lines. If resellers delay ordering products or cancel orders for existing products in anticipation of
new releases, the Company’s business, operating results and financial condition will be materially
adversely affected. See ‘‘Item 5 — ‘‘Operating and Financial Review and Prospects’’ and ‘‘Item 4 —
Information on the Company.’’
**Dependence Upon Key Personnel**
The Company’s future performance depends, in significant part, upon the continued service of its key
technical, sales and management personnel, including Gil Shwed, Marius Nacht and Jerry Ungerman.
The loss of the services of one or more of the Company’s key personnel could have a material adverse
effect on the Company’s business, operating results and financial condition. The Company’s future
success also depends on its continuing ability to attract and retain highly qualified technical, sales and
managerial personnel. Competition for such personnel is intense, and there can be no assurance that the
Company can retain its key technical, sales and managerial employees or that it can attract, motivate or
retain other highly qualified technical, sales and managerial personnel in the future. If the Company
## cannot retain or is unable to hire such key personnel, the Company’s business, operating results and financial condition will be materially adversely affected. See ‘‘Item 4 — Information on the Company.’’
**Risk of Litigation**
The Company has been a party to various lawsuits and other legal proceedings in the normal course
of its business. In particular, the Company is the subject of a complaint submitted by a competitor to the
Directorate-General for Competition of the European Commission, alleging anti-competitive behavior
on the part of the Company and abuse by the Company of its dominant position. There can be no
assurance that other similar complaints may not arise in the future, either from European or other
anti-trust authorities and an adverse outcome in such proceedings could have a material adverse effect
on the Company. Moreover, the results of complex legal proceedings are difficult to predict and an
unfavorable resolution of a lawsuit or proceeding could have a material adverse effect on the Company’s
## business, results of operations or financial condition. Legal proceedings can be expensive, lengthy and disruptive to normal business operations, regardless of their merit. Moreover, the results of complex legal
proceedings are difficult to predict and an unfavorable resolution of a lawsuit or proceeding could have
a material adverse effect on the Company’s business, results of operations or financial condition. See
‘‘Legal Proceedings’’ in ‘‘Item 8 — Financial Information.”
5
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
## establish additional marketing and sales operations, hire additional personnel and recruit additional resellers internationally. To the extent that the Company is unable to do so effectively, the Company’s
growth is likely to be limited and the Company’s business, operating results and financial condition will
be materially adversely affected. In addition, as the Company expands its international operations, a
portion of revenues generated in international jurisdictions may be subject to taxation by such
jurisdictions at rates higher than those to which the Company is subject in Israel. Most of the Company’s
worldwide sales are currently denominated in United States dollars. An increase in the value of the
United States dollar relative to foreign currencies would make the Company’s products more expensive
and, therefore, potentially less competitive in those markets. Additional risks inherent in the Company’s
worldwide business activities generally include unexpected changes in regulatory requirements, tariffs
and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, longer accounts receivable payment cycles, difficulties in operations
management, potentially adverse tax consequences, including restrictions on the repatriation of earnings,
and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such
factors will not have a material adverse effect on the Company’s future international sales and,
consequently, the Company’s business, operating results and financial condition. See ‘‘Item 4 —
Information on the Company’’ and ‘‘Item 5 — Operating and Financial Review and Prospects.’’
**Product Liability; Risk of Product Defects**
The Company’s sales agreements typically contain provisions designed to limit the Company’s
exposure to potential product liability or related claims. In selling its products, the Company relies
primarily on “shrink wrap” licenses that are not signed by the end-user, and, for this and other reasons,
such licenses may be unenforceable under the laws of certain jurisdictions. As a result, the limitation of
the liability provisions contained in the Company’s agreements may not be effective. The Company’s
products are used to manage network security, which may be critical to organizations, and, as a result, the
sale and support of products by the Company may entail the risk of product liability and related claims.
A product liability claim brought against the Company could have a material adverse effect upon the
## Company’s business, operating results and financial condition. Software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or when new
versions are released. In particular, the personal computer hardware environment is characterized by a
wide variety of non-standard configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming. Despite testing by the Company and by current
and potential resellers, there can be no assurance that errors will not be found in new products or releases
after commencement of commercial shipments. The occurrence of these errors could result in adverse
publicity, loss of or delay in market acceptance or claims by resellers against the Company, any of which
could have a material adverse effect upon the Company’s business, operating results and financial
condition. See ‘‘Item 4 — Information on the Company.’’
**Dependence on Proprietary Technology; Risks of Infringement**
The Company relies primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary rights as set forth below
in the section entitled ‘‘Proprietary Rights and Trademark Litigation’’ in ‘‘Item 4 — Information on the
Company.’’ The Company has certain patent applications pending and there can be no assurance that the
6
## RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel piracy of its software products exists, software piracy can be expected to be a persistent problem. In
do the laws of the United States or Israel. To date, the Company has not conducted any material amount
of business in such countries. There can be no assurance that the Company’s efforts to protect its
proprietary rights will be adequate or that the Company’s competitors will not independently develop
similar technology.
**Approved Enterprise Status**
The Company receives significant tax benefits in Israel, particularly as a result of the ‘‘Approved
Enterprise’’ status of the Company’s facilities and programs. To be eligible for tax benefits, the Company
must meet certain conditions, relating principally to adherence to the investment program filed with the
Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations.
Although the Company believes that it will be able to meet such conditions in the future, if the Company
fails to meet such conditions it would be subject to corporate tax in Israel at the standard rate of 36%,
and could be required to refund tax benefits already received. There can be no assurance that such tax
benefits will be continued in the future at their current levels or otherwise. The termination or reduction
of certain programs and tax benefits (particularly benefits available to the Company as a result of the
## Approved Enterprise status of the Company’s facilities and programs) or a requirement to refund tax
benefits already received would have a material adverse effect on the Company’s business, operating
results and financial condition. See ‘‘Item 4 — Information on the Company” and ‘‘Israeli Taxation,
Foreign Exchange Regulation and Investment Programs’’ in ‘‘Item 10 — Additional Information.’’
**Anti-Takeover Effects Of Israeli Laws**
Under the Israeli Companies Law, a merger is generally required to be approved by the shareholders
and board of directors of each of the merging companies. Shares held by a party to the merger are not
counted toward the required approval. If the share capital of the company that will not be the surviving
company is divided into different classes of shares, the approval of each class is also required. A merger
may not be approved if the surviving company will not be able to satisfy its obligations. At the request
of a creditor, a court may block a merger on this ground. In addition, a merger can be completed only
after all approvals have been submitted to the Israeli Registrar of Companies and 70 days have passed
from the time that a proposal for approval of the merger was filed with the Registrar.
The Israeli Companies Law provides that an acquisition of shares in a public company must be made
## by means of a tender offer, if as a result
of the acquisition, the purchaser would become a 25%
shareholder of the company. This rule does not apply if there is already another 25% shareholder of the
company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become
a 45% shareholder of the company, unless someone else already holds a majority of the voting power of
the company. These rules do not apply if the acquisition is made by way of a merger.
Regulations promulgated under the Israeli Companies Law provide that these tender offer
requirements do not apply to companies whose shares are listed for trading outside of Israel if, according
to the law in the country in which the shares are traded, including the rules and regulations of the stock
exchange on which the shares are traded, either:
• There is a limitation on acquisition of any level of control of the company; or
• The acquisition of any level of control requires the purchaser to do so by means of a tender offer
to the public.
7
RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
The Company’s Board of Directors has the authority to issue up to 5,000,000 preferred shares and
to determine the price, rights (including voting rights), preferences, privileges and restrictions of such
preferred shares, without any vote or actions by the Company’s shareholders. The rights and preferences
of such preferred shares could include a preference over the ordinary shares on the distribution of the
Company’s assets upon a liquidation or sale of the Company, preferential dividends, redemption rights,
and the right to elect one or more directors and other voting rights. The rights of the holders of the
ordinary shares will be subject to, and may be adversely affected by, the rights of the holders of any
preferred shares that may be issued in the future. The Company has no current plans to issue preferred
## shares. The issuance of preferred shares, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting shares of the Company. Furthermore, certain
provisions of the Company’s Articles of Association could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. These provisions stipulate that the Company cannot
engage in a business combination with an interested shareholder (defined generally as the beneficial
owner of 15% of the outstanding shares and its affiliates) for a period of three years following the date
that such shareholder became an interested shareholder, unless certain conditions are met. These
provisions may have the effect of delaying or deterring a change in control of the Company, thereby
limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the
price that some investors are willing to pay for the Company’s securities.
**Concentration of Share Ownership**
As of February 28, 2002, the directors, executive officers and principal shareholders of the Company
and their affiliates beneficially owned approximately 27% of the outstanding ordinary shares. As a result,
these shareholders are able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a change in control of the
Company. See “Item 7 — Major Shareholders and Related Party Transactions.”
The Company has agreements with its directors and senior officers which provide, subject to Israeli
law, for the Company to indemnify these directors and senior officers for (a) any monetary obligation
## imposed upon them for the benefit of a third party by a judgment, including a settlement agreed to in
writing by the Company, or an arbitration decision certified by the court, as a result of an act or omission
of such person in his capacity as a director or officer of the Company, and (b) reasonable litigation
expenses, including legal fees, incurred by such a director or officer or which he is obligated to pay by a
court order, in a proceeding brought against him by or on behalf of the Company or by others, or in
connection with a criminal proceeding in which he was acquitted, in each case relating to acts or omissions
of such person in his capacity as a director or officer of the Company.
**Exchange Controls and Other Limitations Affecting Security Holders**
Until May 1998, Israel imposed restrictions on transactions in foreign currency. These restrictions
affected the Company’s operations in various ways, and also affected the right of non-residents of Israel
to convert into foreign currency amounts they received in Israeli currency, such as the proceeds of a
judgment enforced in Israel. Despite these restrictions, foreign investors who purchased shares with
8
## RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
Neither the Memorandum and Articles of Association of the Company nor the laws of Israel restrict
in any way the ownership or voting of ordinary shares by non-residents of Israel, except with respect to
subjects of countries which are in a state of war with Israel.
**ITEM 4. INFORMATION ON THE COMPANY**
**General**
Check Point develops, markets and supports Internet security solutions for enterprise networks, and
service providers (Telcos, ISPs, ASPs and MSPs), including Virtual Private Networks (VPNs), firewalls,
intranet and extranet security. The Company delivers solutions that enable secure, reliable and
manageable business-to-business communications over Internet Protocol (“IP”) networks—including the
Internet, intranets and extranets. Check Point product offerings also include traffic control/quality of
## Company’s Secure Virtual Network (SVN) architecture and provide centralized management, distributed deployment, and comprehensive policy administration. The capabilities of Check Point products can be
extended with the Open Platform for Security (OPSEC), enabling integration with best of breed
## extended hardware, security applications and enterprise software applications.
Check Point was incorporated in 1993 and its address is 3A Jabotinsky Street, Ramat-Gan 52520,
Israel. Its telephone number is 972-3-753-4555. Copies of this Annual Report on Form 20-F and other
documents incorporated herein by reference can be obtained upon request from the Company’s investor
relations department, Three Lagoon Drive, Redwood City, California 94065 (telephone no.
650-628-2000) or through the Company’s website, www.checkpoint.com.
**Industry Background**
Information, and the ability to access and distribute it, is a key strategic asset in today’s competitive
business environment. This need to effectively use and communicate information as well as work more
collaboratively has led to the extensive deployment of network-based communications systems
(connectivity). Increased connectivity is in turn increasing the need for technology to safeguard and
manage the access to information available over these increasingly global networks.
*Increase in Connectivity*
The network computing market has undergone two major transitions over the past decade, which
## have contributed to the increase in global connectivity. The first of these transitions was the migration of corporate computing
environments. The ability to access and share information through client/server technology has expanded
the need for connectivity beyond workgroup LANs (local area networks) to enterprise-wide networks
spanning multiple LANs and WANs (wide area networks). The second major transition has been the
widespread adoption of the Internet for business-to-business communications. Internet-based business
applications have rapidly expanded beyond e-mail to a broad range of business applications and services
including direct to customer transactions, product marketing, advertising and
## electronic publishing, customer support. The emergence of eBusiness increases the need for and challenges in providing secure
access to information and applications.
9
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel access, transaction processing services, audio and telephone services and video teleconferencing services.
communication systems.
*The Need for Network Security*
Although the increase in of connectivity and information exchange provides tremendous benefits, it
also exposes an organization’s sensitive information and applications to unauthorized access, both
through connections to the public Internet and from within the enterprise. In addition, the transmission
of data over the Internet also exposes sensitive data to unauthorized interception. These risks create a
critical need for enterprises to protect their information and information systems from unauthorized
access and use.
Earlier methods for securing information resources are no longer adequate to meet the security
requirements of today’s global networks. In the centralized mainframe environments that dominated the
## information systems landscape in previous years, organizations were able to secure a limited number of access points through physical barriers and controlled access to data through log-on procedures and
password protection. However, in today’s distributed network environments with multiple points of
access and multiple network resources, it is impractical to individually secure every application and
resource on the network. Therefore, an additional layer of security at the network level is needed to act
as a “virtual” barrier to control access to the network and to regulate and protect the flow of data
between network segments.
*Traditional Approaches to Network Security*
The increasing demands placed on enterprise security systems by the expansion of Internet services
and global enterprise networking are quickly outpacing the capabilities of many traditional Internet
firewall architectures. These demands include the need to define and transparently enforce an integrated,
enterprise-wide security policy that can be managed centrally and implemented on a distributed basis. An
effective network security solution also must be open and extendible to enable it to address the rapidly
changing requirements of the Internet and intranets, including the addition of new security applications,
such as authentication, encryption, URL filtering, anti-virus protection, and Java and ActiveX security
services and functions.
## The Check Point Solution
Using Check Point’s Secure Virtual Network (SVN) architecture, an organization can connect and
secure all elements of the enterprise network: networks, applications, systems and users. Check Point’s
Stateful Inspection technology, the foundation of all Check Point solutions, enables system
administrators to define and transparently enforce an integrated, centrally managed, enterprise-wide
network traffic policy that provides for secure and reliable communications. In addition, the Company’s
Open Platform for Security (OPSEC) framework provides a single platform that enables integration with
multiple third-party security applications, computer hardware, internetworking hardware, appliances and
enterprise applications from within Check Point’s open, extensible management framework. The
## following are the key factors that differentiate Check Point’s solution from earlier network security approaches:
10
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying is the critical convergence point for network security and traffic management, the Company has the
advantage of being able to apply this same architectural foundation to manage traffic flow and network
performance, inspecting traffic only once for both critical network decisions. State information is
extracted data maintained to provide context for future screening decisions.
*Open Platform for Security.* Check Point’s Open Platform for Security, or OPSEC, allows users to
integrate, manage, and deploy all aspects of network security through an open, extensible management
framework. Today, more than 300 vendors have joined the OPSEC Alliance. OPSEC partners develop
specialized solutions that span the range of enterprise network security technologies — from
high-performance internetworking, server and appliance platforms with embedded Check Point SVN
software, to authentication, public key infrastructure, content security, intrusion detection, and other
solutions. Additionally, through the OPSEC Check Point Certified Managed Service Provider (CCMSP)
program, customers have the option to select a complete managed service offering from among a group
of the world’s leading MSPs participating in this program. The OPSEC framework is designed to allow
end-users to choose system components that best meet their requirements, whether from the Company
or various third-party vendors, and to rapidly exploit new developments in security technology.
*Broad, Integrated Internet Security Solution.* The VPN-1 and FireWall-1 product families extend
across all major market segments, from small businesses to large enterprise networks. Most products
support a broad range of platforms, including Sun Microsystems (Solaris), IPSO, Microsoft (Windows),
Linux, Hewlett-Packard (HP-UX) and IBM Corporation (AIX). Check Point’s Internet security
solutions provide a broad range of features and functionality including the following:
*Integration of Third-Party Security Applications.* Through OPSEC, end-users of VPN-1 and
FireWall-1 are able to integrate the product into various network management systems and add new
features and functionality, such as public key infrastructure, authentication, encryption, URL
categorization, content security, anti-virus protection, intrusion detection, auditing and reporting
controls and enterprise directory integration.
*Implementation of the Virtual Private Networks.* The VPN-1 architecture supports multiple
authentication methods, including digital certificates, password-based techniques, biometrics and
authentication tokens. In addition, VPN-1 provides data encryption capabilities to shield
communications over public networks from unauthorized monitoring or alteration, enabling
companies to set up ‘‘virtual private networks’’ offering a level of privacy comparable to private
communication lines. The VPN-1 product family supports multiple encryption and key management
methods including IPSec, DES, IKE, AES, and 3DES. The Company extends the VPN to the mobile
desktop users with its SecuRemote and SecureClient software. In addition, the multi-vendor
interoperability offered by VPN-1 enables the deployment of secure and reliable intranet and
extranet VPNs for business communications.
*Extensive, Scaleable Application Support.* VPN-1 and FireWall-1 support over 150 pre-defined
applications, including database and enterprise applications such as Oracle SQL*Net, network
management protocols such as SNMP, multimedia applications such as RealAudio, Microsoft’s
NetMeeting and Microsoft’s NetShow, and Internet applications such as Secure HTTP. In addition,
through the easy-to-use graphical user interface, system administrators can easily add support for
new or custom applications by completing simple, on-line templates, or by writing simple macros
using INSPECT, the Company’s high-level scripting language.
11
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel networks. The Company’s Security product line includes its FireWall-1 family of products, its VPN-1
family of virtual private networking solutions and some associated products. The Company’s Traffic
Control product line includes its FloodGate-1 bandwidth management solution. The Management
product line includes Meta IP address management products. Other Company products include
Provider-1 and Site Manager-1 for service providers and large enterprises. During 2001 the Company
started shipping the Next Generation (NG) version of all of its products, delivering advances in Internet
security making it open, scalable, centrally manageable and easy to deploy, while enabling reduced
communication costs
*FireWall-1*
Check Point FireWall-1 is a comprehensive application suite that integrates access control,
authentication, network address translation, content security, auditing and enterprise policy
management. FireWall-1 is based on Check Point’s patented Stateful Inspection technology to deliver
high performance security, application support and scalability. The most widely used network security
suite on the market today, FireWall-1 is ICSA and E3-certified. It is available on a variety of platforms
including UNIX and Windows servers and several industry appliance platforms.
The Company’s FireWall-1 product contains the full flexibility of the FireWall-1 management and
security capabilities, including a rule-based editor, object managers and authentication features. In
## addition to the Enterprise
products also enable centralized management of multiple gateways with distributed
implementation, as well as remote management of the network security system. FireWall-1 Enterprise
and Internet Gateway products consist of one Management Module and one firewall Module. All
FireWall-1 products are compatible and FireWall-1 Internet Gateway products can be upgraded while
retaining the same management and user interface capabilities.
*VPN-1*
The Company’s VPN-1 product family is designed to meet the need of organizations to protect the
privacy and integrity of network communications by establishing a confidential communications channel
for virtual private networking. Multiple encryption schemes are supported, including emerging standards
for interoperability between different vendors. Encryption, decryption and key management, including
digital signatures and certificate authority, are all fully integrated with VPN-1’s Management Module and
rule base editor and log viewer. Included in the Company’s VPN-1 product family is VPN-1 SecuRemote
to extend the VPN to the desktop and laptop by providing end-to-end encryption support, and VPN-1
SecureClient incorporating all VPN-1 features plus a personal firewall.
## FloodGate-1
FloodGate-1 is an add on module to VPN-1/FireWall-1 that provides policy-based bandwidth
management solution that alleviates traffic congestion on oversubscribed Internet and Intranet links. The
flagship product of the Company’s Traffic Control product line, FloodGate-1 enables organizations to
define and manage enterprise-wide policies that precisely control valuable bandwidth resources to
optimize network performance and alleviate network congestion.
12
---
## policy management capabilities, developed for Managed Service Providers (MSPs) and large enterprise networks. Provider-1 enables the central creation and management of a single hardware server, while
maintaining complete and secure isolation between individual customer databases. Provider-1 is designed
to reduce the hardware and personnel costs associated with managing multiple security policies in MSP
and enterprise network environments.
*SiteManager-1*
## SiteManager-1 is a comprehensive, centralized management system, capable of scaling to manage
thousands of customers at the provider network operations center. It enables service providers and
Telcos to address the high-growth market for delivering managed Internet security and VPN services to
small and medium-sized businesses.
*Safe@Home, Safe@Office and S-box*
SofaWare Technologies Ltd. (‘‘SofaWare’’), an affiliate of the Company, develops and markets
## Internet security solutions enabling safe and productive high-speed broadband access.
SofaWare’s Safe@Home and Safe@Office products protect small networks with local, web-based
security management capabilities. Safe@Home and Safe@Office also enable service providers to offer
managed security solutions including content filtering and other value-added services to their subscribers.
S-box is the latest SofaWare product offering, a relatively inexpensive appliance that integrates the
SofaWare software into a convenient, user-friendly package. Check Point has licensed certain of its
## technology to SofaWare and SofaWare has appointed Check Point as the exclusive worldwide reseller of SofaWare products. See ‘‘Organizational Structure’’ below in this Item 4.
**Technology**
*TheVPN-1/ FireWall-1 Technology and SVN Architecture*
Check Point’s VPN-1/ FireWall-1 technology provides a powerful, easy-to-use solution for the
implementation of an integrated network security solution. A high level of security and security
management is achieved through the company’s Secure Virtual Network (SVN) architecture. Three key
elements of the SVN architecture include:
*Management Technologies and Architecture (SMART — Security Management Architecture)*
## Check Point’s Security Management Architecture (SMART) is based on a three-tier framework that
## includes a powerful graphical user interface (GUI) for the system and security administrator that enables flexible definition, review, audit and maintenance of the
architecture allows for the efficient storage and specification of security policy elements (such as
computers, users, networks and network devices, network services and security rules). Powerful
management tools, such as object managers, audit and network activity logging and monitoring tools and
policy editors are based on this unifying architecture. VPN-1/FireWall-1 SMART management servers
can manage multiple security enforcement points regardless of their size and physical location.
## 13
---
INSPECT programming language.
Based on fine grained matching, traffic can be dropped (indicating a violation of the security policy),
## forwarded, encrypted and forwarded (secured VPN traffic), prioritized (FloodGate-1 QoS – IQ Engine Technology) or sent for further analysis through additional enforcement modules.
These include
functions like checking the credentials and authentication of the requesting user and inspecting the traffic
through screening technology such as URL filtering or an Anti-Virus system. Many of these additional
security technologies are provided by 3rd party vendors and are integrated through the OPSEC
architecture. In addition, technologies like SecureXL further accelerate the performance of security and
network operations using system extensions, or 3rd party ASIC-based accelerators and platforms.
*Integration with additional systems (OPSEC — Open Platform for Security)*
The OPSEC architecture provides a single platform that manages various aspects of network security
through an open, extensible management framework. Various third-party security applications plug into
the OPSEC framework through published application programming interfaces (APIs), such as the CVP
(Content Vectoring Protocol) which integrates virus scanning software and other content inspection
programs, UFP (URL Filtering Protocol) which integrates URL list services and SAMP (Suspicious
Activity Monitoring Protocol) which integrates suspicious activity monitoring programs. OPSEC also
supports industry-standard protocols such as RADIUS, IPSec, and SNMP. Once integrated into the
OPSEC framework, all applications can be set up and managed from a central point, utilizing a single
## policy editor Network security is implemented in both the management module and the firewall enforcement
module. The management module defines the security policy through a set of rules established by the
system administrator. These rules are then enforced by any number of firewall modules. The cornerstone
of Check Point’s VPN-1/FireWall-1 technology includes the Company’s patented Stateful Inspection
technology, the Secured Virtual Network (SVN) architecture, SMART (Security Management
Architecture), SecureXL for industry-leading VPN performance, One-Click VPN technology for easy
VPN deployment, and the OPSEC architecture.
Stateful Inspection enables highly efficient, transparent screening of all communications attempting
to pass through a network gateway. Check Point’s SVN provides manageable and scalable security
solutions which are easy to use, fast, open and secure. The SVN architecture includes new technologies
such as SMART- Check Point’s new Security Management Architecture which provides comprehensive
management and policy tools for service providers, enterprises, branch offices, small businesses and the
home user.
**Sales and Marketing**
The Company’s sales and marketing strategy is designed to promote its products as strategic
components of enterprise networks. The Company’s marketing efforts are focused on promoting
FireWall-1 and VPN-1 as the leading brand names in enterprise security. Sales efforts focus on expanding
the installed base and increasing penetration levels of end-user customers worldwide by leveraging
multiple channels of distribution (channel partners): distributors, Value Added Resellers (VARs),
Original Equipment Manufacture (OEMs), system integrators, and Managed Service Providers (MSPs).
The Company currently sells its products to end-user customers through numerous resellers and
distributors worldwide. The Company expects that it will continue to be dependent upon a limited
## number of resellers for a significant portion of its revenues. If anticipated orders from these resellers fail
14
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel issues an invoice to the reseller, and sends a software key to the reseller to provide to the customer which
enables full use of the products purchased by the customer. The Company offers a variety of fee-based
software services programs, including support of the Company’s software products in accordance with
specifications contained in the user’s guide, and access to technical support personnel and product
enhancements.
The Company has bundling relationships with server and workstation vendors and appliance
manufacturers, such as Nokia and Intrusion.com, and other suppliers of enterprise network hardware
products. The Company believes that strategic relationships can significantly contribute to the
achievement of its sales and marketing goals by integrating complementary technologies. Additionally,
these hardware partners provide primary support and training to their customers enabling Check Point
to concentrate its support efforts on high-level technical assistance for its partners.
The Company has derived substantially all of its revenues, and expects to continue to derive the vast
majority of its revenues in the foreseeable future, from sales of its VPN-1 and FireWall-1 product family,
including related software subscriptions, support and technical services and training programs. Revenues
from the sales in the Americas, Europe, Japan and the rest of the world were 53%, 29%, 11% and 7%
in 1999, 48%, 34%, 9% and 9% in 2000, and 45%, 37%, 10% and 8% in 2001 respectively, of total
revenues.
The Company’s OPSEC (Open Platform for Security) Alliance program is focused on delivering
integration and interoperability with complimentary products and developing marketing relationships
with partners to promote ‘‘best-of-breed’’ solutions. With over 300 partners, OPSEC is the industry’s
leading open multi-vendor security framework. OPSEC provides customers with a broad choice of
‘‘best-of-breed’’ integrated applications and deployment platforms that support Check Point’s Secure
Virtual Network (SVN) Architecture. Products that carry the ‘‘OPSEC Certified’’ and ‘‘Secured by
Check Point’’ seals have been tested to enable integration and interoperability. System integrators with
which the Company maintains informal cooperative relationships include Accenture, Computer Sciences
Corporation, Electronic Data Systems, and PriceWaterhouse Coopers, and IBM Global Services.
Companies that maintain a marketing relationship with the Company to promote their integrated
products include Aladdin, Baltimore Technologies, Entrust, Hewlett-Packard, IBM, Network Associates,
Novell, RSA Security, Symantec, Trend Micro and VeriSign, as well as many others.
The Company conducts a number of marketing programs to support the sale and distribution of its
products. These programs are designed to inform existing and potential OEM partners, resellers, and
end-user customers about the capabilities and benefits of the Company’s products.
See ‘‘Risk Factors’’ in ‘‘Item 3 — Key Information.’’
**Customer Service and Support**
The Company operates a Worldwide Technical Services (WTS) organization, based primarily in
Dallas, Texas, providing a wide range of educational and professional services. This enables the Company
to partner with resellers in implementing secure, reliable service solutions. Substantially all of the
Company’s revenues from customer service and support are derived from the Company’s U.S. subsidiary.
The Company’s channel partners generally provide the installation, training, maintenance and
support for their customers, with Check Point providing the high-level technical backup support. Check
Point also offers direct support agreements to end users which prefer to purchase directly from the
15
## Customer Service and Support
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel development group in Ramat Gan, Israel to provide an extremely close coupling between customer issues
and usage and product development. The Escalation Group conducts code analysis and detailed
troubleshooting and delivers updated code, as appropriate. Analysis of historical trouble tickets is
conducted and tracked. This information is used in the development of features and enhancements in new
product releases.
To provide hands-on training, education and certification, Check Point has an in-house educational
services group. The group develops courses and curricula for Check Point classes conducted directly by
the Company or by an affiliate company. Such classes include both lecture-taught and computer-based
training sessions on Check Point products, including installation, management and advanced
implementations. The Company offers industry level certification programs including Check Point
Certified Security Expert (CCSE) and Check Point Certified Security Administrator (CCSA). Using a
leveraged model, Check Point has trained hundreds of partners, and these partners have in turn
established Authorized Training Centers.
The Company also has a professional services organization. They offer a set of consulting services
that includes on-site support for installation of its products, and assistance in developing sound security
business practices.
Customers are encouraged to purchase a software subscription, which is a component of the services
program that provides product updates and version upgrades for Check Point’s products on a ‘‘when and
if available’’ basis. In addition, once the software subscription has been purchased, customers can then
purchase a variety of support programs. These software support programs can be sold and delivered by
the Company’s resellers and OEM partners or the customer can choose to purchase a Check Point
software support program that is sold by the reseller but delivered by Check Point through its Worldwide
Technical Services (WTS) organization directly to the customer.
**Research and Product Development**
The Company believes that its future success will depend upon its ability to enhance its existing
products and develop and introduce new products that address the increasingly sophisticated needs of
end-users. The Company works closely with its distribution channels and major resellers, who provide
significant feedback for product development and innovation. The Company’s new product development
efforts are focused on enhancements to its current family of products and new products for network
security and management. Although the Company expects to develop its new products internally, it may,
based upon timing and cost considerations, acquire or license certain technologies or products from third
parties.
## Net research and development expenses for 1999, 2000 and 2001 were $18.9 million, $30.3 million
and $33.2 million, respectively. At December 31, 2001, the Company had 326 employees dedicated to
research and development activities, and quality assurance. The Company is a member of the
International Computer Security Association (ICSA) and the Secure Wide Area Networking Task Force.
**Competition**
See ‘‘Risk Factors — Competition’’ in ‘‘Item 3 — Key Information.’’
16
RCI Group Inc.
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
## in Canada and Japan, as well as under the European Patent Convention (designating Germany, France,
United Kingdom, Italy and Sweden as countries in which patent coverage may potentially be sought).
The Company has also filed co-pending PCT national phase patent applications in Canada, Japan, Korea,
Norway, and under the European Patent Convention (designating France, United Kingdom, Ireland,
Sweden, Germany, Switzerland and Finland) based on an earlier patent application filed in Israel and
currently pending. A patent issued from the European Patent Office (the ‘‘EPO’’) becomes effective as
though it were a national patent in each designated member nation once national fees are paid, and all
other local requirements are met. The EPO opposition period of nine months from grant of the patent
at the EPO can affect the enforcement of that patent nationally if an opposition is filed during that time.
If the opposition is won, it can negate the patent altogether or result in the protection being offered by
the patent being narrowed. There can be no assurance that the Company’s applications, whether or not
currently challenged by applicable governmental patent examiners, will be issued either at all or within
the scope of the claims sought by the Company. Furthermore, there can be no assurance that others will
not develop technologies that are similar or superior to the Company’s technology or design around any
patents issued to the Company. Despite the Company’s efforts to protect its proprietary rights,
unauthorized parties may copy aspects of the Company’s products or obtain and use information that the
Company regards as proprietary. Policing any of such unauthorized uses of the Company’s products is
difficult, and although the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company’s proprietary rights as fully as do the laws of the United
States or Israel. To date, the Company has not conducted any material amount of business in such
countries. There can be no assurance that the Company’s efforts to protect its proprietary rights will be
adequate or that the Company’s competitors will not independently develop similar technology.
**Organizational Structure**
The Company is organized under the laws of the State of Israel and wholly owns the subsidiaries specified
below:
**NAME OF SUBSIDIARY COUNTRY OF INCORPORATION**
Check Point Software Technologies, Inc. (*) United States of America (Delaware)
MetaInfo Inc. (*) United States of America (Delaware)
Check Point Software Technologies (Canada) Inc. United States of America (Delaware)
## Check Point Software Technologies (Australia) PTY Ltd.
Check Point Software Technologies (Japan) Ltd. Japan
Check Point Software Technologies (Singapore) PTE Ltd. Singapore
## Check Point Software Technologies (Netherlands) B.V.
Netherlands
| Check Point Software Technologies, Inc. (*) | United States of America (Delaware) |
| --- | --- |
| MetaInfo Inc. (*) | United States of America (Delaware) |
| Check Point Software Technologies(Canada)Inc. | United States of America (Delaware) |
| Check Point Software Technologies(Australia)PTY Ltd. | Australia |
| Check Point Software Technologies(Japan)Ltd. | Japan |
| Check Point Software Technologies(Singapore)PTE Ltd. | Singapore |
| Check Point Software Technologies(Netherlands)B.V. | Netherlands |
| Check Point Software TechnologiesSARL | France |
| Israel Check Point Software TechnologiesLtd.China | China |
---
Check Point Software Technologies (Spain) S.A. Spain
Check Point Software Technologies Mexico S.A. de C.V. Mexico
| NAME OF SUBSIDIARY | COUNTRY OF INCORPORATION |
| --- | --- |
| Check Point Software Technologies B.V. | Netherlands |
| Check Point Software Technologies (Italia) S.R.L. | Italy |
| Check Point Software Technologies (Switzerland) A.G. | Switzerland |
| Check Point Software Technologies Norway A.S. | Norway |
| Check Point Software Technologies (Spain) S.A. | Spain |
| Check Point Software Technologies Mexico S.A. de C.V. | Mexico |
| Check Point Software Technologies (Brazil) LTDA | Brazil |
| Check Point Software Technologies (UK) Ltd. | United Kingdom |
| Check Point Software Technologies GmbH | Germany |
| C.P.S.T. Sweden A.B. | Sweden |
| Check Point Software Technologies (Luxembourg) S.A.（**） | Luxembourg |
| Check Point (Hungary) Group Financing Ltd.（**） | Hungary |
further increase its holdings in SofaWare to approximately two-thirds of the equity of SofaWare on a fully
diluted basis.
**Plants, Property and Equipment**
The Company’s headquarters and research and development facilities are located in Ramat-Gan,
Israel, near Tel-Aviv, where the Company leases approximately 113,000 square feet of office space. These
facilities are leased under leases that expire between 2003 and 2011, including renewal options. The
Company also leases approximately a total of 97,000 square feet of office space in the United States. Of
that, approximately 42,000 square feet of office space are leased for the sales and marketing headquarters
in Redwood City, California, and approximately 31,000 square feet of office space for its support center
in Dallas, Texas. These facilities are leased under leases for periods of up to five years. In addition, the
Company leases regional office space in the United States in Texas, California, Colorado, Michigan,
Illinois, Massachusetts, Washington, Georgia, New York, Arizona, Florida, New Jersey, Alabama,
## Illinois, Massachusetts, Washington, Minnesota and Virginia. Other
Germany, Japan, Holland, Italy, Australia, Sweden, Norway, Spain, Switzerland and China.
18
RCI Group Inc.
---
intranet and extranet security. The Company delivers solutions that enable secure, reliable and
## Internet, intranets and extranets.
The Company’s business is subject to the effects of general global economic conditions and in
particular, market conditions in the enterprise security and VPN industry. Recently, these economic and
market conditions have reduced the high growth that the industry had experienced over the past several
years. As a result, the market value, financial results and capital spending levels of many of the
## Company’s customers have been materially adversely affected. The Company believes that the impact of
the current general economic downturn in the industry may result in slower revenue growth rates for the
Company than have been achieved in recent years.
The Company has derived substantially all of its revenues, and expects to continue to derive the vast
majority of its revenues in the foreseeable future, from sales of its FireWall-1 and VPN-1 product family,
including related software subscriptions, support, technical services and training programs.
No customer accounted for more than 10% of the Company’s revenues in 2000 or 2001. During 1999
approximately 12% of the revenues were derived from a single customer.
During each of 1999, 2000 and 2001, the Company significantly increased the number of its
distributors, resellers, system integrators and managed service providers on a worldwide basis.
The following table sets forth, for the periods indicated, the percentage of total consolidated
revenues derived from sales into each of the regions identified in the table.
Year Ended December 31,
**Region 1999 2000 2001**
Americas 53% 48% 45%
Europe (excluding Great Britain) 20% 26% 27%
Great Britain 9% 8% 10%
Japan 11% 9% 10%
Other — mostly Asia Pacific 7% 9% 8%
The Company may experience declining operating margins as it expands its customer and technical
support organization. The Company also expects that it will experience increasing competition and
pricing pressure, which would result in lower operating margins. In 2002, the Company intends to
continue to make investments in the further development and expansion of its sales and marketing
organization, including the expansion of its field organization both in the United States and additional
| Region | 1999 | 2000 | 2001 |
| --- | --- | --- | --- |
| Americas | 53% | 48% | 45% |
| Europe (excluding Great Britain) | 20% | 26% | 27% |
| Great Britain | 9% | 8% | 10% |
| Japan | 11% | 9% | 10% |
| Other — mostly Asia Pacific | 7% | 9% | 8% |
that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. On an on-going basis, management evaluates its estimates and judgments, including those related
to arrangements with extended payment terms, product returns, bad debts, income tax provisions and
legal contingencies. Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual results may differ from
these estimates.
19
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel records estimated reductions to revenue for product returns. If the Company’s channel partners return
note 2K in Financial Statements.
*Bad Debt and Allowance for Doubtful accounts*
## The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of its channel partners to make required payments. If the financial condition of the Company’s
channel partners were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
*Income taxes*
The Company operates within multiple taxing jurisdictions and is subject to audit in these
jurisdictions. These audits can involve complex issues, which may require an extended period of time to
resolve. In management’s opinion, adequate provisions for income taxes have been made for all years.
## Legal Contingencies
As discussed in ‘‘Legal Proceedings’’ in ‘‘Item 8 — Financial Information,’’ the Company is involved in
a legal proceeding with the European Commission and, as of December 31, 2001, management has accrued
its estimate of the probable costs for the resolution of this claim. This estimate has been developed in
consultation with outside counsel handling the Company’s defense in this matter and is based upon an
## analysis of potential outcomes. Management does not believe this proceeding will have a material adverse
effect on the Company’s consolidated financial position. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially affected by changes in the
Company’s assumptions and estimates related to this proceeding or the outcome of this proceeding.
## Results of Operations:
The following table presents, for the periods indicated, information concerning the Company’s
results of operations (in thousands of US$).
Revenues:
Products and licenses
Software subscriptions
Total products
Support, training and consulting
**1999 2000 2001**
$172,270 $326,998 $374,026
33,771 65,273 110,236
206,041 392,271 484,262
13,526 33,012 43,381
## Total revenues Cost of revenues
22,423 35,265 26,571
Gross profit 197,144 390,018 501,072
Operating expenses:
| | 1999 | 2000 | 2001 |
| --- | --- | --- | --- |
| Revenues: | | | |
| Products and licenses | $172,270 | $326,998 | $374,026 |
| Software subscriptions | 33,771 | 65,273 | 110,236 |
| Total products | 206,041 | 392,271 | 484,262 |
| Support, training and consulting | 13,526 | 33,012 | 43,381 |
| Total revenues | 219,567 | 425,283 | 527,643 |
| Cost of revenues | 22,423 | 35,265 | 26,571 |
| Gross profit | 197,144 | 390,018 | 501,072 |
| Operating expenses: | | | |
| Research and development, net | 18,923 | 30,309 | 33,221 |
| Sales and marketing | 68,229 | 110,003 | 109,086 |
| General and administrative | 13,069 | 20,409 | 22,002 |
| Total operating expenses | 100,221 | 160,721 | 164,309 |
| Operating income | 96,923 | 229,297 | 336,763 |
| Financial income, net | 12,962 | 29,147 | 44,760 |
| Income before taxes on income | 109,885 | 258,444 | 381,523 |
| Taxes on income | 14,104 | 37,231 | 59,603 |
| Net income | $ 95,781 | $ 221,213 | $ 321,920 |
---
Total revenues 100 100 100
Cost of revenues 10 8 5
Gross profit 90 92 95
| | 1999 | 2000 | 2001 |
| --- | --- | --- | --- |
| Revenues: | | | |
| Products and licenses | 78% | 77% | 71% |
| Software subscriptions | 15 | 15 | 21 |
| Total products | 93 | 92 | 92 |
| Support, training and consulting | 7 | 8 | 8 |
| Total revenues | 100 | 100 | 100 |
| Cost of revenues | 10 | 8 | 5 |
| Gross profit | 90 | 92 | 95 |
| Operating expenses: | | | |
| Research and development, net | 9 | 7 | 6 |
| Sales and marketing | 31 | 26 | 21 |
| General and administrative | 6 | 5 | 4 |
| Total operating expenses | 46 | 38 | 31 |
| Operating income | 44 | 54 | 64 |
| Financial income, net | 6 | 7 | 8 |
| Income before taxes on income | 50 | 61 | 72 |
| Taxes on income | 6 | 9 | 11 |
| Net income | 44% | 52% | 61% |
Cost of revenues was $22.4 million, $35.3 million and $26.6 million for 1999, 2000 and 2001, respectively.
Gross margins were 90%, 92% and 95% of the Company’s revenues for 1999, 2000 and 2001, respectively.
The decrease in cost of revenues was mainly attributable to a decrease in third party sales (mainly Nokia
and ISS) and increases in the Company’s operational efficiency in general production costs during 2001.
*Research and development, Net.* Research and development expenses consist primarily of salaries
and other related expenses for research and development personnel, as well as the cost of facilities and
depreciation of capital equipment. Net research and development expenses were $18.9 million,
$30.3 million and $33.2 million in 1999, 2000 and 2001, respectively, representing 9%, 7% and 6% of
revenues, respectively. The increase in absolute dollars was mainly attributable to recruiting skilled
development personnel, and facility costs. The Company anticipates that research and development
expenditures will increase in the short term and may fluctuate as a percentage of revenues thereafter as
the Company continues to expand its research and development organization.
*Sales and marketing.* Sales and marketing expenses consist primarily of salaries, commissions,
advertising, trade shows, travel and other related expenses. Sales and marketing expenses were $68.2
million, $110.0 million and $109.1 million in 1999, 2000 and 2001, respectively, representing 31%, 26%
and 21% of revenues, respectively. The level of expenses in 2001 was slightly lower than in 2000, however
the Company succeeded in increasing its sales force while reducing non-headcount related expenses.
Sales and marketing expenses decreased substantially as a percentage of revenues in 2001 and 2000 as
21
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel and increased costs associated with the expansion of the Company’s business. The decreases in general
increases in revenues relative to general and administrative expense levels. The Company anticipates that
general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage
of revenues as the Company expands its financial and administrative infrastructure.
*Financial income, net.* Financial income, net consists primarily of interest earned on cash and cash
equivalents, short and long term deposits and marketable securities. Financial income, net was $13.0
million, $29.1 million, and $44.8 million in 1999, 2000 and 2001, respectively. The increase in these periods
was primarily attributable to the increase in the Company’s cash and cash equivalents, short and
long-term deposits and marketable securities, all of which grew as a result of the Company’s cash flow
from its operations. Interest income is heavily dependent on prevailing U.S. interest rates.
**Quarterly Results of Operations.**
The following table sets forth certain unaudited consolidated statements of income data for each of
the quarters in 2000 and 2001, as well as the percentage of the Company’s revenues represented by each
item. The unaudited consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained herein and include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a fair presentation of such
information when read in conjunction with the Company’s consolidated financial statements and notes
thereto appearing elsewhere in this annual report. The Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and should not be relied upon as an
## indication of future performance. US$ in thousands, except per share data:
Revenues
Cost of revenues
Gross profit
2000 2001
**Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4**
$ 78,166 $ 90,668 $116,014 $140,435 $145,010 $142,071 $118,032 $122,530
7,644 8,006 9,407 10,208 10,078 6,464 5,368 4,661
70,522 82,662 106,607 130,227 134,932 135,607 112,664 117,869
Operating expenses:
Research and development, net 6,175 6,659 8,344 9,131 9,320 9,049 7,511 7,341
Sales and marketing
General and administrative
Total operating expenses
24,218 27,733 28,467 29,585 30,382 28,714 23,500 26,490
5,199 4,502 5,094 5,614 6,538 6,145 4,877 4,442
35,592 38,894 41,905 44,330 46,240 43,908 35,888 38,273
Operating income 34,930
Financial income, net 5,494
| | 2000 | | | | 2001 | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 |
| Revenues | $78,166 | $90,668 | $116,014 | $140,435 | $145,010 | $142,071 | $118,032 | $122,530 |
| Cost of revenues | 7,644 | 8,006 | 9,407 | 10,208 | 10,078 | 6,464 | 5,368 | 4,661 |
| Gross profit | 70,522 | 82,662 | 106,607 | 130,227 | 134,932 | 135,607 | 112,664 | 117,869 |
| Operating expenses: | | | | | | | | |
| Research and development, net | 6,175 | 6,659 | 8,344 | 9,131 | 9,320 | 9,049 | 7,511 | 7,341 |
| Sales and marketing | 24,218 | 27,733 | 28,467 | 29,585 | 30,382 | 28,714 | 23,500 | 26,490 |
| General and administrative | 5,199 | 4,502 | 5,094 | 5,614 | 6,538 | 6,145 | 4,877 | 4,442 |
| Total operating expenses | 35,592 | 38,894 | 41,905 | 44,330 | 46,240 | 43,908 | 35,888 | 38,273 |
| Operating income | 34,930 | 43,768 | 64,702 | 85,897 | 88,692 | 91,699 | 76,776 | 79,596 |
| Financial income, net | 5,494 | 6,411 | 7,800 | 9,442 | 10,101 | 11,574 | 11,440 | 11,645 |
| Income before taxes on income | 40,424 | 50,179 | 72,502 | 95,339 | 98,793 | 103,273 | 88,216 | 91,241 |
| Taxes on income | 5,545 | 6,508 | 10,858 | 14,320 | 15,115 | 16,472 | 13,911 | 14,105 |
| Net income | $34,879 | $43,671 | $61,644 | $81,019 | $83,678 | $86,801 | $74,305 | $77,136 |
| Basic net earnings per share | $0.15 | $0.19 | $0.26 | $0.34 | $0.35 | $0.36 | $0.31 | $0.32 |
| Shares used in computing basic net earnings per share | 230,256 | 231,663 | 233,418 | 235,362 | 236,945 | 239,555 | 241,342 | 242,353 |
| Diluted net earnings per share | $0.13 | $0.17 | $0.23 | $0.31 | $0.32 | $0.33 | $0.29 | $0.30 |
| Shares used in computing diluted net earnings per share | 262,941 | 263,637 | 264,281 | 263,982 | 262,367 | 260,792 | 259,194 | 258,893 |
| | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 |
| As a percentage of Revenues | | | | | | | | |
| Revenues | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
| Cost of revenues | 10 | 9 | 8 | 7 | 7 | 5 | 5 | 4 |
| Gross profit | 90 | 91 | 92 | 93 | 93 | 95 | 95 | 96 |
| Operating expenses: | | | | | | | | |
| Research and development, net | 8 | 7 | 7 | 7 | 6 | 6 | 6 | 6 |
| Sales and marketing | 31 | 31 | 25 | 21 | 21 | 20 | 20 | 21 |
| General and administrative | 7 | 5 | 5 | 4 | 5 | 5 | 4 | 4 |
| Total operating expenses | 46 | 43 | 37 | 32 | 32 | 31 | 30 | 31 |
| Operating income | 44 | 48 | 55 | 61 | 61 | 64 | 65 | 65 |
| Financial income, net | 7 | 7 | 7 | 7 | 7 | 9 | 10 | 9 |
| Income before taxes on income | 52 | 55 | 62 | 68 | 68 | 73 | 75 | 74 |
| Taxes on income | 7 | 7 | 9 | 10 | 10 | 12 | 12 | 11 |
| Net income | 45% | 48% | 53% | 58% | 58% | 61% | 63% | 63% |
fluctuations related to the slowdown in spending activities in Europe for the quarter ending
September 30 and the year-end purchasing cycles of many end-users of the Company’s products. The
Company believes that it will continue to encounter quarter-to-quarter seasonality that could result in
proportionately lower sales in the quarters ending September 30 and March 31 relative to sales in the
quarters ending June 30 and December 31, respectively.
The Company’s expense levels are based, in part, on expectations as to future revenues. If revenue
levels are below expectations, operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in revenues due to the relatively small amount of the
Company’s expenses, which vary with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily meaningful and should not
be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that
in some future quarter the Company’s operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company’s Ordinary Shares would likely be
materially adversely affected.
Liquidity and Capital Resources
The Company has financed its operations through cash generated from operations. Cash and cash
equivalents and short term investments were $487.0 million, and long term interest bearing investments
were $541.4 million, totaling $1,028.4 million as of December 31, 2001, as compared with cash and cash
equivalents and short term investments of $438.4 million and long term interest bearing investments of
$217.6 million totaling $656.0 million as of December 31, 2000. The Company generated net cash from
operations of $144.3 million, $315.7 million and $347.2 million in 1999, 2000 and 2001, respectively. Net
cash from operations for 2001 consisted primarily of net income less decreases in deferred revenues,
employees and payroll accruals and offset by decreases in trade receivables and increases in depreciation
and amortization. Net cash from operations for 1999 and 2000 consisted primarily of net income plus
## increases in deferred revenues,
receivables, other receivables and prepaid expenses. The Company’s capital investments amounted to
approximately $6.1 million, $9.1 million, and $9.7 million in 1999, 2000 and 2001, respectively. Currently,
the Company’s capital expenditures consist primarily of computer equipment and software for the
23
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel securities and bank deposits of varying maturities, depending on projected cash needs for operations,
capital purchases and other business purposes.
The Company’s principal sources of liquidity consist of its current assets and long-term investments
(which aggregated $1,142,908 as of December 31, 2001), its cash flow from operations and its financial
income, net. The Company believes that these sources of liquidity will be sufficient to satisfy the
Company’s capital requirements for the foreseeable future.
**Effective Corporate Tax Rate**
The Company’s effective tax rate was 12.8%, 14.4% and 15.6% in 1999, 2000 and 2001, respectively.
These low tax rates were mainly achieved as a result of the Company’s ‘‘approved enterprise’’ status
under Israeli law of its production facilities in Israel. The Company’s production facilities have been
granted the status of ‘‘approved enterprise,’’ for its capital investment plans.
According to the provisions of Israeli law, the Company has chosen to enjoy ‘‘alternative plan
benefits’’ relating to these facilities, which involves a tax exemption or reduction. Accordingly, the
Company’s income from its ‘‘approved enterprise’’ is tax exempt for a period of two to four years and
is subject to a reduced corporate tax rate of 10% — 25% (based on percentage of foreign ownership) for
## an additional period of six to eight years. (The tax benefits under these investment plans are scheduled to gradually expire starting from 2005 through 2013).
The period of tax benefits, for each program, is limited to the earlier of 12 years from
commencement of production, or 14 years from receipt of approval.
Tax-exempt income attributable to the ‘‘approved enterprises’’ cannot be distributed to shareholders
without subjecting the Company to taxes except upon complete liquidation of the Company. The
Company’s Board of Directors has determined that such tax-exempt income will not be distributed as
dividends. Accordingly, no deferred income taxes have been provided on income attributable to the
Company’s ‘‘approved enterprises. ’’
If the retained tax-exempt income (approximately $ 370 million as of December 31, 2001) is
distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at
the reduced corporate tax rate applicable to such profits (between 10%-25%) and an income tax liability
would be incurred of up to approximately $ 90 million as of December 31, 2001.
If the Company fails to meet the requirements of being an ‘‘approved enterprise’’ in the future, the
Company could be subject to the regular Israeli corporate tax rate of 36% and could be required to
refund tax benefits already received.
If the retained tax-exempt income (approximately $ 370 million as of December 31,2001) is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the reduced corporate tax rate applicable to such profits (between 10%-25%) and an income tax liability would be incurred of up to approximately $ 90 million as of December 31,2001.
If the Company fails to meet the requirements of being an "approved enterprise" in the future, the Company could be subject to the regular Israeli corporate tax rate of 36% and could be required to refund tax benefits already received.
---
## Irwin Federman (1)(2)(3)............... Director David Rubner (2) ...................... Director
Ray Rothrock (1)(2)(3) ................. Director
Alex Vieux ............................ Director
| Name | Position |
| --- | --- |
| Gil Shwed(1) | Chief Executive Officer and Chairman of the Board |
| Marius Nacht | Senior Vice President and Vice Chairman of the Board |
| Jerry Ungerman | President |
| Eyal Desheh | Chief Financial Officer |
| Shlomo Kramer | Director |
| Irwin Federman(1)(2)(3) | Director |
| David Rubner(2) | Director |
| Ray Rothrock(1)(2)(3) | Director |
| Alex Vieux | Director |
| Tal Shavit | Director |
President from January 1999 until the beginning of 2001. Mr. Nacht served as the Company’s Vice
President of International Operations from September 1995 until December 1998, and from July 1993 to
September 1995 Mr. Nacht served as a Vice-President of the Company. Mr. Nacht has served as a director
of the Company since its inception in July 1993. Mr. Nacht received a Masters degree in Electrical
Engineering and Communication Systems from Tel Aviv University, as well as a B.S. in Physics and
Mathematics from Hebrew University of Jerusalem.
Jerry Ungerman was appointed President of the Company in 2001 and has global responsibility for
sales, marketing, business development and technical services. He served as Senior Vice President from
1998 until 2000. He began his career with IBM in 1967 and from July 1971 to October 1998,
Mr. Ungerman held a number of senior management positions with Hitachi Data Systems Corp., a
provider of computer networking and data storage solutions for computing environments. Mr. Ungerman
holds a B.S.B. in business from the University of Minnesota and is a director of Serena Software.
Eyal Desheh has been Chief Financial Officer of the Company since May 2000. He was Chief
Financial Officer for Scitex Corporation Ltd., a company engaged in digital imaging for graphics
communications, where he was responsible for all the major finance functions, investor relations, risk
management, mergers and acquisitions and legal affairs. Before joining Scitex, he served as Vice
President for business development and strategy at Bezeq, The Israeli Telecommunications Corp. Ltd.,
Deputy Chief Financial Officer of Teva Pharmaceuticals Ltd., Chief Executive Officer of H.L. Financial
Services Ltd. and numerous positions in Bank Hapoalim. Mr. Desheh holds a B.A. in Economics and an
M.B.A in Finance, both from Hebrew University of Jerusalem.
Shlomo Kramer, a co-founder of the Company, served as the Company’s Executive Vice President from
October 1996 until December 1998, and served as Vice President of Product and Business Development from
October 1995 to October 1996. From July 1993 to October 1995, Mr. Kramer served as a Vice President of
the Company. Mr. Kramer has served as a director of the Company since its inception in July 1993.
Mr. Kramer received a Masters degree in Computer Science from Hebrew University of Jerusalem as well
as a B.S. in Mathematics and Computer Science from Tel Aviv University.
25
---
Venrock Associates since 1995. Mr. Rothrock is also a director of a number of private companies.
Mr. Rothrock received a B.S. in engineering from Texas A&M University, an M.S. from the
Massachusetts Institute of Technology and an M.B.A. from the Harvard Business School.
David Rubner has served as a director of the Company since June 1999. Mr. Rubner is Chairman and
Chief Executive Officer of Rubner Technology Ventures Ltd., a venture capital firm, and is a general
partner in Hyperion Israel Advisors Ltd., a venture capital firm. Prior to starting this company,
Mr. Rubner served as President and Chief Executive Officer of ECI Telecommunications Ltd. Prior to
this appointment, he held the positions of Chief Engineer, Vice President of Operations and Executive
Vice President and General Manager of the telecommunications division of ECI Telecommunications
Ltd. Mr. Rubner holds a B.S. degree in engineering from Queen Mary College, University of London,
and an M.S. degree from Carnegie Mellon University. Mr. Rubner is a member of the Presidium of the
Electronics Industries Association, was a recipient of the Industry Prize in 1995 and serves on the boards
of directors of a number of companies.
Alex Serge Vieux is Chairman, CEO and founder of DASAR Brothers, Inc., which he founded in
1990 and the owner of ETRE, the European Technology Roundtable Exhibition. He is a member of the
board of several public and private technology companies including BVRP software, Cibox, Commerce
One, Kyriba, madge, Thrunet and White Pajama. Mr. Vieux has served as a senior advisor to both
government and industry and was lately named, for the second year in a row, one of the most influential
people in the European technology community. Mr. Vieux is currently a visiting professor at the French
University Paris Dauphine, where he is teaching telecommunications in the United States. Mr. Vieux is
a graduate of the Institut d’Etudes Politiques in Paris and HEC. He also holds a law degree from the
UniversitI de Paris II-Assas and an M.B.A. from Stanford University, where he was a Fulbright Scholar.
Dr. Tal Shavit has served as a director of the Company since June 2000. Dr. Shavit is an
organizational consultant who heads her own consulting firm, ‘‘Insight,’’ which she founded 12 years ago.
Dr. Shavit specializes in consulting to global high-tech companies, as well as venture capitalists and
start-up companies, on international collaboration, mergers and acquisitions, and rapid organizational
growth. She also lectures at the Technion-Israel Institute of Technology and the New York Polytechnic
University on management.
Except for Messrs. Shwed, Nacht and Kramer, as of February 28, 2002, none of the directors or
executive officers of the Company owned more than one percent of the outstanding ordinary shares. For
information as to the share ownership of Messrs. Shwed, Nacht and Kramer, see ‘‘Item 7 — Major
Shareholders and Related Party Transactions.’’
**Board Composition**
The Company’s Articles of Association provide for a Board consisting of not less than six nor more
than 12 members. Each director (other than an outside director, as explained below) is elected to serve
until the next annual general meeting of shareholders and until his or her successor has been elected.
Each officer is elected by and serves at the discretion of the Board of Directors. Each of the Company’s
officers and directors, other than nonemployee directors, devotes substantially all of his business time to
the affairs of the Company. There are no family relationships among any of the directors, officers or key
employees of the Company.
## Board Composition
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel powers to committees of the Board of Directors, as it deems appropriate, subject to the provisions of
Israeli law. The Board of Directors has appointed a Compensation Committee and Audit Committee.
**Outside and Independent Directors**
In accordance with Israel’s Companies Law and the regulations promulgated under the Companies
Law, the Company must have two outside directors. The outside directors must meet certain statutory
requirements of independence. The term of office of an outside director is three years. An outside
director can be removed from office only under very limited circumstances. Both of the outside directors
must serve on the company’s statutory audit committee, and at least one outside director must serve on
each committee of the Board of Directors. The Company has appointed Irwin Federman and Ray
Rothrock as its outside directors under Israel’s Companies Law.
In addition, the NASDAQ National Market requires that companies listed thereon must have at
## least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise.
**Audit Committee**
The Israeli Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the management of the
company’s business and approving related party transactions as required by law. An audit committee
must consist of at least three directors, including both of the outside directors. The Chairman of the
Board of Directors, any director employed by or otherwise providing services to the company, and a
controlling shareholder or any relative of a controlling shareholder may not be a member of the audit
committee. An audit committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two outside directors are serving as
## members of the audit committee and at least one of the outside directors was present at the meeting in which an approval was granted. In addition, the NASDAQ National Market requires the Company to
establish an audit committee, at least a majority of whose members are independent of management. The
responsibilities of the audit committee under the NASDAQ rules include evaluating the independence
of a company’s outside auditors. The Company’s Audit Committee satisfies both the Israeli law and the
NASDAQ National Market requirements.
**Compensation Committee**
The Company’s Compensation Committee reviews and, as required, approves policies under which
compensation is awarded to the Company’s executive officers and key managers and oversees the
administration of the Company’s executive compensation programs, including the Company’s stock
option plans.
**Compensation of Directors and Officers**
The aggregate direct compensation of all 10 persons as a group who served in the capacity of director
or executive officer during the year ended December 31, 2001 was $2,638,637. In addition, the Company set
## aside $116,478 for pension and disability insurance for certain executive officers. This does not include
amounts expended by the Company for automobiles made available to its officers, expenses (including
business travel, professional and business association dues and expenses) reimbursed to officers and other
27
---
Stock Options
*Israel Stock Option Plan*
The Company’s 1996 Israel Stock Option Plan (the ‘‘1996 Israel Plan’’) was adopted by the Board
of Directors on April 12, 1996. The 1996 Israel Plan authorizes the issuance of up to 61,616,480 ordinary
shares. As of February 28, 2002, 9,896,368 ordinary shares have been issued under the 1996 Israel Plan,
options to purchase 18,641,087 ordinary shares were outstanding (including options incorporated from
previous grants to employees in Israel prior to the adoption of the 1996 Israel Plan) and 33,079,025
shares remained available for future grant. The exercise prices range between $0.002 and $86.54. The
## limitations, to determine the persons entitled to receive options, the terms and conditions on which
## options are granted and the number of shares subject to each grant. Pursuant to Section Income Tax Ordinance, grantees that receive options under the 1996
previously received options that were incorporated upon the adoption of the 1996 Israel Plan, and those
who are not employees of the Company) are afforded certain tax benefits. In order to qualify for these
benefits, the options are registered in the name of the Trust Company of Israel General Bank, as trustee
(the ‘‘Trustee’’) for each of the employees who is granted options. Each option, and any ordinary shares
acquired upon the exercise of the option, must be held by the Trustee until the expiration of two years
from the date of the grant of the option. The 1996 Israel Plan provides for the options granted under the
Plan to have a maximum exercise period of seven years from the date of grant, and for tax-qualified
options to become exercisable in equal installments on the second, third, fourth and fifth anniversaries
of the date of grant. Options that are not tax-qualified options may become exercisable beginning one
year from the date of grant. Options that are not exercised will become available for further grant by the
Board under the 1996 Israel Plan.
*United States Stock Option Plan*
The Company’s 1996 United States Stock Option Plan (the ‘‘1996 U.S. Plan’’) was adopted by the Board
of Directors on April 12, 1996 and was approved by the shareholders as the successor to the Company’s 1995
Stock Option Plan (the ‘‘1995 Plan’’). The 1996 U.S. Plan authorizes the issuance of up to 85,524,721 ordinary
shares. As of February 28, 2002, 33,103,553 ordinary shares have been issued under the 1996 U.S. Plan,
options to purchase 8,990,038 ordinary shares were outstanding (including options incorporated from the 1995
Plan) and options to purchase 43,431,130 ordinary shares remained available for future grant. Ordinary shares
subject to outstanding options, including options granted under the 1995 Plan, which expire or terminate prior
to exercise, will be available for future issuance under the 1996 U.S. Plan.
## Under the 1996 U.S. Plan, employees (including officers) and independent consultants may, at the
discretion of the plan administrator, be granted options to purchase ordinary shares at an exercise price
not less than 85% of the fair market value of such shares on the grant date (the Company does not intend
to issue options at an exercise price of less than fair market value). Non-employee members of the Board
of Directors will be eligible solely for automatic option grants under the 1996 U.S. Plan.
The 1996 U.S. Plan is administered by the Compensation Committee of the Board. The
Compensation Committee has complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of any granted option as either
an incentive option or a non-statutory option under U.S. Federal tax laws, the vesting schedule to be in
28
RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel note payable in installments over a period of years. The amount financed may include any U.S. Federal
or state income and employment taxes incurred by reason of the option exercise.
The Compensation Committee has the authority to effect, from time to time, the cancellation of
outstanding options under the 1996 Plan in return for the grant of new options for the same or a different
number of option shares with an exercise price per share based upon the fair market value of the ordinary
shares on the new grant date.
In the event the Company is acquired by merger, consolidation or asset sale, the ordinary shares
subject to each option outstanding at the time under the 1996 U.S. Plan will terminate to the extent not
assumed by the acquiring entity. The Compensation Committee also has discretion to provide for the
acceleration of one or more outstanding options under the 1996 U.S. Plan and the vesting of shares
subject to outstanding options upon the occurrence of certain hostile tender offers.
Under the automatic grant program contained in the 1996 U.S. Plan, each individual joining the
Board as a non-employee director receives at that time, an automatic option grant for 30,000 ordinary
shares. In addition, at each annual shareholders meeting, each non-employee director who is to continue
to serve as a non-employee director after such annual meeting is automatically granted a fully vested
option to purchase up to an additional 11,250 ordinary shares, provided that the director has served as
a non-employee director for at least six months prior to the date of such annual meeting. The exact
number of ordinary shares covered by the options to be granted to each non-employee director is
determined by the other directors in office immediately prior to the date of his or her election or
appointment, or the date of the annual meeting, as the case may be. Each option has an exercise price
not less than the fair market value of the ordinary shares on the automatic grant date and a maximum
term of 10 years, subject to earlier termination following the optionee’s cessation of Board service. The
option becomes exercisable in four equal annual installments over the optionee’s period of Board service,
beginning one year after the grant date. The Board may amend or modify the 1996 U.S. Plan at any time.
The 1996 U.S. Plan will terminate on April 11, 2006, unless terminated sooner by the Board.
**Employee Stock Purchase Plan**
On November 24, 1996, the Company adopted an Employee Stock Purchase Plan (the ‘‘Purchase
Plan’’), which was ratified by the Company’s shareholders. Under the Purchase Plan, 6,000,000 ordinary
shares were authorized for issuance. As of February 28, 2002, 824,794 ordinary shares have been issued
under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the
United States Internal Revenue Code, is implemented by six-month offerings with purchases occurring
at six-month intervals in February and July. The Compensation Committee of the Board administers the
Purchase Plan. Employees of the Company’s United States subsidiary are eligible to participate if they
are employed for more than 20 hours per week. The Purchase Plan permits eligible employees to
## purchase ordinary shares through payroll deductions, which may not exceed 15% of an employee’s compensation, nor more than 1,875 shares per participant on any purchase date. The price of the ordinary
shares purchased under the Purchase Plan will be 85% of the lower of the fair market value of the
ordinary shares at the beginning of the six-month offering period or on the semi-annual purchase date.
Employees may terminate their participation in the Purchase Plan at any time during the offering period,
and participation ends automatically on termination of employment with the Company. Each outstanding
purchase right will be exercised immediately prior to a merger or consolidation of the Company. The
Board may amend or terminate the Purchase Plan immediately after the close of any purchase date.
However, the Board may not, without shareholder approval, materially increase the number of ordinary
29
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
**Employees**
As of February 28, 2002, the Company had 1,178 employees, of whom 326 were engaged in research,
development, and quality assurance, 512 were engaged in marketing and sales, 210 were engaged in
## customer support and operations, Company believes that its relations with its employees are satisfactory.
Substantially all of the Company’s employees are located in Israel and the United States. With
respect to its employees in Israel, the Company is subject to various Israeli labor laws and labor practices,
and to administrative orders extending certain provisions of collective bargaining agreements between
the Histadrut (Israel’s General Federation of Labor) and the Coordinating Bureau of Economic
## Organizations (the Israeli federation of employers’ organizations) to all private sector employees. For
example, mandatory cost of living adjustments, which compensate Israeli employees for a portion of the
increase in the Israeli consumer price index, are determined on a nationwide basis. Israeli law also
requires the payment of severance benefits upon the termination, retirement or death of an employee.
The Company meets this requirement by contributing on an ongoing basis towards ‘‘managers’
insurance’’ funds that combine pension, insurance and, if applicable, severance pay benefits. In addition,
Israeli employers and employees are required to pay specified percentages of wages to the National
Insurance Institute, which is similar to the United States Social Security Administration. Other provisions
of Israeli law or regulation govern matters such as the length of the workday, minimum wages, other
terms of employment and restrictions on discrimination. The Company is subject to the labor laws and
regulations of other jurisdictions in the world where it has employees.
**ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**
The following table sets forth certain information regarding ownership of the Company’s ordinary
shares as of February 28, 2002 for each person who is known by the Company to own beneficially more
than five percent of the Company’s outstanding ordinary shares.
**Name of Ten Percent Amount Beneficially Percentage of**
**Shareholders, Officers and Directors Owned Class**
Gil Shwed..................... 27,048,996 11.0%
Marius Nacht.................. 25,371,796 10.4%
Shlomo Kramer ................. 13,780,650 5.7%
## The Company is not directly or indirectly controlled by another corporation or
by any foreign
government. The Company’s major shareholders do not have different voting rights with respect to their
shares.
| Name of Ten Percent Shareholders, Officers and Directors | Amount Beneficially Owned | Percentage of Class |
| --- | --- | --- |
| Gil Shwed | 27,048,996 | 11.0% |
| Marius Nacht | 25,371,796 | 10.4% |
| Shlomo Kramer | 13,780,650 | 5.7% |
30
---
Company’s status as an ‘‘approved enterprise’’ under Israeli tax law can be distributed to shareholders
without subjecting the Company to taxes only upon the complete liquidation of the Company. The
## Company’s Board of Directors has determined that such tax-exempt income will not be distributed as dividends. Therefore, the Company does not expect to pay cash dividends for the foreseeable future.
## Legal Proceedings
(a) On June 20, 2001, the Company, through its subsidiary in France received a formal request for
information from the Directorate-General for Competition of the European Commission (the
‘‘Commission’’) regarding a complaint submitted by Stonesoft Corporation, a Finnish company alleging
anti-competitive behavior, and in particular, alleging abuse of a dominant position held by the Company,
and requesting that the Commission investigate the allegations and order injunctive relief. The Company
responded to the Commission in a timely manner both to this and a subsequent request for information
received on November 6, 2001, and has contested the existence of a dominant position or of infringing
behavior on its part. The Company’s legal counsel has advised that, where the Commission determines
## at the conclusion of a formal proceeding that a company has violated European competition rules, fines may be imposed up to a maximum of 10% of the Company’s consolidated annual revenues as of the date
of the last violation. Since responding to the Commission’s second request for information, the Company
has been engaging in discussions with the Commission with a view to resolving the matter in a manner
acceptable to all sides and on the basis of which the complaint against it would be withdrawn and the
investigation terminated. These discussions are ongoing. To date, the Commission has not initiated
formal proceedings against the Company. Based on the opinion of the Company’s management and its
legal counsel, a provision was recorded in the financial statements as of December 31, 2001 in respect of
probable costs arising from this matter.
(b) On July 5, 1996, Checkpoint Systems, Inc. (‘‘CSI’’) a manufacturer of theft prevention devices
for retail stores filed an action alleging trademark infringement and unfair competition against the
Company in the United States District Court for the District of New Jersey. CSI sought to enjoin the
Company from using the ‘‘Check Point’’ name in connection with the Company’s products and services.
The District Court issued its opinion in the Company’s favor on July 12, 2000, and the District Court’s
decision was affirmed on appeal during 2001. The judgment is now final and no longer appealable.
**ITEM 9. THE OFFER AND LISTING**
The Company’s ordinary shares are traded publicly on the NASDAQ National Market under the
symbol ‘‘CHKP.’’
The following table lists the high and low closing sale prices for the ordinary shares for the periods
indicated as reported by the NASDAQ National Market:
**High Low**
**1997**........................................................ $ 17.00 $ 5.42
**1998**....................................................... 7.96 2.17
## 1999....................................................... 2000.......................................................
2001....................................................... 110.58 20.70
31
| | High | Low |
| --- | --- | --- |
| 1997 | $17.00 | $5.42 |
| 1998 | 7.96 | 2.17 |
| 1999 | 34.85 | 4.46 |
| 2000 | 113.33 | 30.54 |
| 2001 | 110.58 | 20.70 |
| 2000 | | |
| First Quarter | 93.29 | 30.54 |
| Second Quarter | 77.90 | 44.96 |
| Third Quarter | 106.83 | 70.19 |
| Fourth Quarter | 113.33 | 68.42 |
| 2001 | | |
| First Quarter | 110.58 | 45.31 |
| Second Quarter | 2001 | 41.38 |
| Third Quarter | 50.95 | 20.70 |
| Fourth Quarter | 44.37 | 20.80 |
| Most recent six months | | |
| September 2001 | 32.99 | 20.70 |
| October 2001 | 33.33 | 20.80 |
| November 2001 | 42.48 | 30.31 |
| December 2001 | 44.37 | 37.31 |
| January 2002 | 47.20 | 32.88 |
| February 2002 | 36.50 | 27.48 |
Networks, firewalls, intranet and extranet security. The Company delivers solutions that enable secure,
reliable and manageable business-to-business communications over Internet Protocol networks including
the Internet, intranets and extranets.
The following is a summary of the material provisions of the Company’s Articles of Association and
related provisions of Israeli corporate law. This summary is qualified in its entirety by reference to the
## complete text of the Articles of Association; see ‘‘Item 4 — Information on the Company — General’’ and ‘‘Item 19 — Exhibits.’’
**Description of Shares**
The Company’s authorized share capital consists of 500,000,000 ordinary shares, NIS 0.01 nominal
value, 5,000,000 Preferred Shares, NIS 0.01 nominal value, and 10 deferred shares, NIS 1 nominal value.
The deferred shares are not entitled to any rights other than the right to receive their nominal value upon
liquidation of the Company.
**Description of Ordinary Shares**
All issued and outstanding ordinary shares are validly issued, fully paid and non-assessable. The
ordinary shares do not have pre-emptive rights. Neither the Memorandum of Association, Articles of
## Association of the Company nor the laws of Israel restrict in any way the ownership or voting of ordinary
shares by non-residents of Israel, except with respect to subjects of counties which are in a state of war
with Israel.
**Dividend and Liquidation Rights.** Subject to the rights of the holders of shares with preferential or
other special rights which may be authorized in the future, holders of ordinary shares are entitled to
receive dividends out of assets legally available therefore and, in the event of the winding up of the
## Company, to share ratably in all assets remaining after payment of liabilities, subject to applicable law.
32
RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel lack of quorum shall be adjourned to the same day in the next week at the same time and place, or to
such time and place as the chairman may determine with the consent of the holders of a majority of the
voting power represented at the meeting in person or by proxy and voting on the question of
adjournment. If at such reconvened meeting a quorum is not present within one half hour from the time
appointed for holding the meeting, any two shareholders present in person or by proxy will constitute a
quorum, regardless of the number of shares represented.
An ordinary resolution (such as resolution for the election of directors and the appointment of
auditors) shall be deemed adopted if approved by the holders of a majority of the voting power
represented at the meeting, in person or by proxy, and voting thereon. A special or extraordinary
resolution (such as a resolution amending the Memorandum of Association or Articles of Association)
shall be deemed adopted if approved by the holders of not less than 75% of the voting power represented
in person or by proxy at the meeting and voting thereon.
Israel’s Companies Law requires that certain transactions, actions and arrangements be approved by
the shareholders. Such transactions, actions and arrangements include: (i) arrangements with a director
as to the term of office or compensation; (ii) certain extraordinary transactions (as defined in the
Companies Law); and (iii) any action or extraordinary transaction involving a director or officer in which
a majority of the Board or the statutory audit committee has a personal interest. See ‘‘Approval of
Certain Transactions; Obligations of Directors, Officers and Shareholders’’ below in this Item 10.
**Transfer of Shares and Notices.** Fully paid ordinary shares are issued in registered form and, subject
to applicable securities laws, may be transferred freely. Each shareholder of record is entitled to receive
at least 21 days’ prior notice of shareholder meetings. For purposes of determining the shareholders
entitled to notice and to vote at such meeting, the Board of Directors may fix the record date which shall
be not more than 40 nor less than four days prior to the date of the meeting.
**Election of Directors.** The ordinary shares do not have cumulative voting rights in the election of
directors. Thus, the holders of ordinary shares conferring more than 50% of the voting power have the
power to elect all the directors, to the exclusion of the remaining shareholders.
**Transfer Agent and Registrar.** American Stock Transfer & Trust Company is the Transfer Agent
and Registrar for the ordinary shares.
**Description of Preferred Shares**
The Company has 5,000,000 preferred shares authorized. The Board of Directors has the authority
to issue the preferred shares in one or more series and to fix the rights, preferences, privileges and
restrictions of such shares, including dividend rights, dividend rates, conversion rights, voting rights, terms
of redemption, redemption prices, liquidation preferences and the number of shares constituting any
series, without further vote or action by the shareholders. The issuance of preferred shares may have the
effect of delaying, deferring or preventing a change in control of the Company without further action by
the shareholders. For example, the Board of Directors could issue preferred shares with voting and
conversion rights may adversely affect the voting power of the holders of ordinary shares, including the
loss of voting control to others. The Company currently has no plans to issue any preferred shares.
## Provisions Affecting a Potential Change of Control
The Company’s Articles of Association provide that the Company may not engage in any business
combination with an interested shareholder for a period of three years following the date that such
shareholder became an interested shareholder, unless: (a) prior to such date, the Board of Directors
33
## RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
(iv) any transaction involving the Company that has an effect of increasing the proportionate share of the
shareholder; or (v) the receipt by the interested shareholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the Company. In general, the
Articles of Association define an interested shareholder as any entity or person beneficially owning 15%
or more of the outstanding voting shares of the Company and any entity or person affiliated with, or more
of the outstanding voting shares of the Company and any entity or person affiliated with, controlling or
controlled by such entity or person.
**Approval of Certain Transactions; Obligations of Directors, Officers and Shareholders**
The Israeli Companies Law codifies the fiduciary duties that office holders, including directors and
executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a
duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder’s
position in the company and such person’s personal affairs, avoiding any competition with the company,
avoiding exploiting any corporate opportunity of the company in order to receive personal advantage for
such person or others, and revealing to the company any information or documents relating to the
company’s affairs which the office holder has received due to his or her position as an office holder. Each
person listed in the table that appears at the beginning of ‘‘Item 6 — Directors, Senior Management and
## Employees’’ is an office holder of the Company.
Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not
directors require approval of the board of directors unless the Articles of Association provide otherwise.
Arrangements regarding the compensation of directors also require audit committee and shareholder
approval. The Israeli Companies Law requires that an office holder promptly disclose any personal
interest that he or she may have and all related material information known to him or her, in connection
with any existing or proposed transaction with the company. In addition, if the transaction is an
extraordinary transaction, the office holder must also disclose any personal interest held by the office
holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any
of the foregoing, or by any corporation in which the office holder is a five percent or greater shareholder,
director or general manager or in which he or she has the right to appoint at least one director or the
general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of
business, a transaction that is not on market terms, or a transaction that is likely to have a material impact
on the company’s profitability, assets or liabilities.
In the case of a transaction that is not an extraordinary transaction, after the office holder complies
with the above disclosure requirements, only board of directors’ approval is required unless the Articles
of Association of the company provide otherwise. Such approval must determine that the transaction is
not adverse to the company’s interest. If the transaction is an extraordinary transaction, then in addition
to any approval required by the Articles of Association, it also must be approved by the audit committee
and by the board of directors and, under specified circumstances, by a meeting of the shareholders. An
Israeli company whose shares are publicly traded shall not be entitled to approve such a transaction
unless, at the time the approval was granted, two members of the audit committee were outside directors
and at least one of them was present at the meeting at which the audit committee decided to grant the
approval. An office holder who has a personal interest in a matter that is considered at a meeting of the
board of directors or the audit committee generally may not be present at this meeting or vote on this
matter.
34
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the company
and other shareholders and refrain from abusing his or her power in the company, including, among other
things, voting in the general meeting of shareholders on the following matters:
• any amendment to the Articles of Association;
• an increase of the company’s authorized share capital;
• a merger; or
• approval of interested party transactions that require shareholder approval.
In addition, any controlling shareholder, any shareholder who can determine the outcome of a
shareholder vote and any shareholder who, under the company’s Articles of Association, can appoint or
prevent the appointment of an office holder, is under a duty to act with fairness towards the company.
The Israeli Companies Law does not describe the substance of this duty.
**Indemnification of Directors and Officers; Limitations on Liability**
Israeli law permits a company to insure an office holder in respect of liabilities incurred by him or
her as a result of the breach of his or her duty of care to the company or to another person, or as a result
of the breach of his or her fiduciary duty to the company, to the extent that he or she acted in good faith
and had reasonable cause to believe that the act would not prejudice the company. A company can also
insure an office holder for monetary liabilities as a result of an act or omission that he or she committed
in connection with his or her serving as an office holder. Moreover, a company can indemnify an office
holder for (a) monetary liability imposed upon him or her in favor of other persons pursuant to a court
judgment, including a compromise judgment or an arbitrator’s decision approved by a court, and (b)
reasonable litigation expenses, including attorneys’ fees, actually incurred by him or her or imposed upon
## him or her by a court, in an action, suit or proceeding brought against him or her by or on behalf of the
company or other persons, or in connection with a criminal action which does not require criminal intent
in which he or she was convicted, in each case in connection with his or her activities as an office holder.
The Company’s Articles of Association allow for insurance and indemnification of office holders to the
fullest extent permitted by law. The Company has entered into indemnification, insurance and
exculpation agreements with its directors and senior officers, following shareholder approval of these
agreements. The Company has directors’ and officers’ liability insurance covering the officers and
directors of the Company and its subsidiaries for certain claims.
**Borrowing Power: Amendment of Rights of Ordinary Shares**
The Company’s Articles of Association grant broad powers to the Board of Directors to authorize
the Company to borrow funds, repay borrowings, make guarantees and grant security interests in
borrowings. The Company’s Articles of Association provide that the rights and provisions of the ordinary
shares may be cancelled, added to, restricted, amended or otherwise altered with a vote of the holders
of at least 75 percent of the outstanding ordinary shares voting at a duly convened shareholders’ meeting.
**ISRAELI TAXATION, FOREIGN EXCHANGE REGULATION AND INVESTMENT PROGRAMS**
The following is a summary of the material Israeli and United States tax consequences, Israeli
## foreign exchange regulations and certain Israeli government programs affecting the Company. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or
35
## RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel would have significantly altered the taxation of individuals, and would also have affected corporate
taxation. In particular, the proposed changes would have reduced, but not eliminated, the tax benefits
available to ‘‘approved enterprises’’ such as the Company’s. The proposed changes would also have
imposed a capital gains tax on individuals on the sale of shares, unless the selling shareholder is entitled
to benefits under a tax treaty. In the interim there have been significant political and economic changes.
## On February 26, 2002 the Minister of Finance appointed a new committee to recommend tax reforms, and
## this committee is expected to submit a report within 90 days. The Company cannot be certain whether the proposed changes will be adopted, when it will be adopted or what form any changes will ultimately take.
*General Corporate Tax Structure*
Israeli companies are generally subject to corporate tax at the rate of 36% of their taxable income.
However in the Company’s case, the rate is currently effectively reduced, as described below.
*Tax benefits under the Law for the Encouragement of Capital Investments, 1959*
The Company’s facilities have been granted Approved Enterprise status pursuant to the Law for the
Encouragement of Capital Investments, 1959 (the ‘‘Investment Law’’), which provides certain tax and
financial benefits to investment programs that have been granted such status.
The Investment Law provides that a proposed capital investment in eligible facilities may, upon
## application to the Investment Center of the Ministry of Industry and Commerce of the State of Israel, be
designated as an ‘‘approved enterprise.’’ Each certificate of approval for an approved enterprise relates to
a specific investment program delineated both by its financial scope, including its capital sources, and by
its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program. The
## tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital
investments are approved, its effective tax rate is the result of a weighted combination of the applicable
rates. Income derived from activity that is not integral to the activity of the enterprise should not be
divided between the different enterprises and should not enjoy tax benefits.
Taxable income of a company derived from an approved enterprise is subject to company tax at the
maximum rate of 25%, rather than 36%, for the benefit period. This period is ordinarily seven years
commencing with the year in which the approved enterprise first generates taxable income, and is limited
to 12 years from completion of the investment under the approved plan or 14 years from the date of
approval, whichever is earlier. The Investment Law also provides that a company that has an approved
enterprise is entitled to accelerated depreciation on its property and equipment that are included in an
approved investment program.
A Foreign Investors Company (‘‘FIC’’), as described in the Investment Law, may enjoy benefits for
a period of up to 10 years, or 12 years if it complies with certain export criteria stipulated in the Investment
Law. A FIC is a company of which more than 25% of its shareholders are foreign residents.
A company owning an approved enterprise may elect to receive an alternative package of benefits.
Under the alternative package, a company’s undistributed income derived from an approved enterprise
will be exempt from company tax for a period of between two and 10 years from the first year of taxable
income, depending on the geographic location of the approved enterprise within Israel, and such company
will be eligible for a reduced tax rate for the remainder of the benefits period.
36
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel dividends are considered to be attributable to the entire enterprise and their effective tax rate is the result
of a weighted combination of the various applicable tax rates. The Company is not obliged to distribute
exempt retained profits under the alternative package of benefits, and may generally decide from which
year’s profits to declare dividends. The Company currently intends to reinvest the amount of its
tax-exempt income and not to distribute such income as a dividend.
The Investment Center of the Ministry of Industry and Commerce bases its decision as to whether
or not to approve an application, on the criteria set forth in the Investment Law and regulations, the then
prevailing policy of the Investment Center, and the specific objectives and financial criteria of the
applicant. Accordingly, there can be no assurance that any such application will be approved. In addition,
the benefits available to an approved enterprise are conditional upon the fulfillment of conditions
stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of
approval, as described above. In the event that a company does not meet these conditions, it would be
required to refund the amount of tax benefits, with the addition of the consumer price index linkage
adjustment and interest.
The Company has derived, and expects to continue to derive, a substantial portion of its income from
its ‘‘approved enterprise’’ facilities. Subject to compliance with applicable requirements, income derived
from its Approved Enterprise facility will be tax exempt for a period of two to four years and after will
be subject to a reduced company tax of up to 25% depending on the extent of foreign shareholders
holding the Company’s ordinary shares for the following three to eight years.
*Tax Benefits and Grants for Research and Development*
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures
(including capital expenditures) in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government ministry, determined by the field of research, the research
and development is for the promotion of the enterprise and is carried out by or on behalf of the company
seeking such deduction.
*Tax Benefits Under the Law for the Encouragement of Industry (Taxation), 1969*
## According to the Law for the Encouragement of Industry Encouragement Law, an ‘‘Industrial Company’’ is a company resident in Israel, at least 90% of the
income of which, in any tax year, determined in Israeli currency, exclusive of income from certain
government loans, capital gains, interest and dividends, is derived from an ‘‘Industrial Enterprise’’ owned
by it. An ‘‘Industrial Enterprise’’ is defined as an enterprise whose major activity in a given tax year is
industrial production activity. The Company currently qualifies as an ‘‘Industrial Company’’ within the
definition of the Industry Encouragement Law. Under the Industry Encouragement Law, Industrial
Companies are entitled to certain preferred corporate tax benefits such as:
## • Deduction of public offering expenses;
• Deduction of purchases of know-how and patents utilized in the development or advancement of
their enterprise, over an eight-year period for tax purposes; and
• Accelerated depreciation rates on equipment and buildings.
37
RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. The
material aspects to the Company can be described as follows:
There is a special tax adjustment for the preservation of equity whereby certain corporate assets are
classified broadly into fixed, inflation resistant, assets and non-fixed (soft) assets. Where a company’s
equity, as defined in law, exceeds the depreciated cost of fixed assets, a deduction from taxable income
that takes into account the effect of the applicable annual rate of inflation on such excess is allowed, up
## to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company’s equity, then
such excess multiplied by the applicable annual rate of inflation is added to taxable income.
Subject to certain limitations, depreciation deductions on fixed assets and losses carried forward are
adjusted for inflation based on the increase in the Israeli consumer price index (CPI).
Under Law, results for tax purposes are measured in real terms, in accordance with the changes in
the Israeli CPI, or in the exchange rate of the dollar for a ‘‘foreign investors’ company.’’ The Company
elected to measure its results for tax purposes on the basis of the changes in the Israeli CPI. Beginning
January 1, 2002, the basis will be changes in the exchange rate of the U.S. dollar.
In November 2001, an amendment to the Inflationary Adjustments Law (Amendment No. 41), 2001
was passed by the Israeli Knesset, pursuant to which until February 28 2002, the Minister of Finance, with
the approval of the finance committee of the Knesset, is entitled to determine by an order that the
provisions of the Inflationary Adjustments Law, in whole or in part, will not apply with respect to a tax
year if the CPI in that year did not exceed 3%. On February 28 2002, the finance committee of the
Knesset determined that the Inflationary Adjustments Law will apply to all entities in 2001, although the
Israeli CPI did not exceed 3% in 2001.
Gains on certain traded securities, which are normally exempt from tax, are taxable in certain
circumstances. However, dealers in securities are subject to the regular tax rules applicable to business
income in Israel. One of the net effects of the Inflationary Adjustments Law is that the Company’s
taxable income for Israeli corporate tax purposes will be different from the Company’s dollar income
reflected in our financial statements, which are based on changes in the shekel exchange rate with respect
to the dollar.
*Capital Gains Tax on Sales of Ordinary Shares*
Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real
gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is
equivalent to the increase of the relevant asset’s reduced purchase price that is attributable to the
increase in the Israeli consumer price index between the date of purchase and the date of sale. The real
gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus
accumulated from and after December 31, 1993, is exempt from any capital gains tax in Israel while the
real gain is added to ordinary income, which is taxed at ordinary rates of 30% to 50% for individuals and
36% for corporations.
## Pursuant to the Convention Between the Government Government of Israel with Respect to Taxes on Income, as amended (the ‘‘United States- Israel Tax
Treaty’’), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the
United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the
benefits afforded to such person by the United States-Israel Tax Treaty (a ‘‘Treaty United States Resident’’)
38
---
*Taxation of Non-Resident Holders of Ordinary Shares*
Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources
in Israel, including passive income such as dividends, royalties and interest. On distributions of dividends,
other than bonus shares and stock dividends, income tax at the rate of 25% (12.5% for dividends not
generated by an approved enterprise if the non-resident is a United States corporation and holds 10% or
more of the Company’s voting power throughout a certain period, and 15% for dividends generated by
an approved enterprise) is withheld at the source, unless a different rate is provided in a treaty between
Israel and the shareholder’s country of residence. Under the United States-Israel Tax Treaty, the
maximum tax on dividends paid to a holder of ordinary shares who is a Treaty United States Resident
will be 25%, however, under the Investment Law, dividends generated by an approved enterprise are
## taxed at the rate of 15%.
Under a recent amendment to the Inflationary Adjustments Law, non-Israeli corporations might be
subject to Israeli taxes on the sale of traded securities in an Israeli company, subject to the provisions of
any applicable double taxation treaty.
*Foreign Exchange Regulations*
Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares
to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted
into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
**UNITED STATES FEDERAL INCOME TAXES**
The following summary sets forth the material United States federal income tax consequences
applicable to the following persons who purchase, hold or dispose of the ordinary shares (‘‘U.S.
## Shareholders’’); (i) citizens or residents (as defined for U.S. federal income tax purposes) of the United States; (ii) corporations or other entities taxable as corporations created or organized in or under the
laws of the United States or any state thereof; (iii) estates, the income of which is subject to United States
federal income taxation regardless of its source; and (iv) trusts, if (a) a U.S. court is able to exercise
primary supervision over its administration and (b) one or more U.S. persons have the authority to
control all of its substantial decisions. This discussion is based on the provisions of the Internal Revenue
## Code of 1986, as amended (the ‘‘Code’’), United States Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date of this Annual Report
on Form 20-F. This discussion generally considers only U.S. Shareholders that will hold the ordinary
shares as capital assets and does not consider (a) all aspects of U.S. federal income taxation that may be
relevant to particular U.S. Shareholders by reason of their particular circumstances (including potential
application of the alternative minimum tax), (shareholders subject to special treatment under the U.S.
federal income tax laws, such as financial institutions, insurance companies, broker-dealers, tax-exempt
organizations and foreign individuals or entities, (c) U.S. Shareholders owning directly or by attribution
10% or more of the Company’s outstanding voting shares, (d) U.S. Shareholders who hold the ordinary
shares as part of a hedging, straddle or conversion transaction, (e) U.S. Shareholders who acquire their
ordinary shares in a compensatory transaction, (f) U.S. Shareholders whose functional currency is not the
dollar, or (g) any aspect of state, local or non-United States tax law.
39
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel current or accumulated earnings and profits as determined for U.S. federal income tax purposes.
Distributions in excess of such earnings and profits will be treated first as non-taxable return of capital
reducing the U.S. Shareholder’s tax basis in the ordinary shares to the extent of the distributions, and
then as capital gain from a sale or exchange of such ordinary shares. Such dividends, generally will not
qualify for the dividends received deduction available to corporations. The amount of any cash
## distribution paid in NIS will equal the U.S. dollar value of the distribution, calculated by reference to the spot exchange rate in effect on the date of the distribution.
*Credit for Israeli Taxes Withheld*
Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to
dividends on the ordinary shares generally will be eligible for credit against a U.S. Shareholder’s United
States federal income tax liability at such U.S. Shareholder’s election. The Code provides limitations on
the amount of foreign tax credits that a U.S. Shareholder may claim, including extensive separate
computation rules under which foreign tax credits allowable with respect to specific categories of income
cannot exceed the United States federal income taxes otherwise payable with respect to each such
category of income. U.S. Shareholders that do not elect to claim a foreign tax credit may instead claim
a deduction for Israeli income tax withheld or paid, but only for a year in which these U.S. Shareholders
## elect to do so for all foreign income taxes. Dividends with respect to the ordinary shares generally will be classified as foreign source ‘‘passive income’’ for the purpose of computing a U.S. Shareholder’s
foreign tax credit limitations for U.S. foreign tax credit purposes. The rules relating to foreign tax credits
are complex, and you should consult your tax advisor to determine whether and if you would be entitled
to this credit.
*Disposition of the Ordinary Shares*
The sale or exchange of ordinary shares generally will result in the recognition of capital gain or loss
in an amount equal to the difference between the amount realized on the sale or exchange and the U.S.
Shareholder’s tax basis in the ordinary shares. Such gain or loss generally will be long-term capital gain
or loss if the U.S. Shareholder’s holding period of the ordinary shares exceeds one year at the time of the
disposition. Gain or loss recognized by a U.S. Shareholder on a sale or exchange of ordinary shares
generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax
treaty between the United States and Israel, gain derived from the sale, exchange or other disposition of
ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells
## the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.
*Passive Foreign Investment Company Status*
Based upon its current and projected income, assets and activities, the Company believes that it is
not currently a passive foreign investment company (a ‘‘PFIC’’) for U.S. federal income tax purposes and
will not be a PFIC for any subsequent year. The Company would be classified as a PFIC if, for any taxable
year, either (i) 75% or more of its gross income in the taxable year is passive income, or (ii) 50% or more
of the average value of its gross assets in the taxable year, calculated quarterly by value produce or are
held for the production of passive income. For this purpose passive income includes dividends, interest,
royalties, rents, annuities and the excess of gain over losses from the disposition of assets which produce
40
## Passive Foreign Investment Company Status
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would
be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to
amounts allocated to years prior to the year of the disposition or ‘‘excess distribution’’ cannot be offset
by any net operating losses. Additionally, if the Company is deemed to be a PFIC, a U.S. Shareholder
who acquires ordinary shares in the Company from a decedent will be denied the normally available
step-up in tax basis to fair market value for the ordinary shares at the date of the death and instead will
have a tax basis equal to the decedent’s tax basis if lower than fair market value.
U.S. Shareholders may avoid taxation under the rules described above by making (i) a ‘‘qualified
electing fund’’ election for the first taxable year in which the Company is a PFIC to include such holder’s
share of the Company’s ordinary earnings and net capital gain on a current basis or (ii) a ‘‘deemed sale’’
election in a subsequent year along with a qualified electing fund election if the Company is still classified
as a PFIC. However, a U.S. Shareholder may make a qualified electing fund election only if the Company
agrees to furnish the U.S. Shareholder annually with certain tax information. The Company does not
presently prepare or provide such information, and such information may not be available to U.S.
Shareholders if the Company is subsequently determined to be a PFIC.
U.S. Shareholders holding ‘‘marketable shares’’ (which the Company considers the ordinary shares
to be) in a PFIC may make an election to ‘‘mark-to-market’’ the ordinary shares annually, rather than
be subject to the above-described rules. Under such election, the U.S. Shareholder will include in income
each year any excess of the fair market value of the PFIC stock at the close of each taxable year over the
U.S. Shareholder’s adjusted basis in such stock. The U.S. Shareholder generally will be allowed an
ordinary deduction for the excess, if any, of the adjusted basis of the PFIC stock over its fair market value
as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior
taxable years, whichever is less. A U.S. Shareholder’s adjusted tax basis in the ordinary shares generally
will be adjusted to reflect the amounts included or deducted under the mark-to-market election.
Additionally, any amounts included in income pursuant to a mark-to-market election, as well as gain on
the actual sale or other disposition of the PFIC stock, are treated as ordinary income. Ordinary loss
treatment also applies to any loss recognized on the actual sale or disposition of PFIC stock to the extent
that the amount of such loss does not exceed the net mark-to-market gains previously included with
respect to such stock. An election to mark-to-market generally will apply to the taxable year in which the
election is made and all subsequent taxable years.
If a U.S. Shareholder makes one of these two elections, distributions and gain will not be recognized
ratably over the U.S. Shareholder’s holding period or be subject to an interest charge as described above.
Further, the denial of basis step-up at death described above will not apply. A U.S. Shareholder making
one of these two elections may experience current income recognition, even if no cash is distributed by
the Company.
A U.S. Shareholder who beneficially owns shares in a PFIC must file an annual return with the IRS
on IRS Form 8621 that describes any distributions received with respect to such shares and any gain
realized on the disposition of such shares.
A number of specific rules and requirements apply to both of these elections and a U.S. Shareholder
is urged to consult his or her tax advisor concerning these elections.
41
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
---
Identification Number and Certification’’). Finalized Treasury Regulations, which are applicable to
payments made after December 31, 2000, have generally expanded the circumstances under which
## information reporting and backup withholding may apply. Amounts withheld as backup withholding may be credited against a U.S. Shareholder’s federal income tax liability. A U.S. Shareholder may obtain a
refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim
for refund with the Internal Revenue Service and furnishing any required information.
**ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
Market risks relating to the Company’s operations result primarily from weak economic conditions
in the markets in which the Company sells its products and from changes in exchange rates or in interest
rates. Other than forward exchange currency contracts and forward rate agreements described below
which are used for hedging cash flow in transactions not denominated in U.S. dollars, the Company does
not use derivative financial instruments in its investment portfolio.
The table below presents principal amounts and related weighted average rates by date of maturity
for the Company’s investments in cash and cash equivalents, deposits and marketable securities held as
of December 31, 2001.
## (In thousands, except percentages)
Fair Value
**Total Book at Dec. 31,**
**Maturity Value 2001**
**2002 2003 2004 2005 2006**
Government and
corporate Book
securities — Value $ 40,794 $ 18,993 $ 5,699 $ 3,393 $ 41,699 $ 110,578 $ 112,855
Floating interest
rate** WAIR* 2.19% 3.15% 2.85% 3.66% 5.54% 3.70%
Government and
corporate Book
| | | Maturity | | | | | Total Book Value | Fair Value at Dec.31, 2001 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | 2002 | 2003 | 2004 | 2005 | 2006 | | |
| Government and corporate securities — | Book Value | $40,794 | $18,993 | $5,699 | $3,393 | $41,699 | $110,578 | $112,855 |
| Floating interest rate** | WAIR* | 2.19% | 3.15% | 2.85% | 3.66% | 5.54% | 3.70% | |
| Government and corporate securities — | Book Value | $114,842 | $82,441 | $90,852 | $158,959 | $127,689 | $574,783 | $583,581 |
| Fixed interest rate | WAIR* | 4.81% | 5.94% | 5.98% | 6.89% | 5.36% | 5.49% | |
| Money market fund | Book Value | $219,068 | — | — | — | — | $219,068 | $219,068 |
| Money market fund | WAIR* | 1.97% | — | — | — | — | 1.97% | |
| Deposits | Book Value | $112,253 | $8,635 | — | $3,000 | — | $123,888 | $123,306 |
| Deposits | WAIR* | 3.74% | 3.40% | — | 7.00% | — | 3.80% | |
| Total | Book Value | $486,957 | $110,069 | $96,551 | $165,352 | $169,388 | $1,028,317 | $1,038,810 |
| Total | WAIR* | 3.06% | 5.25% | 5.79% | 6.82% | 5.41% | 4.55% | |
1025 Connecticut Ave., NW, Sixth Floor
Washington, DC 20036
(202) 659-9600 Tel accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the
date of the transaction. All transaction gains and losses of the remeasurement of monetary balance sheet
## items are reflected in the statement of income as financial income or expenses, as appropriate.
The Company hedges the exposure of assets and anticipated revenues denominated in the Japanese yen
with forward and option contracts. The Company monitors its foreign currency exposures daily to maximize
the overall effectiveness of its foreign currency hedge positions. If these derivatives meet the definition of a
hedge and is so designated, depending on the nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value is recognized in earnings.
In order to hedge portions of its risk of overall changes in cash flows resulting from forecasted export
sales over the next year, the Company has instituted a foreign currency cash flow hedging program with
zero cost-collar contracts. As of December 31, 2001, the Company expects to reclassify $2,909 thousands
of unrealized gains on hedging derivative instruments, from accumulated other comprehensive income to
earnings during the next 12 months, in line with actual export sales. Also, the Company enters into
forward exchange contracts designated to hedge the fair value of certain foreign currency denominated
customers’ balances.
As of December 31, 2001, the Company’s management believes that because the above transactions
are carried out with well-established institutions, liabilities owing to the Company will be fulfilled. Total
outstanding transactions to sell/purchase U.S. dollars in exchange for the Japanese yen were in the
amount of $ 9.1 million. The above transactions were for a period of three months. As of December 31,
December 2001, the Company accumulated other comprehensive income of $2.9 million with zero
cost-collar contracts.
**Interest Rate Risk**
The Company’s exposure to market risk for changes in interest rates relates primarily to the
Company’s investment in marketable securities. The Company’s marketable securities are comprised of
U.S. and European government and corporate debt instruments. The fair value of the Company’s long
and short-term securities is based upon their market values as of December 31, 2001.
The Company has entered into forward rate agreements (‘‘FRA’’,) designated as a cash flow hedge
that effectively convert a portion of its floating rate investments debt to a fixed rate basis for a 12 month
period beginning one year after the date of the agreement, thus reducing the impact of the interest rate
changes on future interest income. As of December 31, 2001, approximately $125 million of the
## Company’s outstanding
transactions with no material effect on the Company’s financial position or operating results.
**ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**
Not applicable.
43
Not applicable.
---
## USE OF PROCEEDS
## required to be disclosed. As of December 31, 2001, the net proceeds from the Company’s initial public offering had been used to pay for fixed assets, research and development costs, hiring employees and
## directly or indirectly, to any of our directors, officers or any of their associates, or to any person owning ten percent or more of any class of equity securities, or any of the Company’s affiliates.
## ITEM 15. Reserved. ITEM 16. Reserved.
There are no material modifications to, or qualifications of, the rights of security holders that are required to be disclosed. As of December 31,2001,the net proceeds from the Company's initial public offering had been used to pay for fixed assets, research and development costs, hiring employees and general working capital. None of the net proceeds from the Company's initial public offering were paid directly or indirectly, to any of our directors, officers or any of their associates, or to any person owning ten percent or more of any class of equity securities, or any of the Company's affiliates.
ITEM 15. Reserved.
ITEM 16. Reserved.
---
## ITEM 19. EXHIBITS
(incorporated
## Company’s annual report on Form 20-F for the year ended December 31, 2000)
4.1 Form of Indemnification Agreement between the Company and its officers and
directors
## 8 List of subsidiaries (incorporated by reference to ‘‘Item 4 — Information on the
Company – Organizational Structure’’ in this Annual Report on Form 20-F)
## 10 Consent of Kost Forer & Gabbay, a member of Ernst & Young International
1 Articles of Association (incorporated by reference to Exhibit 2.5 to the Company's annual report on Form 20-F for the year ended December 31, 2000)
4.1 Form of Indemnification Agreement between the Company and its officers and directors
8 List of subsidiaries (incorporated by reference to "Item 4 — Information on the Company - Organizational Structure" in this Annual Report on Form 20-F)
10 Consent of Kost Forer & Gabbay, a member of Ernst & Young International
---
JOBNAME: Check Point Software PAGE: 1 SESS: 16 OUTPUT: Fri Mar 29 13:11:41 2002 /joshua TRagsdal-0/fin/nyork/51029/sig01
V
### SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
### CHECK POINT SOFTWARE TECHNOLOGIES LTD.
By: Gil Shwed *Chief Executive Officer and Chairman of the Board*
By: Eyal Desheh *Chief Financial Officer*
### Date: March 21, 2002
# RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
|1025 Connecticut Ave., NW, Sixth Floor|75 Varick Street, 16th Floor||
|---|---|---|
|Washington, DC 20036|New York, NY 10013||
|csdc@rcigroup.com|csny@rcigroup.com|Proofed []|
(202) 659-9600 Tel (212) 219-3700 Tel
(202) 659-0779 Fax (212) 219-1311 Fax
---
# INDEX Report of Independent Auditors
## Consolidated Balance Sheets
## Consolidated Statements of Income
## Consolidated Statements of Changes in Shareholders’ Equity
## Consolidated Statements of Cash Flows
## Notes to Consolidated Financial Statements
## INDEX
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-2
---
## To the Shareholders of
# period ended December 31, 2001. These financial statements are the responsibility of Check Point Software Technologies Ltd.’s management. Our responsibility is to express an opinion on these financial
# We conducted our audits in accordance with auditing standards generally accepted in the United
## whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Check Point Software Technologies Ltd. and its
subsidiaries as of December 31, 2000 and 2001, and the consolidated results of their operations and cash
flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 14, 2002 A Member of Ernst & Young International
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Check Point Software Technologies Ltd. and its subsidiaries as of December 31,2000 and 2001,and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31,2001,in conformity with accounting principles generally accepted in the United States.
Tel-Aviv, Israel January 14, 2002
KOST FORER & GABBAY A Member of Ernst & Young International
---
## Short-term bank deposits 209,974 Marketable securities 71,213
## Other accounts receivables
| | December 31, | |
| --- | --- | --- |
| | 2000 | 2001 |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $157,203 | $219,068 |
| Short-term bank deposits | 209,974 | 112,253 |
| Marketable securities | 71,213 | 155,636 |
| Trade receivables, net | 84,381 | 74,294 |
| Other accounts receivables | 17,637 | 19,165 |
| Total current assets | 540,408 | 580,416 |
| Long-term investments | 219,309 | 542,276 |
| Property and equipment, net | 11,638 | 13,248 |
| Other assets | 6,284 | 6,968 |
| | $777,639 | $1,142,908 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | |
| Current liabilities: | | |
| Trade payables | $3,644 | $4,945 |
| Employees and payroll accruals | 33,243 | 26,153 |
| Deferred revenues | 121,202 | 95,703 |
| Accrued expenses and other liabilities | 69,101 | 98,583 |
| Total current liabilities | 227,190 | 225,384 |
| Accrued severance pay, net | 1,166 | 1,796 |
| Shareholders' equity: | | |
| Share capital - Authorized: 500,000,000 ordinary shares of NIS 0.01 par value; 10 deferred shares of NIS 1 par value; 5,000,000 preferred shares of NIS 0.01 par value as of December 31, 2000 and 2001 Issued and outstanding: 235,464,986 ordinary shares, 1 deferred share and no preferred shares as of December 31, 2000; 242,824,021 ordinary shares, 1 deferred share and no preferred shares as of December 31, 2001 | 723 | 735 |
| Additional paid-in capital | 102,303 | 143,907 |
| Accumulated other comprehensive income | - | 2,909 |
| Retained earnings | 446,257 | 768,177 |
| Total shareholders' equity | 549,283 | 915,728 |
| | $777,639 | $1,142,908 |
F-3
---
## 219,567 425,283
## 7,613
## 14,810
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Revenues: | | | |
| Products sales | $172,270 | $326,998 | $374,026 |
| Services | 47,297 | 98,285 | 153,617 |
| | 219,567 | 425,283 | 527,643 |
| Cost of revenues: | | | |
| Product sales | 7,613 | 10,881 | 5,760 |
| Services | 14,810 | 24,384 | 20,811 |
| | 22,423 | 35,265 | 26,571 |
| Gross profit | 197,144 | 390,018 | 501,072 |
| Operating expenses: | | | |
| Research and development, net | 18,923 | 30,309 | 33,221 |
| Sales and marketing | 68,229 | 110,003 | 109,086 |
| General and administrative | 13,069 | 20,409 | 22,002 |
| Total operating expenses | 100,221 | 160,721 | 164,309 |
| Operating income | 96,923 | 229,297 | 336,763 |
| Financial income, net | 12,962 | 29,147 | 44,760 |
| Income before taxes on income | 109,885 | 258,444 | 381,523 |
| Taxes on income | 14,104 | 37,231 | 59,603 |
| Net income | $95,781 | $221,213 | $321,920 |
| Basic net earnings per share | $0.43 | $0.95 | $1.34 |
| Diluted net earnings per share | $0.39 | $0.84 | $1.25 |
The accompanying notes are an integral part of the consolidated financial statements.
---
RCI Group Inc.
CHECK POINT SOFTWARE TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except share data)
| | Share capital | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total comprehensive income | Total shareholders' equity |
| --- | --- | --- | --- | --- | --- | --- |
| Balance as of January 1, 1999 | $114 | $46,776 | $ (446) | $129,263 | | $175,707 |
| Tax benefit related to exercise of stock options | - | 4,909 | - | - | | 4,909 |
| Stock split effected as a stock dividend(100%) | 116 | (116) | - | - | | - |
| Issuance of shares upon exercise of options(10,243,356 shares) | 4 | 15,661 | - | - | | 15,665 |
| Comprehensive income: | | | | | | |
| Unrealized holding gains on available-for-sale marketable securities | - | - | 446 | - | $446 | 446 |
| Net income | - | - | - | 95,781 | 95,781 | 95,781 |
| Total comprehensive income | - | - | - | 95,781 | 95,781 | 95,781 |
| Balance as of December 31,1999 | 234 | 67,230 | - | 225,044 | | 292,508 |
| Tax benefit related to exercise of stock options | - | 9,730 | - | - | | 9,730 |
| Stock split effected as a stock dividend(100%) | 236 | (236) | - | - | | - |
| Issuance of shares upon exercise of options(7,551,908 shares) | 12 | 25,820 | - | - | | 25,832 |
| Stock split effected as a stock dividend(50%) | 241 | (241) | - | - | | - |
| Comprehensive income: | - | - | - | 221,213 | $221,213 | 221,213 |
| Net income | - | - | - | 221,213 | $221,213 | 221,213 |
| Total comprehensive income | - | 102,303 | - | 446,257 | | 549,283 |
| Balance as of December 31,2000 | 723 | 5,345 | - | - | | 5,345 |
| Tax benefit related to exercise of stock options | - | - | - | - | | - |
| Issuance of shares upon exercise of options(7,314,402 shares) | 12 | 37,724 | - | - | | 37,736 |
| Purchase of stock dividend for fractional shares | - | (1,465) | - | - | | (1,465) |
| Comprehensive income: | | | | | | |
| Unrealized gains on hedging derivative instruments | - | - | 2,909 | - | $2,909 | 2,909 |
| Net income | - | - | - | 321,920 | 321,920 | 321,920 |
| Total comprehensive income | - | - | - | - | $324,829 | - |
| Balance as of December 31,2001 | $735 | $143,907 | $2,909 | $768,177 | | $915,728 |
The accompanying notes are an integral part of the consolidated financial statements.
---
## Depreciation and amortization 3,603 7,107
## Deferred income taxes, net (1,103) (4,312)
## Decrease (increase) in trade receivables, net (20,893)
## Decrease (increase) in other receivables and prepaid (3,507)
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Cash flows from operating activities: | | | |
| Net income | $95,781 | $221,213 | $321,920 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 3,603 | 7,107 | 10,354 |
| Deferred income taxes, net | (1,103) | (4,312) | (240) |
| Decrease (increase) in trade receivables, net | (20,893) | (36,742) | 10,087 |
| Decrease (increase) in other receivables and prepaid expenses | (3,507) | (7,970) | 939 |
| Increase (decrease) in trade payables | 1,917 | (1,328) | 1,301 |
| Increase (decrease) in employees and payroll accruals | 8,068 | 17,611 | (7,090) |
| Increase in accrued expenses and other liabilities | 11,555 | 44,492 | 29,482 |
| Increase (decrease) in deferred revenues | 44,201 | 65,203 | (25,499) |
| Increase in tax benefit related to exercise of stock options | 4,909 | 9,730 | 5,345 |
| Increase in accrued severance pay, net | 273 | 540 | 630 |
| Other | (456) | 117 | (54) |
| Net cash provided by operating activities | 144,348 | 315,661 | 347,175 |
| Cash flows from investing activities: | | | |
| Proceeds from short-term bank deposits | 50,308 | 160,035 | 216,980 |
| Investment in short-term bank deposits | (108,743) | (144,414) | (103,749) |
| Proceeds from held-to-maturity marketable securities | 20,854 | 40,523 | 186,620 |
| Investment in held-to-maturity marketable securities | (45,030) | (249,073) | (603,119) |
| Proceeds from sale of investment | 1,694 | — | — |
| Investment in long-term bank deposits | (60,328) | (7,000) | (8,635) |
| Investment in privately held companies | (377) | (1,145) | — |
| Purchase of property and equipment | (6,083) | (9,051) | (9,678) |
| Net cash used in investing activities | (147,705) | (210,125) | (321,581) |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of shares upon exercise of options | 15,665 | 25,832 | 37,736 |
| Purchase of stock dividend fractional shares | — | — | (1,465) |
| Net cash provided by financing activities | 15,665 | 25,832 | 36,271 |
| Increase in cash and cash equivalents | 12,308 | 131,368 | 61,865 |
| Cash and cash equivalents at the beginning of the year | 13,527 | 25,835 | 157,203 |
| Cash and cash equivalents at the end of the year | $25,835 | $157,203 | $219,068 |
| Supplemental disclosure of cash flow activities: | | | |
| Cash paid during the year for income taxes | $7,327 | $14,472 | $20,770 |
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
(VPNs), firewalls, intranet and extranet security. The Company delivers solutions that enable
# secure, reliable and manageable business-to-business communications over Internet Protocol (‘‘IP’’) networks—including the Internet, intranets and extranets. Check Point product offerings also include traffic control/quality of service (QoS) and IP address management. Check Point products are fully integrated as a part of the Company’s Secure Virtual Network architecture and provide centralized management, distributed deployment, and comprehensive
## policy administration. The capabilities of Check Point products can be extended with the Open Platform for Security (OPSEC), enabling integration with best of breed hardware, security
applications and enterprise software applications.
The Company’s revenues are derived from the sales of Internet security and virtual private
networking solutions (FireWall-1 and VPN-1 product families), Quality of Service (Flood
Gate-1), IP address management (Meta IP) and related software subscription, support and
training program offerings. The Company sells its software products worldwide through channel
partners: distributors, Value Added Resellers (VAR’s), system integrators, Original Equipment
Manufacturers (‘‘OEMs’’) and Managed Service Providers (MSP’s).
No customer accounted for more than 10% of the Company’s revenues in 2000 or 2001. During
1999, approximately 12% of revenues were derived from a single customer.
**NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES**
The consolidated financial statements are prepared according to United States generally
accepted accounting principles (‘‘U.S. GAAP’’).
a. Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
## b. Financial statements in United States dollars:
Most of the Company’s revenues are denominated in United States dollars (‘‘dollars’’). In
addition, a substantial portion of the Company’s costs are incurred in dollars. The
Company’s management believes that the dollar is the primary currency of the economic
environment in which Check Point Ltd. and each of its subsidiaries operate. Thus, the
dollar is their functional and reporting currency. Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured into dollars in accordance
with Statement of Financial Accounting Standard (‘‘SFAS’’) No. 52 ‘‘Foreign Currency
Translation.’’ All transaction gains and losses of the re-measurement of monetary balance
sheet items are reflected in the statements of income as financial income or expenses, as
appropriate.
Principles of consolidation:
The consolidated financial statements include the accounts of Check Point Ltd. and its
subsidiaries. Intercompany transactions and balances have been eliminated upon
consolidation.
F-7
## RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
---
Cash equivalents are short-term, highly liquid investments that are readily convertible to
# e. Short and long-term deposits:
# Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Bank deposits with maturities of more than one year are included in long-term investments. Deposits are presented at cost while related accrued
## interest is included in other receivables.
## f. Investments in marketable securities:
The Company accounts for investments in debt and equity securities in accordance with
SFAS No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities.’’
## Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and reevaluates such determinations at
each balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity and are stated
at amortized cost. The amortized cost of held-to-maturity securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such amortizations,
## interest and declines in value considered to be other than temporary, are included in financial income, net.
Investments in privately held companies:
Investments in non-marketable, privately held companies are recorded at the lower of cost
or estimated fair value since the Company does not have the ability to exercise significant
influence over operating and financial policies of the investee.
Comprehensive income:
The Company accounts for comprehensive income under the provisions of SFAS No. 130,
‘‘Reporting Comprehensive Income,’’ which establishes standards for reporting and
displaying comprehensive income and its components. Comprehensive income represents
the change in shareholders’ equity during a period from transactions and other events and
## circumstances from non-owner sources. It
resulting from investments by, and distributions to, owners.
Property and equipment:
Property and equipment are stated at cost less accumulated depreciation and are
## depreciated using the straight-line method over the estimated useful lives of the assets,
ranging from two to ten years. Leasehold improvements are amortized by the straight-line
method over the term of the lease.
The Company periodically assesses the recoverability of the carrying amount of property
and equipment, providing for any possible impairment losses, based on the difference
between the carrying amount and fair value of such assets in accordance with SFAS No.
121, ‘‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
## Be Disposed Of.’’ As of December 31, 2001, no impairment losses have been identified.
F-8
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
---
# Sold, Leased or Otherwise Marketed,’’ requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.
# Based on the Company’s product development process, technological feasibility established upon completion of a working model. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general
## release have been insignificant. Therefore, all research and development costs have been
expensed.
k.
Revenue recognition:
The Company derives its revenues from license fees for its products, software subscriptions,
specified upgrades, support, consulting services and training programs. The Company sells
its products primarily through channel partners, which are all considered end-users.
The Company accounts for software sales in accordance with Statement of Position
(‘‘SOP’’) No. 97-2, ‘‘Software Revenue Recognition,’’ as amended. SOP 97-2 generally
requires revenues earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of the element. The Company has
adopted SOP 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions,’’ for all multiple-element transactions entered into after
## January 1, 2000. SOP
98-9 requires that revenue be recognized under the ‘‘residual
method’’ when vendor specific objective evidence (‘‘VSOE’’) of fair value exists for all
undelivered elements and VSOE does not exist for the delivered elements, and when all
other revenue recognition criteria are met.
Revenue from license fees is recognized when persuasive evidence of an arrangement
exists, delivery of the product has occurred, the fee is fixed or determinable, and
collectability is probable. The Company maintains certain provisions for product returns
and rebates in accordance with SFAS No. 48, ‘‘Revenue Recognition when Right of Return
Exists,’’ and based on its experience. Such provisions amounted to $10,050 and $1,377 as of
December 31, 2000 and 2001, respectively. The Company periodically considers
arrangements regarding certain customers with payment terms extending beyond the
company’s customary payment terms not to be fixed or determinable. If the fee is not fixed
or determinable, revenue is deferred and recognized when payments become due from the
customer providing that all other revenue recognition criteria have been met.
Software subscription, specified upgrades, support, consulting services and training
program revenues included in multiple element arrangements are deferred and either
recognized on a straight-line basis over the term of the software subscription and support
agreement or when services are performed. The VSOE of fair value of the undelivered
elements (software subscription, specified upgrades, support, consulting services and
training) is generally determined based on the price charged for the undelivered element
when sold separately.
Severance pay:
The Company’s liability for severance pay is calculated pursuant to Israeli severance pay
law based on the most recent salary of the employees multiplied by the number of years of
employment as of the balance sheet date. The Company records as expenses the net
F-9
RCI Group Inc.
Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel fully provided by monthly payments deposited with insurers and by an accrual established
# deposits. This liability is presented as accrued severance pay, net.
# The deposited funds include profits accumulated up to the balance sheet deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on
## the cash surrender value of these policies, and includes immaterial profits. The amount of
deposited funds as of December 31, 2000 and 2001 was $1,937 and $2,757, respectively.
Severance expenses for the years ended December 31, 1999, 2000 and 2001, were $1,152,
$1,549 and $1,997, respectively.
Income taxes:
The Company accounts for income taxes in accordance with SFAS No. 109, ‘‘Accounting
For Income Taxes.’’ SFAS No. 109 prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
Advertising expenses:
## Advertising costs
December 31, 1999, 2000 and 2001, were $9,570, $14,431 and $15,516, respectively.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents, short-term bank deposits, marketable
securities, trade receivables and long-term deposits. The majority of the Company’s cash
and cash equivalents, short-term deposits and long-term deposits are invested in dollar and
## dollar linked investments and are deposited in major banks mainly in the U.S. and Europe. Such deposits in the United States may be in excess of insured limits and are not insured
in other jurisdictions. Management believes that the financial institutions that hold the
Company’s investments are financially sound and, accordingly, minimal credit risk exists
## with respect to these investments.
The Company’s trade receivables are geographically diversified and derived from sales to
customers mainly in the United States, Europe and Asia. The Company performs ongoing
credit evaluations of its customers. The allowance for doubtful accounts is determined with
respect to specific debts that are doubtful of collection amounting to $2,972 and $7,000 as
of December 31, 2000 and 2001, respectively.
The Company’s marketable securities include investments which are considered by
management to be financially sound, in debentures of U.S. corporations and the Israeli
Government. The Company’s investments in debts are diversified among high-quality
credit securities, in accordance with the Company’s investment policy.
F-10
---
# to recognize all derivatives on the balance sheet at fair value. If the derivative meets the definition of a hedge and is so designated, depending on the nature of the hedge, changes
## in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective
## portion of a derivative’s change in fair value is recognized in earnings. The adoption of SFAS No. 133 had no cumulative effect on income
comprehensive income.
The Company hedges the exposure of anticipated revenues and assets denominated in
foreign currencies with forward and option contracts. In order to hedge portions of its risk
of overall changes in cash flows resulting from forecasted export sales over the next year,
the Company has instituted a foreign currency cash flow hedging program with zero
cost-collar contracts. As of December 31, 2001, the Company expects to reclassify $2,909 of
the unrealized gains on these hedging derivative instruments, from accumulated other
comprehensive income to earnings during the next twelve months, in line with actual export
sales. In addition, the Company enters into forward exchange contracts designated to hedge
the fair value of certain foreign currency denominated customers’ balances.
The Company has also entered into forward rate agreements (‘‘FRA’’,) designated as a
cash flow hedge that effectively convert a portion of its floating rate investments to a fixed
rate basis for a 12 month period beginning one year after the date of the agreement, thus
reducing the impact of the interest rate changes on future interest income. As of December
31, 2001, approximately $125 million of the Company’s outstanding short-term debt had its
interest income designated as hedged forecasted transactions with no material effect on the
Company’s financial position or operating results.
As of December 31, 2001, the Company’s management believes that because the above
transactions are carried out with well-established institutions, liabilities owing to the
Company will be fulfilled.
Basic and diluted earnings per share:
Basic net earnings per share are computed based on the weighted average number of
ordinary shares outstanding during each year. Diluted net earnings per share are computed
based on the weighted average number of ordinary shares outstanding during each year,
plus dilutive potential ordinary shares considered outstanding during the year, in
accordance with FASB Statement No. 128, ‘‘Earnings Per Share.’’
The total weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net income, since they would have an anti-dilutive effect,
were 1,503,050, 694,128 and 2,658,141 for 1999, 2000 and 2001, respectively.
## q. Basic and diluted earnings per share:
F-11
---
# Certain Transactions Involving Stock Compensation’’ in accounting for its employee stock option plans. Under APB Opinion No. 25, when the exercise price of the Company’s share
# options is less than the market price of the underlying shares on the date compensation expense is recognized. The pro forma disclosures required by SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ are provided in Note 9d.
## s. Fair value of financial instruments:
## The following methods and assumptions were used by the Company in estimating its fair
value disclosures for financial instruments:
1. The carrying amount of cash and cash equivalents, short-term bank deposits, trade
receivables and trade payables approximate their fair values due to the short-term
maturities of these instruments.
2. The fair value of marketable securities is based on quoted market prices (see Notes 3
and 4).
The carrying amount of the Company’s long-term deposits is estimated by discounting
## 3. the future cash flows using the current interest rates for deposits of similar terms and
maturities (see Note 4).
4. The fair value of derivative instruments (used for hedging purposes) is estimated by
obtaining current quotes from investment bankers.
Impact of recently issued accounting standards:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, ‘‘Business
Combinations,’’ and SFAS No. 142 ‘‘Goodwill and Other Intangible Assets.’’ SFAS No. 141
requires that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and
measurement of goodwill and intangible assets arising from business combinations
completed after June 30, 2001. SFAS 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives and requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue to be amortized
over their estimated useful lives. Additionally, SFAS 142 requires that goodwill included in
## the carrying value of equity method investments no longer be amortized. The provision of
SFAS 141 and SFAS 142 will not have any effect on the Company’s financial position or
operating results.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,’’ which addresses
financial accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, ‘‘Accounting for the Impairment of Long-Lived Assets to be
Disposed Of,’’ and the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal of a segment of a business. FAS 144, is
effective for fiscal years beginning after December 15, 2001, with earlier application
encouraged. The Company expects to adopt FAS 144 as of January 1, 2002 and it does not
expect that such adoption will have any impact on the Company’s financial position or
results of operations.
F-12
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
Certain prior year amounts have been reclassified to conform with their current period
# NOTE 3:-MARKETABLE SECURITIES
# Gross unrealized Amortized cost gains Estimated fair value December 31, December 31, December 31,
## 2000 2001 2000 U.S. corporate debt $55,519 $155,241 $108
Israeli Government Debt
## NOTE 4:- LONG-TERM INVESTMENTS
$15,694 $ 395 $255 $ 4 $15,949 $ 399
**LONG-TERM INVESTMENTS**
## As of December 31, 2000 and held-to-maturity.
| | Amortized cost | | Gross unrealized gains | | Estimated fair value | |
| --- | --- | --- | --- | --- | --- | --- |
| | December 31, | | December 31, | | December 31, | |
| | 2000 | 2001 | 2000 | 2001 | 2000 | 2001 |
| U.S. corporate debt | $55,519 | $155,241 | $108 | $4591 | $55,627 | $18,942 |
| Israeli Government Debt | $15,694 | $395 | $255 | $4 | $15,949 | $399 |
## Deposits Investments in privately held companies
$219,309 $542,276
Composed as follows:
**Gross unrealized**
## Gross unrealized Amortized cost gain(losses)
| | December 31, | |
| --- | --- | --- |
| | 2000 | 2001 |
| U.S. corporate debt(a) | $180,110 | $529,725 |
| Israeli Government debt and deposits(a) | 18,942 | - |
| Deposits | 18,510 | 11,635 |
| Investments in privately held companies | 1,747 | 916 |
| | $219,309 | $547,258 |
**NOTE 5:-PROPERTY AND EQUIPMENT**
| | Amortized cost | | Gross unrealized gain(losses) | | Estimated fair value | |
| --- | --- | --- | --- | --- | --- | --- |
| | December 31, | | December 31, | | December 31, | |
| | 2000 | 2001 | 2000 | 2001 | 2000 | 2001 |
| U.S. corporate debt | $180,110 | $25,272 | $(2,590) | $6,480 | $177,460 | $536,205 |
| Israeli Government debt | 18,942 | - | 638 | - | 19,580 | - |
| Deposits | 18,510 | 11,638 | - | (582) | 18,510 | 11,053 |
| | $217,562 | $541,360 | $(2,012) | $5,898 | $215,550 | 547,258 |
## Depreciated cost
| | December 31, | |
| --- | --- | --- |
| | 2000 | 2001 |
| Cost: | | |
| Computers and peripheral equipment | $19,624 | $25,272 |
| Office furniture and equipment | 3,855 | 4,866 |
| Other | 2,590 | 2,966 |
| | 26,069 | 33,104 |
| Accumulated depreciation | 14,431 | 19,856 |
| Depreciated cost | $11,638 | $13,248 |
---
# NOTE 6:-ACCRUED EXPENSES AND OTHER LIABILITIES
# Income taxes payable $25,109 Marketing expenses payable 18,862 Other 25,130
## NOTE 5:- PROPERTY AND EQUIPMENT - (Continued)
## NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
**COMMITMENTS AND CONTINGENT LIABILITIES**
## a. Lease commitments: The facilities of the Company are rented under operating leases for periods ending through
| Income taxes payable | $25,109 | $56,299 |
| --- | --- | --- |
| Marketing expenses payable | 18,862 | 18,676 |
| Other | 25,130 | 23,608 |
| | $69,101 | $98,583 |
## 2003 2004
2005
2006 1,678
$15,922
Rent expenses for the years ended December 31, 1999, 2000 and 2001, were $ 4,275, $ 6,125
and $ 6,842, respectively.
| 2002 | $ 6,786 |
| --- | --- |
| 2003 | 2,901 |
| 2004 | 2,305 |
| 2005 | 2,252 |
| 2006 | 1,678 |
| | $15,922 |
responded to the Commission in a timely manner both to this and a subsequent request for information
received on November 6, 2001, and has contested the existence of a dominant position or of infringing
behavior on its part. The Company’s legal counsel has advised that, where the Commission determines
at the conclusion of a formal proceeding that a company has violated European competition rules, fines
## may be imposed up to a maximum of 10% of the Company’s consolidated annual revenues as of the date
of the last violation. Since responding to the Commission’s second request for information the Company
has been engaging in discussions with the Commission with a view to resolving the matter in a manner
acceptable to all sides and on the basis of which the complaint against it would be withdrawn and the
investigation terminated. These discussions are ongoing. To date, the Commission has not initiated
formal proceedings against the Company. Based on the opinion of the Company’s management and its
legal counsel, provision was recorded in the financial statements as of December 31, 2001 in respect of
probable costs arising from this matter.
F-14
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
# The District Court issued its opinion in the Company’s favor on July 12, 2000, and the District Court’s decision was affirmed on appeal during 2001. The judgment is now final and no longer appealable.
## NOTE 8:- TAXES ON INCOME
# TAXES ON INCOME
## a. Measurement of taxable income under the Israeli Income Tax (Inflationary Adjustments)
Law, 1985:
Results for Israeli tax purposes are measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli Consumer Price Index (the ‘‘Israeli CPI’’). As
explained in Note 2b, the financial statements are measured in dollars. The difference
between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a
further difference between taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of SFAS No. 109, Check Point Ltd.
## has not provided for currency and the tax bases of assets and liabilities.
In November 2001, an amendment to the Inflationary Adjustments Law (Amendment No.
41), 2001 was passed by the Israeli Knesset, pursuant to which until February 28 2002, the
Minister of Finance, with the approval of the finance committee of the Knesset, is entitled
to determine by an order that the provisions of the Inflationary Adjustments Law, in whole
or in part, will not apply with respect to a tax year if the Israeli CPI in that year did not
exceed 3%. On February 28 2002, the finance committee of the Knesset determined that the
Inflationary Adjustments Law will apply to all entities in 2001, although the Israeli CPI did
not exceed 3% in 2001.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959
(the ‘‘Law’’):
Check Point Ltd.’s production facilities have been granted the status of an ‘‘Approved
Enterprise,’’ under the Law, for capital investment plans.
In accordance with the Law, Check Point Ltd. has chosen to enjoy ‘‘alternative plan
benefits,’’ under which Check Point Ltd. waived its right to Israeli government grants in
return for certain tax exemptions. Accordingly, Check Point Ltd.’s income from an
‘‘approved enterprise’’ is exempt from Israeli income taxes for a period of two to four years
and is subject to a reduced corporate tax rate of 10% to 25% (based on the percentage of
foreign ownership of Check Point Ltd.) for an additional period of six to eight years,
respectively. The tax benefits under these capital investment plans are scheduled to
gradually expire from 2005 through 2011.
The duration of tax benefits for each of the programs is subject to limitations of the earlier
of 12 years from commencement of production, or 14 years from receipt of approval as an
‘‘Approved Enterprise’’ under the law.
Tax-exempt income attributable to the ‘‘Approved Enterprise’’ can be distributed to
shareholders without subjecting Check Point Ltd. to taxes only upon the complete
liquidation of Check Point Ltd. Check Point Ltd.’s Board of Directors has determined that
F-15
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
(202) 659-9600 Tel (212) 219-3700 Tel
---
# If the retained tax-exempt income (approximately $ 370,000 as of December 31, 2001) is distributed in a manner other than in the complete liquidation of Check Point Ltd., it would
# be taxed at the reduced corporate tax rate applicable to such profits (between 10% to 25%) and an income tax liability would be incurred of up to approximately $ 90,000 December 31, 2001.
## Should Check Point Ltd. fail to meet such requirements in the future, income attributable
to its ‘‘Approved Enterprise’’ programs could be subject to the regular Israeli corporate tax
rate of 36% and Check Point Ltd. could be required to refund tax benefits already received
with respect to such programs.
Income from sources other than the ‘‘Approved Enterprise’’ are subject to tax at regular
Israeli corporate tax rate of 36%.
Tax benefits under the Israeli Law for the Encouragement of Industry (Taxes), 1969:
Check Point Ltd. is an ‘‘industrial company’’ under the above law and as such is entitled to
certain tax benefits, including accelerated rates of depreciation and the deduction of public
offering expenses.
Deferred tax assets:
Deferred tax assets reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. As of December 31, 2000 and 2001, the Company’s deferred taxes
calculated on reserves and allowances are comprised as follows:
December 31,
**2000 2001**
U.S. carryforward tax deductions $ 151,273 $ 222,000
Accrued vacation, severance pay and fixed assets 5,519 5,759
## Net deferred tax assets before valuation allowance
Valuation allowance (151,273) (222,000)
Net deferred tax assets $ 5,519 $ 5,759
Domestic $ 356 $ 593
Foreign 5,163 5,166
| | December 31, | |
| --- | --- | --- |
| | 2000 | 2001 |
| U.S. carryforward tax deductions | $151,273 | $222,000 |
| Accrued vacation, severance pay and fixed assets | 5,519 | 5,759 |
| Net deferred tax assets before valuation allowance | 156,792 | 227,759 |
| Valuation allowance | (151,273) | (222,000) |
| Net deferred tax assets | $5,519 | $5,759 |
| Domestic | $356 | $593 |
| Foreign | 5,163 | 5,166 |
| | $5,519 | $5,759 |
F-16
RCI Group Inc.
---
# Domestic $110,635 $243,843 $366,237 Foreign (750) 14,601
# $109,885 $258,444 Provisions for income tax expense are comprised as follows:
## NOTE 8:- TAXES ON INCOME - (Continued)
1999
Current $15,207
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Domestic | $110,635 | $243,843 | $37,231 |
| Foreign | (750) | 14,104 | 15,286 |
| | $109,885 | $258,444 | $381,523 |
$14,104
g. Income tax rate:
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Current | $15,207 | $41,543 | $59,843 |
| Deferred | (1,103) | (4,312) | (240) |
| | $14,104 | $37,231 | $59,603 |
| Domestic | $10,796 | $31,224 | $52,884 |
| Foreign | 3,308 | 2000 | 6,719 |
| | $14,104 | $37,231 | $59,603 |
## Statutory tax rate in Israel Increase (decrease) in taxes resulting from:
Effect if ‘‘Approved Enterprise ’’status
(*) (27%) (25%) (17%)
Other, net 4% 3% (3%)
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Income before taxes as reported in the statements of income | $109,885 | $258,444 | $381,523 |
| Statutory tax rate in Israel | 36% | 36% | 36% |
| Increase (decrease) in taxes resulting from: | | | |
| Effect if “Approved Enterprise”status(*) | (27%) | (25%) | (17%) |
| Other, net | 4% | 3% | (3%) |
| Effective income tax rate | 13% | 14% | 16% |
| ($)Basic net earnings per share amounts of the benefit resulting from the exemption | $0.13 | $0.28 | $0.23 |
| ($)Diluted net earnings per share amounts of the benefit resulting from the exemption | $0.12 | $0.25 | $0.22 |
13% 14%
---
# On December 20, 1999, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock dividend, effective January 23, 2000. On June 29, 2000, the Company’s Board of Directors approved a two-for-one stock split in the form of a stock dividend, effective July 14, 2000.
## On January 18, 2001, the Company’s Board of Directors approved a three-for-two stock
## split in the form of a stock dividend, effective February 1, 2001. This stock split has been
reflected in the Consolidated Statements of Changes in Shareholder’s Equity.
Shareholders otherwise entitled to receive fractional shares because they held a number of
old ordinary shares that were not evenly divisible by the split number were paid by cash.
All shares, options and earnings per share amounts have been retroactively adjusted for all
periods presented to reflect the stock splits effected as stock dividends.
Deferred share:
The deferred share is not entitled to any rights other than the right to receive its nominal
value upon liquidation of the Company.
Employee Stock Purchase Plan (‘‘ESPP’’):
The Company has reserved a total of 6,000,000 shares for issuance under the ESPP. Eligible
employees may use up to 15% of their salaries to purchase ordinary shares. The ESPP will
be implemented by effecting an offering every six months. The price of an ordinary share
purchased under the ESPP is equal to 85% of the lower of the fair market value of the
ordinary share on the subscriptions date of each offering period, or on the purchase date.
## d. Stock options:
Under the Company’s Stock Option Plan (the ‘‘Plan’’), options are granted to employees,
officers and directors at an exercise price equal to at least the fair market value at the date
## of grant and are granted for periods not to exceed seven years. Options granted under the
Plan generally vest over a period of four to five years.
The Company’s 1996 Incentive Employee Stock Option Plan authorizes the grant of
options to purchase up to 61,616,480 ordinary shares under the Israeli plan and up to
85,524,721 ordinary shares under the U.S. plan.
As of December 31, 2001, an aggregate of 78,270,926 ordinary shares are available for
future grant.
Under the Company's Stock Option Plan (the "Plan")，options are granted to employees, officers and directors at an exercise price equal to at least the fair market value at the date of grant and are granted for periods not to exceed seven years. Options granted under the Plan generally vest over a period of four to five years.
The Company's 1996 Incentive Employee Stock Option Plan authorizes the grant of options to purchase up to 61,616,480 ordinary shares under the Israeli plan and up to 85,524,721 ordinary shares under the U.S.plan.
F-18
---
# 1999 2000 2001 1999 2000 Outstanding at beginning of year 35,723 38,748 33,428 $ 2.3 $ 5.91
# Granted 19,230 3,305 2,607 9.38 57.73 Exercised (10,243) (7,552) (7,314) 1.43 3.25 Forfeited or cancelled (5,962) (1,073) (2,244) 3.17 7.91 38,748 33,428 26,477 $ 5.91 $11.57
## Outstanding at end of year Exercisable at end of year
5,139 8,258 9,611 $ 2.31 $ 6.56 $10.74
The options outstanding as of December 31, 2001, have been separated into ranges of
exercise price, as follows:
| | Options(in thousands) | | | Weighted average exercise price | | |
| --- | --- | --- | --- | --- | --- | --- |
| | 1999 | 2000 | 2001 | 1999 | 2000 | 2001 |
| Outstanding at beginning of year | 35,723 | 38,748 | 33,428 | $2.3 | $5.91 | $11.57 |
| Granted | 19,230 | 3,305 | 2001 | 9.38 | 57.73 | 41.65 |
| Exercised | (0.43) | (7,552) | (7,314) | 1.6 | 3.19 | 3.5 |
| Forfeited or cancelled | (5,962) | (1,073) | (2,874) | 3.77 | 5.92 | 4.44 |
| Outstanding at end of year | 38,748 | 33,428 | 26,477 | $5.91 | $11.57 | $16.14 |
| Exercisable at end of year | 1,136 | 8,258 | 9,611 | $9.38 | $156 | $10.50 |
9.83 – 11.66 6,807 4.7 10.52 3,950 10.50
12.58 – 17.00 2,530 4.8 15.11 452 14.94
20.36 – 23.60 249 4.9 21.00 52 21.10
27.22 – 30.54 577 6.0 29.51 115 29.97
| Exercise price | Options outstanding at December 31,2001(in thousands) | Weighted average remaining contractual life(years) | Weighted average exercise price | Options exercisable at December 31,2001(in thousands) | Weighted average exercise price of exercisable options |
| --- | --- | --- | --- | --- | --- |
| $0.02-0.67 | 149 | 1.4 | $0.43 | 149 | $0.43 |
| 1.6-3.19 | 7,051 | 3.5 | 2.80 | 2,874 | 278 |
| 3.77-5.92 | 3,461 | 3.8 | 4.44 | 1,136 | 5.4 |
| 6.93-9.38 | 803 | 4.5 | 8.22 | 156 | 8.15 |
| 9.83-11.66 | 6,807 | 4.7 | 10.52 | 3,950 | 10.50 |
| 12.58-17.00 | 2,530 | 4.8 | 15.11 | 452 | 14.94 |
| 20.36-23.60 | 249 | 4.9 | 21.00 | 52 | 21.10 |
| 27.22-30.54 | 577 | 6.0 | 29.51 | 115 | 29.97 |
| 31.75-36.72 | 278 | 5.4 | 34.68 | 121 | 34.63 |
| 40.09-51.21 | 3,128 | 6.1 | 43.34 | 363 | 46.44 |
| 57.59-65.58 | 29 | 5.7 | 62.92 | 4 | 65.58 |
| 68.42-70.02 | 529 | 5.9 | 68.62 | 86 | 68.76 |
| 70.19-75.08 | 204 | 5.5 | 71.56 | 29 | 71.55 |
| 79.80-86.54 | 682 | 5.7 | 86.28 | 124 | 86.11 |
| $0.24-$86.54 | 26,477 | 4.5 | $16.14 | 9,611 | $10.74 |
6% for 1999 and 2000 and 3.7% 2001; dividend yields of 0% for 1999, 2000 and 2001;
volatility factors of the expected market price of the Company’s Ordinary shares of 1.04 for
1999, 1.09 for 2000 and 1.00 for 2001; and an expected life of the option of 6 months after
the option is vested for 1999, 2000 and 2001.
F-19
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
---
# Net income as reported $95,781 $221,213 $321,920 Pro forma net income $71,412 $156,472
# Pro forma basic earnings per share $ 0.32 $ 0.67
# Pro forma diluted earnings per share $ 0.29 $ 0.60
e. Dividends:
Dividends, if any, declared on the ordinary shares will be paid in NIS. Dividends paid to
shareholders outside Israel will be converted into dollars, on the basis of the exchange rate
| | December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Net income as reported | $95,781 | $221,213 | $321,920 |
| Pro forma net income | $71,412 | $156,472 | 243,408 |
| Pro forma basic earnings per share | $0.32 | $0.67 | $1.01 |
| Pro forma diluted earnings per share | $0.29 | $0.60 | $0.94 |
e. Dividends:
Numerator:
Net income $ 95,781 $221,213 $321,920
Numerator for basic net earnings per
## share — net income available to ordinary shareholders
Numerator for diluted net earnings per
share — net income available to
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Numerator: | | | |
| Net income | $95,781 | $221,213 | $321,920 |
| Numerator for basic net earnings per share — net income available to ordinary shareholders | $95,781 | $221,213 | $321,920 |
| Numerator for diluted net earnings per share — net income available to ordinary shareholders after assumed conversions | $95,781 | $221,213 | $321,920 |
| Denominator: | | | |
| Weighted average ordinary shares outstanding(in thousands) | 222,930 | 232,611 | 240,008 |
| Denominator for basic net earnings per share — weighted — average shares(in thousands) | 222,930 | 232,611 | 240,008 |
| Effect of dilutive securities:Employee stock options(in thousands) | 23,526 | 29,940 | 18,067 |
| Denominator for diluted net earnings per share(in thousands) | 246,456 | 262,515 | 258,075 |
---
The Company operates in one reportable operating segment: the development, selling and
# marketing of performance software products. The Company follows the requirements of SFAS No. 131 ‘‘Disclosures About Segments of an Enterprise and Related Information.’’
# 1. Revenues based on the end customers’ location: Year ended December 31,
## 1999 2000 2001 Americas $117,276 $204,374 $235,360 42,928 111,330 140,359
Europe (excluding Great Britain)
Great Britain
Japan 24,154 37,561 52,815
Other 15,053 36,843 46,473
$219,567 $425,283 $527,643
2. Long-lived assets:
| | Year ended December 31, | | |
| --- | --- | --- | --- |
| | 1999 | 2000 | 2001 |
| Americas | $117,276 | $204,374 | $235,360 |
| Europe (excluding Great Britain) | 42,928 | 111,330 | 140,359 |
| Great Britain | 20,156 | 35,175 | 52,636 |
| Japan | 24,154 | 37,561 | 52,815 |
| Other | 15,053 | 36,843 | 46,473 |
| | $219,567 | $425,283 | $527,643 |
| 2. Long-lived assets: | | | |
| Israel | $4,721 | $6,952 | $7,772 |
| Americas | 4,351 | 3,277 | 4,072 |
| Other | 622 | 1,409 | 1,404 |
| | $9,694 | $11,638 | $13,248 |
| Financial income, net: | | | |
| Financial income: | | | |
| Interest income | $13,146 | $29,554 | $41,389 |
| Other | 129 | 377 | 3,671 |
| | 13,275 | 29,931 | 45,060 |
| Financial expenses: | | | |
| Other | (313) | (784) | (300) |
| | (313) | (784) | (300) |
| Financial income, net | $12,962 | $29,147 | $44,760 |
---
both the Company and Indemnitee recognize the increased risk of litigation and other
# Articles of Association of the Company authorize the directors; and
**WHEREAS,** in recognition of Indemnitee’s need for substantial protection against personal liability
in order to assure Indemnitee’s continued service to the Company in an effective
manner and Indemnitee’s reliance on the aforesaid Articles of Association and, in part,
to provide Indemnitee with specific contractual assurance that the protection afforded
by the Articles of Association will be available to Indemnitee (regardless of, among
other things, any change in the composition of the Company’s Board of Directors or
any acquisition of the Company), the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses (whether partial or complete) to
Indemnitee to the fullest extent permitted by law and as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and of the Indemnitee’s continuing to
serve the Company directly or, at its request, with another entity, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. **CERTAIN DEFINITIONS.**
1.1. *Change in Control*: shall be deemed to have occurred if: (i) any ‘‘person’’ (as such term
is used in Section 13(d) and 14(d) of the United States Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation owned directly or indirectly by
the shareholders of the Company in substantially the same proportions as their
ownership of shares of the Company, is or becomes the ‘‘beneficial owner’’ (as defined
in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company
representing 20% or more of the total voting power represented by the Company’s
## then outstanding voting securities; or (ii) individuals who at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company’s shareholders was approved by a majority of
the directors then still in office who either were directors at the beginning of the period
of whose election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or (iii) the shareholders of the Company
approve a merger or consolidation of the Company with any other corporation, other
than a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the Company
of all or substantially all the Company’s assets.
A-1
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
1025 Connecticut Ave., NW, Sixth Floor 75 Varick Street, 16th Floor
Washington, DC 20036 New York, NY 10013
---
Indemnitee due to an act performed or failure to act by him in his capacity as an Office
Holder of the Company or any subsidiary of the Company or any entity in which
Indemnitee serves as an Office Holder at the request of the Company either prior to
or after the date hereof for (the following shall be hereinafter referred to as
‘‘Indemnifiable Events’’):
2.1.1. monetary liability imposed on the Indemnitee in favor of a third party in a
## judgment, including a settlement or an arbitral award confirmed by a court,
for an act that the Indemnitee performed by virtue of being an Office Holder
of the Company; and
2.1.2. reasonable costs of litigation, including attorneys’ fees, expended by the
Indemnitee or for which the Indemnitee has been charged by a court, in an
action brought against the Indemnitee by or on behalf of the Company or a
third party, or in a criminal action in which the Indemnitee was found
innocent, or in a criminal offense in which the Indemnitee was convicted and
in which a proof of criminal intent is not required.
The indemnification undertaking made by the Company shall be only with respect to
such events as are described in Schedule A hereto. The maximum amount payable by
the Company under this Agreement shall not exceed one-half of the shareholders’
equity of the Company, measured by the balance sheet of the Company last published
prior to the time that notice is provided to the Company pursuant to Section 8 below.
If so requested by the Indemnitee, the Company shall advance an amount (or amounts)
estimated by it to cover Indemnitee’s reasonable litigation Expenses, with respect to
which the Indemnitee is entitled to be indemnified under Section 2.1 above.
The Company’s obligation to indemnify the Indemnitee and advance Expenses in
accordance with this Agreement shall be for such period as the Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit or
proceeding or any inquiry or investigation, whether civil, criminal or investigative,
arising out of the Indemnitee’s service in the foregoing positions, whether or not the
Indemnitee is still serving in such positions.
2.5. The Company undertakes that as long as it may be obligated to provide indemnification
and advance Expenses under this Agreement, the Company will purchase and maintain
in effect directors and officers liability insurance to cover the liability of the Indemnitee
to the fullest extent permitted by law.
A-2 thereto as to which all rights of appeal therefrom have been exhausted or lapsed) and
## shall not be obligated to indemnify or advance Indemnitee (unless there has been a determination by a court or competent jurisdiction
that the Indemnitee would be permitted to be so indemnified under this Agreement).
3.2. *Change in Control of Company.* The Company undertakes that in the event of a
Change in Control of the Company, the Company’s obligations under this Agreement
shall continue to be in effect following such Change in Control, and the Company shall
take all necessary action to ensure that the party acquiring control of the Company
shall independently undertake to continue in effect such Agreement, to maintain the
provisions of the Articles of Association allowing indemnification and to indemnify
Indemnitee in the event that the Company shall not have sufficient funds or otherwise
shall not be able to fulfill its obligations hereunder.
**NO MODIFICATION.**
No supplement, modification or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall
such waiver constitute a continuing waiver. Any waiver shall be in writing.
**SUBROGATION.**
In the event of payment under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the execution of such
## documents necessary to enable the Company effectively to bring suit to enforce such rights.
**REIMBURSEMENT.**
The Company shall not be liable under this Agreement to make any payment in connection with any
claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received
any insurance policy or otherwise) of the amounts otherwise indemnifiable
## payment (under hereunder. Any amounts paid to the Indemnitee under such insurance policy or otherwise after the
Company has indemnified the Indemnitee for such liability or Expense shall be repaid to the
Company promptly upon receipt by Indemnitee.
**EFFECTIVENESS.**
Subject to the receipt of all the required approvals in accordance with Israeli Law, including the
## approvals of the audit
shareholders of the Company, this Agreement shall be in full force and effect as of the date hereof.
## 7. EFFECTIVENESS.
A-3
---
## 8.2. Except as otherwise provided below, to the extent that it may wish, the Company
jointly with any other indemnifying party similarly notified will be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the Indemnitee. After
notice from the Company to the Indemnitee of its election to assume the defense
thereof, the Company will not be liable to the Indemnitee under this Agreement for
any legal or other expenses subsequently incurred by Indemnitee in connection with
the defense thereof other than reasonable costs of investigation or as otherwise
provided below. The Indemnitee shall have the right to employ his or her own counsel
in such action, suit or proceeding, but the fees and expenses of such counsel incurred
## after notice from the Company of its assumption of the defense thereof shall be at the
expense of the Indemnitee, unless: (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and the Indemnitee in the
conduct of the defense of such action; or (iii) the Company shall not in fact have
employed counsel to assume the defense of such action, in each of which cases the fees
and expenses of counsel shall be at the expense of the Company. The Company shall
not be entitled to assume the defense of any action, suit or proceeding brought by or
on behalf of the Company or as to which the Indemnitee shall have reached the
conclusion specified in (ii) above.
8.3. The Company shall not be liable to indemnify the Indemnitee under this Agreement
for any amounts paid in settlement of any action or claim effected without its written
consent. The Company shall not settle any action or claim in any manner that would
impose any penalty or limitation on the Indemnitee without the Indemnitee’s written
consent. Neither the Company nor the Indemnitee will unreasonably withhold their
consent to any proposed settlement.
**EXCULPATION.**
The Company hereby exempts the Indemnitee, to the fullest extent permitted by law, from any
liability for damages caused as a result of the Indemnitee’s breach of the duty of care to the
Company, provided that the Indemnitee shall not be exempt with respect to any action or omission
as to which, under applicable law, the Company is not entitled to exculpate the Indemnitee.
**NON-EXCLUSIVITY.**
The rights of the Indemnitee hereunder shall not be deemed exclusive of any other rights he or she
may have under the Company’s Articles of Association or applicable law or otherwise, and to the
extent that during the indemnification period the rights of the then existing directors and Office
## Holders are more favorable to such directors or Office Holders than the rights provided thereunder
or under this Agreement to the Indemnitee, the Indemnitee shall be entitled to the full benefits of
such more favorable rights.
## 10. NON-EXCLUSIVITY.
A-4
RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying indemnification relates to an Indemnifiable Event.
12. SEVERABILITY.
## The provisions of this Agreement shall be severable in the event that any provision hereof (including
13. GOVERNING LAW, JURISDICTION.
any provision within a single section, paragraph or sentence) is held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain
enforceable to the fullest extent permitted by law.
**GOVERNING LAW, JURISDICTION.**
This Agreement shall be governed by and construed and enforced in accordance with the laws of the
State of Israel. The parties hereto irrevocably submit to the exclusive jurisdiction of the courts of
## Tel-Aviv in any action related to this Agreement 14.
ENTIRE AGREEMENT AND TERMINATION.
This Agreement represents the entire agreement between the parties; and there are no other
agreements, contracts or understandings between the parties with respect to the subject matter of this
Agreement. No termination or cancellation of this Agreement shall be effective unless in writing and
## signed by both parties hereto.
COMPANY Name:
Signature:
## 14. ENTIRE AGREEMENT AND TERMINATION.
This Agreement represents the entire agreement between the parties; and there are no other agreements, contracts or understandings between the parties with respect to the subject matter of this Agreement. No termination or cancellation of this Agreement shall be effective unless in writing and signed by both parties hereto.
## COMPANY
By:____
Name:____
Signature:____
---
Acts in regard to copyrights, patents, designs and any other intellectual property rights, and
## Acts in regard to ‘‘Y2K’’ malfunctions
6. Approval of corporate actions including the approval of the acts of the Company’s
management, their guidance and their supervision
7. Claims of failure to exercise business judgment and a reasonable level of proficiency, expertise
and care in regard to the Company’s business
8. Claims relating to the offering of securities, claims relating to violations of securities laws of
any jurisdiction and claims arising out of the Company’s status as a publicly-traded company,
including, without limitation, fraudulent disclosure claims, failure to comply with SEC
disclosure rules and other claims relating to relationships with investors and the investment
community
9. Violations of laws requiring the Company to obtain regulatory and governmental licenses,
permits and authorizations in any jurisdiction
10. Claims in connection with publishing or providing any information, including any filings with
governmental authorities, on behalf of the Company in the circumstances required under
applicable laws
11. Violations of any law or regulation governing domestic and international telecommunications
in any jurisdiction
12. Claims in connection with employment relationships with the Company’s or its subsidiaries’
employees.
10. Claims in connection with publishing or providing any information, including any filings with governmental authorities, on behalf of the Company in the circumstances required under applicable laws
11. Violations of any law or regulation governing domestic and international telecommunications in any jurisdiction
12. Claims in connection with employment relationships with the Company's or its subsidiaries' employees.
---
JOBNAME: Check Point Software PAGE: 1 SESS: 12 OUTPUT: Fri Mar 29 13:12:04 2002 /joshua TRagsdal-0/fin/nyork/51029/consentltr
V
### Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-6032, 333-7260, 333-9136 and 333-9508) of Check Point Software Technologies Ltd. of our report dated January 14, 2002, with respect to the consolidated financial statements of Check Point Software Technologies Ltd. included in this Annual Report on Form 20-F for the year ended December 31, 2001.
Yours Truly,
March 19, 2002 KOST, FORER & GABBAY Tel-Aviv, Israel A Member of Ernst & Young International
# RCI Group Inc. Financial Printing, Imaging & Time Sensitive Copying
(202) 659-9600 Tel (212) 219-3700 Tel
(202) 659-0779 Fax (212) 219-1311 Fax