20-F 1 zk1008124.htm 20-F zk1008124.htm


 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
 
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
   
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ___________ to _____________
   
OR
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
Date of event requiring this shell company report ________________
   
Commission file number 000-28584
 
CHECK POINT SOFTWARE TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
 
ISRAEL
(Jurisdiction of incorporation or organization)
 
5 Ha’Solelim Street, Tel Aviv 67897, Israel
(Address of principal executive offices)
 
John Slavitt, Esq.
General Counsel
Check Point Software Technologies, Inc.
800 Bridge Parkway
Redwood City, CA 94065 U.S.A.
Tel: (650) 628-2110
Fax: (650) 649-1975
 
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Name of exchange on which registered
     
Ordinary shares, NIS 0.01 nominal value
 
NASDAQ Global Select Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2009. 209,099,392 ordinary shares, NIS 0.01 nominal value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
 
Yes S No £
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 
Yes £ No S
 
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 S No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes £ No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer S       Accelerated filer £       Non-accelerated filer £
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
S U.S. GAAP
 
£ International Financial Reporting Standards as issued by the International Accounting Standards Board
 
£ Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 £ Item 18 £
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
 
Yes £ No S
 


 
 
 

 
 
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2

 
 
Currency of Presentation and Certain Defined Terms
 
In this Annual Report on Form 20-F, references to “U.S.” or “United States” are to the United States of America, its territories and possessions; and references to “Israel” are to the State of Israel. References to “$”, “dollar” or “U.S. dollar” are to the legal currency of the United States of America; references to “NIS” or “Israeli shekel” are to the legal currency of Israel; references to “Euro” are to the legal currency of the European Union; and references to “Swedish Krona” are to the legal currency of the Kingdom of Sweden. Our financial statements are presented in U.S. dollars and are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP.
 
All references to “we,” “us,” “our” or “Check Point” shall mean Check Point Software Technologies Ltd., and, unless specifically indicated otherwise or the context indicates otherwise, our consolidated subsidiaries.
 
Forward-Looking Statements
 
Some of the statements contained in this Annual Report on Form 20-F are forward-looking statements that involve risks and uncertainties. The statements contained in this Annual Report on Form 20-F that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding trends related to our business and our expectations, beliefs, intentions or strategies regarding the future. These statements are subject to known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology, such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements also include, but are not limited to, statements in (i) “Item 4 – Information on Check Point” regarding our belief as to increased use of Internet technologies, continued expansion of connectivity services, acceleration of the use of networks, the need and demand for network, gateway and virtual security, the need and demand for flexible and extensible security, the demand for our new blade architecture and adoption of new licensing offerings, increasing demands on enterprise security systems, the impact of our relationship with our technology partners on our sales goals, the contribution of our products to our future revenue, our development of future products, and our ability to integrate, market and sell acquired products and technologies; and (ii) “Item 5 – Operating and Financial Review and Prospects” regarding, among other things, our expectations regarding our business and the markets in which we operate and into which we sell products, future amounts and sources of our revenue, our ongoing relationships with our current and future customers and channel partners, our future costs and expenses, the adequacy of our capital resources.
 
Forward-looking statements involve risks, uncertainties and assumptions, and our actual results may differ materially from those predicted. Many of these risks, uncertainties and assumptions are described in the risk factors set forth in “Item 3 – Key Information – Risk Factors” and elsewhere in this Annual Report on Form 20-F. All forward-looking statements included in this Annual Report on Form 20-F are based on information available to us on the date of the filing and reasonable assumptions. We undertake no obligation to update any of the forward-looking statements after the date of the filing, except as required by applicable law.
 
 
3

 
 
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
KEY INFORMATION
 
Selected Financial Data
 
We prepare our historical consolidated financial statements in accordance with United States generally accepted accounting principles (U.S. GAAP). The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for each of the years from 2005 to 2009. The selected consolidated statement of income data for the years 2007, 2008 and 2009, and the selected consolidated balance sheet data at December 31, 2008 and 2009, have been derived from our audited consolidated financial statements set forth in “Item 18 – Financial Statements.” The selected consolidated statement of income data for the years 2005 and 2006, and the selected consolidated balance sheet data at December 31, 2005, 2006 and 2007, has been derived from our previously published audited consolidated financial statements, which are not included in this Annual Report on Form 20-F. This selected financial data should be read in conjunction with our consolidated financial statements, and are qualified entirely by reference to such consolidated financial statements.
 
 
4

 
 
   
Year Ended December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
   
(in thousands, except per share data)
 
       
Consolidated Statement of Income Data:
                             
Revenues
  $ 579,350     $ 575,141     $ 730,877     $ 808,490     $ 924,417  
Operating expenses (*):
                                       
Cost of revenues
    30,540       36,431       82,301       92,609       133,270  
Research and development
    50,542       62,210       80,982       91,629       89,743  
Selling and marketing
    142,336       157,114       217,491       214,439       220,877  
General and administrative
    24,244       43,503       53,527       53,313       56,409  
Restructuring and other acquisition related costs
                            9,101  
Acquired in-process R&D
          1,060       17,000              
Total operating expenses
    247,662       300,318       451,301       451,990       509,400  
Operating income
    331,688       274,823       279,576       356,500       415,017  
Financial income, net
    54,177       63,647       49,725       40,876       32,058  
Other-than-temporary impairment, net of gain on sale of marketable securities previously impaired (**)
                      (11,221 )     (1,277 )
Income before taxes on income
    385,865       338,470       329,301       386,155       445,798  
Taxes on income
    66,181       60,443       48,237       62,189       88,275  
Net income
  $ 319,684     $ 278,027     $ 281,064     $ 323,966     $ 357,523  
Basic earnings per share
  $ 1.30     $ 1.18     $ 1.26     $ 1.51     $ 1.71  
Shares used in computing basic earnings per share
    245,520       235,519       222,548       214,361       209,371  
Diluted earnings per share
  $ 1.27     $ 1.17     $ 1.25     $ 1.50     $ 1.68  
Shares used in computing diluted earnings per share
    251,747       236,769       225,442       216,668       212,208  
 
(*) Including pre-tax charges for amortization of intangible assets, acquisition related expenses and stock-based compensation in the following items:
 
Amortization of intangible assets and acquisition related expenses
                             
Cost of products and licenses
  $ 5,414     $ 5,414     $ 27,724     $ 24,554     $ 28,224  
Selling and marketing
    228       604       12,260       12,428       22,429  
General and administrative
          927                      
Total
  $ 5,642     $ 6,945     $ 39,984     $ 36,982     $ 50,653  
Stock-based compensation
                                       
Cost of products and licenses
  $     $ 39     $ 65     $ 48     $ 47  
Cost of software updates, maintenance and services
    408       470       668       684       641  
Research and development
    1,252       9,371       4,309       5,037       6,649  
Selling and marketing
    1,825       7,997       8,780       6,855       5,032  
General and administrative
    260       18,515       20,230       19,703       18,538  
Total
  $ 3,745     $ 36,392     $ 34,052     $ 32,327     $ 30,907  
 
(**) The year ended December 31, 2008, includes a write down of $11.2 million (pre-tax) of marketable securities. The year ended December 31, 2009, includes a write down of $3.1 million related to auction rates securities, net of a $1.8 million gain on the sale of marketable securities that were previously impaired in 2008.
 
 
5

 
 
   
December 31,
 
   
 2005
   
2006
   
2007
   
2008
   
2009
 
   
(in thousands)
 
                               
Consolidated Balance Sheet Data:
                             
Working capital
  $ 1,186,119     $ 967,805     $ 692,316     $ 791,976     $ 648,944  
Total assets
    2,092,495       2,080,793       2,368,575       2,593,616       3,069,594  
Shareholders’ equity
    1,775,721       1,711,533       1,856,955       2,015,865       2,319,718  
Capital stock
    387,303       423,155       465,104       504,182       528,648  
 
Risk Factors
 
If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our ordinary shares could decline and you could lose part or all of your investment.
 
Risks Related to Our Business and Our Market
 
If the market for information and network security solutions does not continue to grow, our business will be adversely affected
 
The market for information and network security solutions may not continue to grow. Continued growth of this market will depend, in large part, upon:
 
 
§
the continued expansion of Internet usage and the number of organizations adopting or expanding intranets;
     
 
§
the ability of their respective infrastructures to support an increasing number of users and services;
     
 
§
the continued development of new and improved services for implementation across the Internet and between the Internet and intranets;
     
 
§
the adoption of data security measures as it pertains to data encryption technologies;
     
 
§
government regulation of the Internet and governmental and non-governmental requirements and standards with respect to data security and privacy; and
     
 
§
general economic conditions in the markets in which we, our customers and our suppliers operate.
 
Recently, economies around the world and financial markets experienced a significant slowdown caused by a multitude of factors, including adverse credit conditions, slower or receding economic activity, concerns about inflation and deflation, fluctuating energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and other factors. During this slowdown, many companies reduced expenditures, and if these adverse conditions continue, it may cause our customers to reduce or postpone their technology spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.
 
Further, if the necessary infrastructure or complementary products and services are not developed in a timely manner and, consequently, the enterprise security, data security, Internet, or intranet markets fail to grow or grow more slowly than we currently anticipate, our business, operating results, and financial condition may be materially adversely affected. Additional details are provided in “Item 4 – Information on Check Point.”
 
We may not be able to successfully compete against our competitors
 
The market for information and network security solutions is intensely competitive and we expect that competition will continue to increase in the future. Our competitors include Cisco Systems, Inc., Juniper Networks, Inc., Fortinet Inc., SonicWall Inc., WatchGuard Technologies, Inc. McAfee, Inc. and other companies in the network security space. We also compete with several other companies, including Microsoft Corporation, Symantec Corporation, IBM Corporation with respect to specific products that we offer. There are hundreds of small and large companies that offer security products and services that we may compete with from time to time.
 
 
6

 
 
Some of our current and potential competitors have various advantages over us, including longer operating histories; access to larger customer bases; significantly greater financial, technical and marketing resources; a broader portfolio of products, applications and services; and larger patent and intellectual property portfolios. As a result, they may be able to adapt better than we can to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products. Furthermore, some of our competitors with more diversified product portfolios and larger customer bases may be better able to withstand a reduction in spending on information and network security solutions and a general slowdown or recession in economic conditions in the markets in which they operate. In addition, some of our competitors have greater financial resources than we do, and they have offered, and in the future may offer, their products at lower prices than we do, particularly when economic conditions are weak, which may cause us to lose sales or to reduce our prices in response to competition.
 
In addition, consolidation in the markets in which we compete may affect our competitive position. This is particularly true in circumstances where customers are seeking to obtain a broader set of products and services than we are able to provide. The markets in which we compete also include many niche competitors, generally smaller companies at a relatively early stage of operations, which are focused on specific Internet and data security needs. These companies’ specialized focus may enable them to adapt better than we can to new or emerging technologies and changes in customer requirements in their specific areas of focus. In addition, some of these companies can invest relatively large resources on very specific technologies or customer segments. The effect of these companies’ activities in the market may result in price reductions, reduced gross margins and loss of market share, any of which will materially adversely affect our business, operating results, and financial condition.
 
Further, vendors of operating system software or networking hardware may enhance their products to include functionality that is currently provided by our products. The widespread inclusion of similar functionality to that which is offered by our solutions, as standard features of operating system software or networking hardware, could significantly reduce the demand for our products, particularly if the quality of such functionality were comparable to that of our products. Furthermore, even if the network or application security functionality provided as standard features by operating systems software or networking hardware is more limited than that of our solutions, a significant number of customers may elect to accept more limited functionality in lieu of purchasing additional products.
 
We may not be able to continue competing successfully against our current and future competitors, and increased competition may result in price reductions, reduced gross margins, and loss of market share, any of which will materially adversely affect our business, operating results, and financial condition. If any of the events described above occur, our business, operating results and financial condition could be materially adversely affected. Additional details are provided in “Item 4 – Information on Check Point.”
 
If we fail to enhance our existing products, develop or acquire new and more technologically advanced products, or fail to successfully commercialize these products, our business and results of operations will suffer
 
The information and network security industry is characterized by rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements, and evolving industry standards in computer hardware and software technology. In particular, the markets for data security, Internet, and intranet applications are rapidly evolving. As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, programming tools, and computer language technology. Further, we must continuously improve our products to protect our customers’ data and networks from evolving security threats.
 
 
7

 
 
Our future operating results will depend upon our ability to enhance our current products and to develop and introduce new products on a timely basis; to address the increasingly sophisticated needs of our customers; and to keep pace with technological developments, new competitive product offerings, and emerging industry standards. Our competitors’ introduction of products embodying new technologies and the emergence of new industry standards may render our existing products obsolete or unmarketable. While we have historically been successful in developing, acquiring, and marketing new products and product enhancements that respond to technological change and evolving industry standards, we may not be able to continue to do so. In addition, we may experience difficulties that could delay or prevent the successful development, introduction, and marketing of these products, as well as the integration of acquired products. Furthermore, our new products or product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In some cases, a new product or product enhancements may negatively affect sales of our existing products. If we do not respond adequately to the need to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition may be materially adversely affected. Additional details are provided in “Item 4 – Information on Check Point” and under the caption “We may not be able to successfully compete” in this “Item 3 – Key Information – Risk Factors.”
 
Product defects may increase our costs and impair the market acceptance of our products and technology
 
Our products are complex and must meet stringent quality requirements. They may contain undetected hardware or software errors or defects, especially when new or acquired products are introduced or when new versions are released. In particular, the personal computer hardware environment is characterized by a wide variety of non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. We may need to divert the attention of our engineering personnel from our research and development efforts to address instances of errors or defects. In addition, we may in the future incur costs associated with warranty claims.
 
Our products are used to deploy and manage Internet security and protect information, which may be critical to organizations. As a result, the sale and support of our products entails the risk of product liability and related claims. We do not know whether, in the future, we will be subject to liability claims or litigation for damages related to product errors, or will experience delays as a result of these errors. Our sales agreements and product licenses typically contain provisions designed to limit our exposure to potential product liability or related claims. In selling our products, we rely primarily on “shrink wrap” licenses that are not signed by the end user, and for this and other reasons, these licenses may be unenforceable under the laws of some jurisdictions. As a result, the limitation of liability provisions contained in these licenses may not be effective. Although we maintain product liability insurance for most of our products, the coverage limits of these policies may not provide sufficient protection against an asserted claim. If litigation were to arise, it could, regardless of its outcome, result in substantial expense to us, significantly divert the efforts of our technical and management personnel, and disrupt or otherwise severely impact our relationships with current and potential customers. In addition, if any of our products fail to meet specifications or have reliability, quality or compatibility problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in revenues, a loss of existing customers, and difficulty attracting new customers.
 
We are subject to risks relating to acquisitions
 
We have made acquisitions in the past and we may make additional acquisitions in the future. The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
 
 
8

 
 
Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:
 
 
§
issue equity securities which would dilute current shareholders’ percentage ownership;
     
 
§
incur substantial debt;
     
 
§
assume contingent liabilities; or
     
 
§
expend significant cash.
 
These financing activities or expenditures could harm our business, operating results and financial condition or the price of our ordinary shares. Alternatively, due to difficulties in the capital and credit markets, we may be unable to secure capital on acceptable terms, or at all, to complete acquisitions.
 
In addition, if we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, and technologies successfully or effectively manage the combined business following the completion of the acquisition. We may also not achieve the anticipated benefits from the acquired business due to a number of factors, including:
 
 
§
unanticipated costs or liabilities associated with the acquisition;
     
 
§
incurrence of acquisition-related costs;
     
 
§
diversion of management’s attention from other business concerns;
     
 
§
harm to our existing business relationships with manufacturers, distributors and customers as a result of the acquisition;
     
 
§
the potential loss of key employees;
     
 
§
use of resources that are needed in other parts of our business;
     
 
§
use of substantial portions of our available cash to consummate the acquisition; or
     
 
§
unrealistic goals or projections for the acquisition.
 
Moreover, even if we do obtain benefits from acquisitions in the form of increased sales and earnings, there may be a delay between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits.
 
We are dependent on a small number of distributors
 
We derive our sales primarily through indirect channels. During 2009, we derived approximately 58% of our sales from our 10 largest distributors, with the largest distributor accounting for approximately 18% of our sales, and the second largest distributor accounting for approximately 17% of our sales. During 2008, these two distributors accounted for approximately 30% of our sales in the aggregate. We expect that a small number of distributors will continue to generate a significant portion of our sales. Furthermore, there has been an industry trend toward consolidation among distributors, and we expect this trend to continue in the near future which could further increase our reliance on a small number of distributors for a significant portion of our sales. If these distributors reduce the amount of their purchases from us for any reason, including because they choose to focus their efforts on the sales of the products of our competitors, our business, operating results and financial condition could be materially adversely affected.
 
Our future success is highly dependent upon our ability to establish and maintain successful relationships with our distributors. In addition, we rely on these entities to provide many of the training and support services for our products and equipment. Accordingly, our success depends in large part on the effective performance of these distributors. Recruiting and retaining qualified distributors and training them in our technology and products requires significant time and resources. Further, we have no long-term contracts or minimum purchase commitments with any of our distributors, and our contracts with these distributors do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential distributors to favor their products or to prevent or reduce sales of our products. Our distributors may choose not to offer our products exclusively or at all. Our failure to establish and maintain successful relationships with distributors would likely materially adversely affect our business, operating results and financial condition.
 
 
9

 
 
We purchase several key components and finished products from sole or limited sources, and we are increasingly dependent on contract manufacturers for our hardware products.
 
Many components, subassemblies and modules necessary for the manufacture or integration of our hardware products are obtained from a sole supplier or a limited group of suppliers. Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on subcontractors involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules and limited control over pricing, quality and timely delivery of components, subassemblies or modules. Replacing suppliers may be difficult and could result in an inability or delay in producing designated hardware products. Substantial delays would have a material adverse impact on our business.
 
Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during time periods in which demand for our products is increasing, especially if demand increases more quickly than we expect.
 
We are dependent on a limited number of product families
 
Currently, we derive the majority of our revenues from sales of integrated appliances and Internet security products primarily under our UTM-1, Power-1, IP Series and related brands, as well as related revenues from software updates, maintenance and other services. We expect that this concentration of revenues from a small number of product families will continue to be the case in the foreseeable future. Endpoint security products and associated software updates, maintenance and support services represent an additional revenue source. Our future growth depends heavily on our ability to effectively develop and sell new and acquired products as well as add new features to existing products. For more details, see “Item 4 – Information on Check Point” and “Item 5 – Operating and Financial Review and Prospects.”
 
We incorporate third party technology in our products, which may make us dependent on the providers of these technologies and expose us to potential intellectual property claims
 
Our products contain certain technology that we license from other companies. Third party developers or owners of technologies may not be willing to enter into, or renew, license agreements with us regarding technologies that we may wish to incorporate in our products, either on acceptable terms or at all. If we cannot obtain licenses to these technologies, we may be at a disadvantage compared with our competitors who are able to license these technologies. In addition, when we do obtain licenses to third party technologies that we did not develop, we may have little or no ability to determine in advance whether the technology infringes the intellectual property rights of others. Our suppliers and licensors may not be required or may not be able to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. Any failure to obtain licenses to intellectual property or any exposure to liability as a result of incorporating third party technology into our products could material and adversely affect our business, results or operations and financing condition.
 
We incorporate open source technology in our products which may expose us to liability and have a material impact on our product development and sales
 
Some of our products utilize open source technologies. These technologies are licensed to us under varying license structures, including the General Public License. If we have improperly integrated, or in the future improperly integrate software that is subject to such licenses into our products, in such a way that our software becomes subject to the General Public License, we may be required to disclose our own source code to the public. This could enable our competitors to eliminate any technological advantage that our products may have over theirs. Any such requirement to disclose our source code or other confidential information related to our products could materially and adversely affect our competitive position and impact our business, results of operations and financial condition.
 
 
10

 
 
We are the defendants in various lawsuits and are also subject to certain tax disputes and governmental proceedings, which could adversely affect our business, results of operations and financial condition
 
We operate our business in various countries, and accordingly attempt to utilize an efficient operating model to optimize our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in different parts of the world.
 
In particular, following audits of our 2002 and 2003 corporate tax returns, the Israeli Tax Authority (the “ITA”) issued orders challenging our positions on several issues, including matters, such as the usage of funds earned by our approved enterprise for investments outside of Israel, deductibility of employee stock options expenses, percentage of foreign ownership of our shares, taxation of interest earned outside of Israel and deductibility of research and development expenses. The largest amount in dispute relates to the treatment of financial income on cash that is held and managed by our wholly-owned Singapore subsidiary, which the ITA is seeking to tax in Israel. In an additional challenge to this amount, the ITA reclassified the transfer of funds from Check Point to our subsidiary in Singapore as a dividend for purposes of the Law for the Encouragement of Capital Investments, which would result in tax on the funds transferred. The ITA orders also contest our positions on various other issues. The ITA, therefore, demanded the payment of additional taxes in the aggregate amount of NIS 963 million with respect to 2002 (assessment received on December 27, 2007) and NIS 151 million with respect to 2003 (assessment received on May 29, 2008), in each case including interest as of the assessment date. We have appealed the orders relating to both years with the Tel Aviv District Court, and these appeals are pending. There can be no assurance that the court will accept our positions on these matters or others and, in such an event, we may record additional tax expenses if these matters are settled for amounts in excess of our current provisions. In addition the ITA is currently examining the income tax returns for the years 2004-2007. The ITA has issued a preliminary assessment under which it demanded the payment of additional taxes in the aggregate amount of NIS 817 million with respect to these years (assessment received on August 2, 2009) including interest as of the assessment date. We appealed such assessment and the ITA is currently conducting a re-examination. There can be no assurance that the ITA will accept our positions on matters raised and, in such an event, an order will be issued.
 
We have also been named as a defendant in three patent related lawsuits: 1) Information Protection and Authentication of Texas, LLC filed a complaint against us on December 30, 2008, in the Eastern District of Texas, alleging infringement by us of U.S. patents nos. 5,311,591 and 5,412,717 and seeking an injunction and an unspecified amount of damages; 2) Enhanced Security Research filed a complaint against us on June 6, 2009, in the District of Delaware, alleging patent infringement; and 3) MPH filed a complaint against us on February 3, 2010, in the Northern District Of Illinois, alleging patent infringement. All of the above complaints are filed against multiple security vendors and all of the plaintiffs are non practicing entities. They are businesses established to hold the patent. We currently intend to vigorously defend these claims. However, as with most litigation, the outcome is difficult to determine.
 
We are currently engaged in various legal disputes with two minority shareholders of our subsidiary SofaWare Technologies Ltd. Both of these shareholders are alleging that we are oppressing them as minority shareholders. One of them is seeking to compel us to purchase his shares, currently values his shares at NIS 16 million, and is seeking judicial appraisal with respect to his shares. The other minority shareholder is seeking remedies that include restrictions on our ability to develop products that compete with SofaWare, and changes in SofaWare’s board of directors. The same shareholder also filed a derivative claim against us on behalf of SofaWare. On February 14, 2008, the court hearing this case partially accepted the derivative claim and ordered that we pay SofaWare NIS 13 million plus interest. Both parties have appealed this ruling. We are also engaged in additional litigation with these two minority shareholders. We believe that the claims filed by these two minority shareholders are without merit and intend to continue to contest these claims vigorously.
 
 
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Further, we are the defendant in various other lawsuits, including employment-related litigation claims, lease termination claims and other legal proceedings in the normal course of our business. Litigation and governmental proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. While we currently intend to defend the aforementioned matters vigorously, we cannot predict the results of complex legal proceedings, and an unfavorable resolution of a lawsuit or proceeding could materially adversely affect our business, results of operations and financial condition. See also “Item 8 – Financial Information” under the caption “Legal Proceedings.”
 
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources
 
In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Companies such as ours in the software industry, and other technology industries, are particularly vulnerable to this kind of litigation as a result of the volatility of their stock prices. We have been named as a defendant in this type of litigation in the past. Any litigation of this sort could result in substantial costs and a diversion of management’s attention and resources.
 
We may not be able to successfully protect our intellectual property rights
 
We seek to protect our proprietary technology by relying on a combination of statutory as well as common law copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions as indicated below in the section entitled “Proprietary Rights” in “Item 4 – Information on Check Point.” We have certain patents in the United States and in some other countries, as well as pending patent applications. We cannot assure you that pending patent applications will be issued, either at all or within the scope of the patent claims that we have submitted. In addition, someone else may challenge our patents and these patents may be found invalid. Furthermore, others may develop technologies that are similar to or better than ours, or may work around any patents issued to us. Despite our efforts to protect our proprietary rights, others may copy aspects of our products or obtain and use information that we consider proprietary. Although we do not know the extent to which there is piracy of our software products, software piracy is a persistent problem. We try to police this type of activity, but it is difficult to do so effectively. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, Israel or Sweden. Our efforts to protect our proprietary rights may not be adequate and our competitors may independently develop technology that is similar to our technology. If we are unable to secure, protect, and enforce our intellectual property rights, such failure could harm our brand and adversely impact our business, financial condition, and results of operations.
 
If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, which could harm our business
 
There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our ability not to infringe upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. As noted above, we have been named in three patent related intellectual property lawsuits. In addition, third-parties have in the past sent us correspondence regarding their intellectual property and in the future we may receive claims that our products infringe or violate their intellectual property rights. Furthermore, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or products. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or royalty payments, prevent us from selling our products, or require that we comply with other unfavorable terms. In addition, we may decide to pay substantial settlement costs and/or licensing fees in connection with any claim or litigation, whether or not successfully asserted against us. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. As such, third-party claims with respect to intellectual property may increase our cost of goods sold or reduce the sales of our products, and may have a material and adverse effect on our business.
 
 
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We are exposed to various legal, business, political and economic risks associated with international operations; these risks could increase our costs, reduce future growth opportunities and affect our results of operations
 
We sell our products worldwide, and we book a significant portion of our revenue outside the United States. We intend to continue to expand our international operations, which will require significant management attention and financial resources. In order to continue to expand worldwide, we will need to establish additional operations, hire additional personnel and recruit additional channel partners, internationally. To the extent that we are unable to do so effectively, our growth is likely to be limited and our business, operating results and financial condition may be materially adversely affected.
 
Our international revenues and operations subject us to many potential risks inherent in international business activities, including, but not limited to:
 
 
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technology import and export license requirements;
     
 
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costs of localizing our products for foreign countries, and the lack of acceptance of localized products in foreign countries;
     
 
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trade restrictions;
     
 
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imposition of or increases in tariffs or other payments on our revenues in these markets;
     
 
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changes in regulatory requirements;
     
 
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greater difficulty in protecting intellectual property;
     
 
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difficulties in managing our overseas subsidiaries and our international operations;
     
 
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declines in general economic conditions;
     
 
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political instability and civil unrest which could discourage investment and complicate our dealings with governments;
     
 
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difficulties in complying with a variety of foreign laws and legal standards;
     
 
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expropriation and confiscation of assets and facilities;
     
 
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difficulties in collecting receivables from foreign entities or delayed revenue recognition;
     
 
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differing labor standards;
     
 
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potentially adverse tax consequences, including taxation of a portion of our revenues at higher rates than the tax rate that applies to us in Israel;
     
 
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fluctuations in currency exchange rates and the impact of such fluctuations on our results of operations and financial position; and
     
 
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the introduction of exchange controls and other restrictions by foreign governments.
 
These difficulties could cause our revenues to decline, increase our costs or both. This is also specifically tied to currency exchange rates which has an impact on our financial statements based on currency rate fluctuations.
 
 
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Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance
 
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Global Select Market rules are creating uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards.
 
In particular, continuing compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and external auditor’s independent attestation on management’s assessment of the internal control over financial reporting.
 
In connection with our Annual Report on Form 20-F for fiscal 2009, our management assessed our internal control over financial reporting, and determined that our internal control over financial reporting was effective as of December 31, 2009, and our independent auditors have expressed an unqualified opinion over the effectiveness of our internal control over financial reporting as of the end of such period. However, we will undertake management assessments of our internal control over financial reporting in connection with each annual report, and any deficiencies uncovered by these assessments or any inability of our auditors to issue an unqualified report could harm our reputation and the price of our ordinary shares.
 
If we fail to comply with new or changed laws or regulations, our business and reputation may be harmed.
 
We are controlled by a small number of shareholders who may make decisions with which you or others may disagree
 
As of January 31, 2010, our directors and executive officers owned approximately 20.8% of the voting power of our outstanding ordinary shares, or 24.3% of our outstanding ordinary shares if the percentage includes options currently exercisable or exercisable within 60 days of January 31, 2010 (the exercise price of some of these options is greater than our current share market price). The interests of these shareholders may differ from your interests and present a conflict. If these shareholders act together, they could exercise significant influence over our operations and business strategy. For example, although these shareholders hold considerably less than a majority of our outstanding ordinary shares, they may have sufficient voting power to influence matters requiring approval by our shareholders, including the election and removal of directors and the approval or rejection of mergers or other business combination transactions. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive a shareholder of a possible premium for its ordinary shares as part of a sale of our company.
 
We may be required to indemnify our directors and officers in certain circumstances
 
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them against some types of claims, subject to dollar limits and other limitations. Subject to Israeli law, these agreements provide that we will indemnify each of these directors and senior officers for any of the following liabilities or expenses that they may incur due to an act performed or failure to act in their capacity as our director or senior officer:
 
 
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Monetary liability imposed on the director or senior officer in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court.
     
 
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Reasonable legal costs, including attorneys’ fees, expended by a director or senior officer as a result of an investigation or proceeding instituted against the director or senior officer by a competent authority; provided, however, that such investigation or proceeding concludes without the filing of an indictment against the director or senior officer and either:
 
 
o
No financial liability was imposed on the director or senior officer in lieu of criminal proceedings, or
     
 
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Financial liability was imposed on the director or senior officer in lieu of criminal proceedings, but the alleged criminal offense does not require proof of criminal intent.
 
 
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Reasonable legal costs, including attorneys’ fees, expended by the director or senior officer or for which the director or senior officer is charged by a court:
 
 
o
In an action brought against the director or senior officer by us, on our behalf or on behalf of a third party,
     
 
o
In a criminal action in which the director or senior officer is found innocent, or
     
 
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In a criminal action in which the director or senior officer is convicted, but in which proof of criminal intent is not required.
 
Our cash balances and investment portfolio have been, and may continue to be, adversely affected by market conditions and interest rates
 
We maintain substantial balances of cash and liquid investments, for purposes of acquisitions and general corporate purposes. Our cash, cash equivalents and marketable securities totaled $1,847 million as of December 31, 2009. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their value. During 2008 and 2009, we recorded an other-than-temporary impairment of marketable securities in the amount of $11.2 million and $3.1 million respectively. We expect that market conditions will continue to fluctuate and that the fair value of our investments may be affected accordingly.
 
Financial income is an important component of our net income. The outlook for our financial income is dependent on many factors, some of which are beyond our control, and they include the future direction of interest rates, the amount of any share repurchases or acquisitions that we effect and the amount of cash flows from operations that are available for investment. We rely on third-party money managers to manage the majority of our investment portfolio in a risk-controlled framework. Our investment portfolio throughout the world is invested in fixed-income securities and is affected by changes in interest rates which have declined considerably. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. In a declining interest rate environment, borrowers may seek to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities we hold more quickly than we initially expected. This action may cause us to reinvest the redeemed proceeds in lower yielding investments. Any significant decline in our financial income or the value of our investments as a result of falling interest rates, deterioration in the credit of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and financial condition.
 
We generally buy and hold our portfolio positions, while minimizing credit risk by setting maximum concentration limit per issuer and credit rating. Our investments consist primarily of government and corporate debentures. Although we believe that we generally adhere to conservative investment guidelines, the continuing turmoil in the financial markets may result in impairments of the carrying value of our investment assets. We classify our investments as available-for-sale. Changes in the fair value of investments classified as available-for-sale are not recognized to income during the period, but rather are recognized as a separate component of equity until realized. Realized losses in our investments portfolio may adversely affect our financial position and results. Had we reported all the changes in the fair values of our investments into income, our reported net income for the year ended December 31, 2009, would have increased by $12.6 million.
 
 
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Our business and operations are subject to the risks of earthquakes, fire, floods and other natural catastrophic events, as well as manmade problems such as power disruptions or terrorism
 
Our headquarters in the United States, as well as certain of our research and development operations, are located in the Silicon Valley area of Northern California, a region known for seismic activity. We also have significant operations in other regions that have experienced natural disasters. We also rely on information technology systems to communicate among our workforce located worldwide. Any disruption to our internal communications, whether caused by a natural disaster or by manmade problems, such as power disruptions or terrorism, could delay our research and development efforts. A significant natural disaster or manmade problem could damage our operations and properties, and adversely affect our business, operating results, and financial condition.
 
Risks Related to Our Operations in Israel
 
Potential political, economic and military instability in Israel, where our principal executive offices and our principal research and development facilities are located, may adversely affect our results of operations
 
We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development facilities are located in Israel. Accordingly, political, economic and military conditions in and surrounding Israel may directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors, and recent years have witnessed increased terrorist activity within Israel. Terrorist attacks and hostilities within Israel, the hostilities between Israel and Hezbollah, and Israel and Hamas, the conflict between Hamas and Fatah, as well as tensions between Israel and Iran, have also heightened these risks. Any hostilities involving Israel, a significant increase in terrorism or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could materially adversely affect our operations. Ongoing and revived hostilities or other Israeli political or economic factors could materially adversely affect our business, operating results and financial condition.
 
Our operations may be disrupted by the obligations of our personnel to perform military service
 
Many of our officers and employees in Israel are obligated to perform annual military reserve duty in the Israel Defense Forces, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key employees. Military service requirements for our employees could materially adversely affect our business, operating results and financial condition.
 
The tax benefits available to us require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.
 
For the year ended December 31, 2009, our effective tax rate was 20%. There can be no assurance that our effective tax rate will not change over time as a result of changes in corporate income tax rates, changes in the tax laws of the various countries in which we operate and fluctuations in the growth rate of our business. We have benefited or currently benefit from a variety of government programs and tax benefits that generally carry conditions that we must meet in order to be eligible to obtain any benefit.
 
If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time.
 
 
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Any of the following could have a material effect on our overall effective tax rate:
 
 
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Some programs may be discontinued,
     
 
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We may be unable to meet the requirements for continuing to qualify for some programs,
     
 
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These programs and tax benefits may be unavailable at their current levels,
     
 
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Upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that would offset the loss of the expiring tax benefit, or
     
 
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We may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.
 
Additional details are provided in “Item 5 – Operating and Financial Review and Products” under the caption “Taxes on income”, in “Item 10 – Additional Information” under the caption “Israeli taxation, foreign exchange regulation and investment programs”, and in notes 10b and 11 to our consolidated financial statements.
 
Provisions of Israeli law and our articles of association may delay, prevent or make difficult an acquisition of us, prevent a change of control, and negatively impact our share price
 
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his or her ordinary shares for shares in a foreign corporation, to taxation before disposition of the investment in the foreign corporation. These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.
 
In addition, our articles of association contain certain provisions that may make it more difficult to acquire us, such as the provision which provides that our board of directors may issue preferred shares. These provisions may have the effect of delaying or deterring a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our securities.
 
Additional details are provided in “Item 10 – Additional Information” under the caption “Articles of association and Israeli Companies Law – Anti-takeover measures.”
 
Our operations expose us to risks associated with fluctuations in foreign currency exchange rates that could adversely affect our business
 
Although we have operations throughout the world, the majority of our revenue and approximately 59% of our operating costs in 2009 were denominated in, or linked to, the U.S. dollar. Accordingly, we consider the U.S. dollar to be our functional currency. However, approximately 41% of our operating costs in 2009 were incurred in other currencies, particularly in Israeli Shekels, Euros, Swedish Krona and British Pounds. As a result of from time to time we may experience increases in the costs of our operations outside the United States, as expressed in dollars, which could have a material adverse effect on our results of operations and financial condition.
 
We use derivative financial instruments, such as foreign exchange forward and option contracts, to mitigate the risk of changes in foreign exchange rates on balance sheet accounts and forecast cash flows. We may not purchase derivative instruments adequate to insulate ourselves from foreign currency exchange risks and over the past year, we have incurred losses as a result of exchange rate fluctuations that have not been offset in full by our hedging strategy.
 
 
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If foreign exchange currency markets continue to be volatile, such fluctuations in foreign currency exchange rates could materially and adversely affect our profit margins and results of operations in future periods. Also, the volatility in the foreign currency markets may make it challenging to hedge our foreign currency exposures effectively.
 
The imposition of exchange or price controls or other restrictions on the conversion of foreign currencies could also have a material adverse effect on our business, results of operations and financial condition.
 
INFORMATION ON CHECK POINT SOFTWARE TECHNOLOGIES
 
Overview
 
Check Point’s mission is to secure the Internet. Check Point was founded in 1993, and has since developed technologies to secure the use of the Internet by corporations and consumers when transacting and communicating. Seventeen years ago, risks and threats were limited and securing the Internet was relatively simple. A firewall and an antivirus solution were generally enough to secure a business. Today, many enterprises require many (in some cases 15 or more) point solutions to secure their information technology (IT) networks from the multitude of threats and potential attacks and are facing an increasingly complex IT security infrastructure.
 
While Check Point’s mission is to secure the Internet, our core competency is reducing complexity in Internet security. We strive to solve the security maze by bringing more, better and simpler security solutions to our customers.
 
Check Point develops, markets and supports a wide range of software, as well as combined hardware and software products and services for IT security. We offer our customers an extensive portfolio of network and gateway security solutions, data and endpoint security solutions and management solutions. Our solutions operate under a unified security architecture that enables end-to-end security with a single line of unified security gateways, and allow a single agent for all endpoint security that can be managed from a single unified management console. This unified management allows for ease of deployment and centralized control and is supported by and reinforced with real-time security updates.
 
Check Point was an industry pioneer with our FireWall-1 and our patented Stateful Inspection technology. In 2009, Check Point continued to innovate with the development of our Software Blade architecture. The dynamic Software Blade architecture delivers secure, flexible and simple solutions that can be customized to meet the security needs of any organization or environment.
 
Our products and services are sold to enterprises, service providers, small and medium sized businesses and consumers. Our Open Platform for Security (OPSEC) framework allows customers to extend the capabilities of our products and services with third-party hardware and security software applications. Our products are sold, integrated and serviced by a network of partners worldwide. Check Point customers include tens of thousands of businesses and organizations of all sizes including all Fortune 100 companies. Check Point’s award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft.
 
 
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Business Highlights
 
In April 2009, we completed the acquisition of the security appliance business from Nokia pursuant to the terms of an Asset Purchase Agreement entered into on December 22, 2008. Prior to the completion of the acquisition, Check Point had collaborated with Nokia’s security appliance business over the past decade to deliver industry-leading enterprise security solutions. Since completing the acquisition, we have been extending the security appliance portfolio that is developed, manufactured and supported by Check Point.
 
In November 2009, we acquired the application database of Facetime Communications. With the acquisition of the industry’s most comprehensive application classification and signature database, Check Point has been able to add security controls for over 50,000 Web 2.0 widgets and more than 4,500 Internet applications to its security gateways. The new solutions enabled by this acquisition provide businesses granular control over application usage and enable security administrators to prevent threats associated with the use of certain Internet applications.
 
Additional details regarding the important events in the development of our business since the beginning of 2009 are provided in “Item 5 – Operating and Financial Review and Prospects” under the caption “Overview.”
 
We were incorporated as a company under the laws of the State of Israel in 1993 under the name of “Check Point Software Technologies Ltd.” Our registered office and principal place of business is located at 5 Ha’Solelim Street, Tel Aviv 67897 Israel. The telephone number of our registered office is 972-3-753-4555. Our company’s Web site is www.checkpoint.com. The contents of our Web site are not incorporated by reference into this Annual Report on Form 20-F.
 
This Annual Report on Form 20-F is available on our Web site. If you would like to receive a printed copy via mail, please contact our Investor Relations department at 800 Bridge Parkway, Redwood City, CA 94065, U.S.A., Tel.: 650-628-2050, email: ir@us.checkpoint.com.
 
Our agent for service of process in the United States is CT Corporation System, 818 West Seventh Street, Los Angeles, CA 90017 U.S.A., Tel.: 213-627-8252.
 
Industry Background
 
Several key factors and trends affect enterprise security. The first is the continuing evolution of threats and attacks, which over the years have become more sophisticated and targeted. Hackers use technology, the Internet and deception to acquire sensitive information. New threats such as drive-by downloads are polluting the Web by downloading malicious code on to a user’s PC to steal confidential and marketable information. The Gumblar.cn exploit is a good example of a sophisticated attack. It targets users of Internet Explorer and Google search, delivering malware through compromised sites to infect a user’s PC and subsequently intercept traffic between the user and the visited sites. Once infected, anything that is typed into the infected PC could be monitored and used to commit data theft.
 
The second challenge is the mounting number of governmental regulations around the world on data privacy and compliance. Enterprises need to put in place data security technologies to protect themselves from violating applicable law regarding data privacy and protection, and avoid experiencing data loss or data theft which could cause them to suffer reputational harm and governmental sanctions, fines and penalties.
 
The third factor is the growing number of people who work remotely or who conduct their activities over mobile devices. Whether remote or mobile, workers need constant connectivity to the enterprise network. The need for increased connectivity has, in turn, expanded the need to safeguard and manage the access to information available over IT networks and to secure sensitive information contained on connected systems. In addition, remote and mobile users are looking to access private enterprise networks and information from a growing spectrum of endpoint devices, including laptops, PDAs, smartphones, portable media players, and removable media storage devices.
 
 
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Finally, another key trend affecting IT security is the complexity of deploying, managing and monitoring the many technologies needed to fully-secure the enterprise IT network. Each security solution comes with its own management console and requires specific training, stretching IT department resources. Integrated security solutions are sought in an effort to keep the security infrastructure simple to manage yet flexible enough to make changes.
 
Product Offerings
 
In an effort to simultaneously address the need for scalable security solutions and the retention of initial investments, Check Point introduced the Software Blade architecture in February 2009. The new architecture provides customers with the ability to tailor their security gateways based on their specific needs at any time. It offers enterprises a common platform to deploy independent, modular and interoperable security applications or “software blades,” such as firewall, virtual private network (VPN), intrusion prevention system (IPS), anti-virus, policy management or event analysis. The new architecture allows customers to select, from a library of over 30 software blades, the exact security they need and to combine these blades into a single, centrally managed solution. Customers can easily extend their security solutions by adding new software blades without the need to purchase additional hardware. This allows our customers to deploy security dynamically, when needed, with lower total cost of ownership, full integration, and on a single management console.
 
The Software Blade architecture is the foundation of our network, endpoint and security management offerings.
 
1. Network security gateway software blades and appliances
 
Our wide range of network security gateways allows our customers to implement their security policies on network traffic between internal networks and the Internet, as well as between internal networks and private networks that are shared with partners. These gateways are available as either appliances or software solutions, providing customers with a broad range of deployment options, including the ability to customize the configuration to best meet their security needs.
 
Our security gateway product line includes the following offerings to secure traffic and optimize performance:
 
Software Blades:
 
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Firewall software blade – Inspects traffic as it passes through security gateways, classifying it based on various criteria, such as source and destination of connection, protocol, services and application used. This provides a means to allow, block and log each connection based on the enterprise’s security policy. Our firewall technology is based on several key differentiated technologies, including the patented Stateful Inspection technology that allows flexible and programmable classification of network traffic.
   
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Intrusion Prevention System (IPS) software blade – Monitors the network for malicious or unwanted traffic and is designed to be able to detect and block “known” and “unknown” attacks on the network or system. Our IPS software blade is supported by online security update services that provide the latest defense mechanisms, including “signatures” for the most recent attacks.
   
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Virtual Private Networks (VPNs) software blade – Provides the means to enable private communication over a network by encrypting traffic between various sub-networks (site-to-site) or individual computers (such as laptops and other mobile devices) and the enterprise network.
   
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Antivirus and Anti-Malware software blade – Stops viruses and other malware at the gateway before they affect users. Enables screening of specific application protocols such as Web traffic to allow/block access to specific Web addresses based on their content. It also includes screening for viruses to detect downloads of malicious applications.
 
 
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Anti-Spam and Email Security software blade – Provides comprehensive protection for an enterprise’s messaging infrastructure. A multi-dimensional approach protects the email infrastructure, provides highly accurate spam protection, and defends organizations from a wide variety of virus and malware threats delivered within email. Continual updates though a Check Point software update service help to intercept threats before they spread.
   
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Web Security software blade – Protects users and enterprises by restricting access to an array of potentially dangerous sites and content, blocking inappropriate Web surfing to over 20 million URLs. Content profiles are updated continually through a Check Point software update service.
   
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Acceleration & Clustering software blade – Delivers a set of patented security acceleration technologies, SecureXL and ClusterXL, that work together to optimize performance and increase security in high-performance environments. These technologies improve overall throughput and reduce latency through several different techniques, such as load balancing and sharing.
   
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Advanced Networking software blade – Adds dynamic routing, multicast support and Quality of Service (QOS) to security gateways. This software blade makes it easier for administrators to deploy security within complex and highly utilized network environments where performance and availability are critical.
 
Most of our products are sold as predefined bundles of “software blades”. These systems are offered as software only which run on a variety of operating systems or as “Appliances” that include hardware and software directly from Check Point.
 
Appliances:
 
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Power-1 Appliances – Enable enterprises to increase security in high-performance environments, such as large campuses or data centers. Our appliances include, Firewall, IPsec VPN, IPS, Acceleration and Clustering, and Advanced Networking, to deliver a high-performance security platform for multi-Gbps environments.
   
§
IP Appliances – Proven for years in complex networking and high-performance environments, Check Point IP Appliances, formerly Nokia IP appliances, offer customers turnkey security functionality, such as firewall, VPN and Intrusion Prevention (IPS) across a wide range of models.
   
§
UTM-1 Appliances – Offer comprehensive all-in-one security designed to deliver out-of-box simplicity that is ideal for small and mid-sized businesses. Built-in security services include firewall, VPN, IPS, antivirus, anti-malware, anti-spam, email security and URL filtering across a wide range of models.
 
Virtualization and Cloud Computing:
 
Consolidating multiple systems into single hardware platform is a recent trend in the IT industry (Virtualization). Another trend that is related is the use of shared computing services to outsource certain IT functions (cloud computing). Check Point has multiple offerings for these environments, enabling consolidating up to 250 physical Check Point gateways into a single high performance hardware platform.
 
§
VSX – Check Point gateways are available on a virtual security operations platform, enabling enterprises to consolidate multiple security gateways in a single hardware system and to secure virtual server environments. The VSX products that provide this capability are available on certain Check Point appliances – primarily Power-1 and IP Appliances and are also offered as software which can run on open servers. VSX has been available since 2002.
   
§
Virtual Edition (VE) – VE enables the deployment of a Check Point security gateway within a virtualized server running the VMWare environment and provides security between the various virtual systems on that server as well as through the gateway to other parts of the network. VE was released in late 2008.
 
 
21

 
 
2. Endpoint security
 
Our endpoint security offerings provide multiple software blades that run on individual computers that are connected to the network, such as desktop computers, laptop computers and other mobile devices. These offerings include:
 
§
Firewall & Security Compliance software blade – Prevents network attacks on individual computers by blocking internal attacks and the proliferation of network “worms” within the enterprise IT network, as well as attacks on desktop and laptop computers that are connected to public networks. It also provides information on the compliance of individual computers to the enterprise’s security policy and allows selective connectivity of devices to the network based on their compliance.
   
§
Full Disk Encryption (FDE) software blade – Fully-encrypts all data stored on a PC, so that unauthorized parties cannot read any data even if they get physical access to the disk drive.
   
§
Media Encryption (ME) and Port Protection software blade – Enables encryption of data stored on mobile devices, such as CDs and DVDs and other external removable media and allows an organization to control the transfer of information from individual computers to external devices, such as USB memory devices and external hard drives.
   
§
Remote Access VPN software blade – Enables mobile devices to securely access the enterprise IT network by encrypting all traffic and ensuring mobile devices and users are properly authenticated.
   
§
WebCheck Secure Browsing software blade – Segregates corporate data from the Internet with browser virtualization technology and provides advanced heuristics to stop users from accessing dangerous websites.
   
§
Anti-Malware and Program Control software blade – Detects viruses and other malware that try to run on any device and/or circumvent its operation. Program control ensures that only legitimate and approved programs are allowed to run on the endpoint.
 
The endpoint security software blades are integrated into a single endpoint security agent with a single client, single interface, single login and single scan. This solution provides security, ease of use and ease of management.
 
3. Security management
 
A key element in implementing our security technologies is the ability to effectively manage their deployment while ensuring consistent operations in accordance with an enterprise’s security policy. Our vision is to provide a single console for security management. This single console reduces the need for multiple, sometimes conflicting, management systems that require a high degree of specialization and training. The key software blades included in our management offerings are:
 
§
Network Policy Management software blade  Provides comprehensive network security policy management via SmartDashboard, a single, unified console.
   
§
Endpoint Policy Management software blade – Enables central deployment, management, monitoring and enforcement of security policy for all endpoint devices across any sized organization.
   
§
Logging & Status software blade – Delivers comprehensive information in the form of logs and a complete visual picture of changes to gateways, tunnels, and users.
   
§
Monitoring software blade – Provides a complete view of network and security performance, enabling fast response to changes in traffic patterns and security events.
   
§
Management Portal software blade – Extends a browser-based view of security policies to outside groups, such as support staff, while maintaining central policy control.
 
 
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§
User Directory software blade – Enables Check Point gateways to leverage directory servers (LDAP) based user information stores, eliminating the risks associated with manually maintaining and synchronizing redundant data stores.
   
§
IPS Event Analysis software blade – Provides a complete IPS event management system providing situational visibility, easy to use forensic tools, and reporting.
   
§
SmartProvisioning software blade – Provides centralized administration and provisioning of Check Point security devices via a single management console.
   
§
SmartWorkflow software blade – Delivers a formal process of policy change management that helps administrators reduce errors and enhance compliance.
   
§
Reporting software blade – Turns vast amounts of security and network data into graphical, easy-to-understand reports.
   
§
SmartEvent software blade – Centralized, real-time security event correlation and management for Check Point and third-party devices.
 
In addition, we offer our SMART-1 security management appliances that combine functionality, storage and turn-key deployment into a single device.
 
Our software blades run in a variety of deployment environments and on platforms that include standard workstations, servers and dedicated appliances. Check Point has both software and dedicated appliance solutions for gateway and management offerings. Check Point offers integrated solutions that are sold and serviced jointly with key partners including Crossbeam Systems Inc. and International Business Machines Corporation (IBM). Different client products run on different client Operating Systems (OS), such as Microsoft Windows, Mac OS, Microsoft Windows Mobile, Symbian, Linux and PalmOS.
 
Technologies
 
We have developed and acquired a variety of technologies that secure networks, endpoints and information.
 
§
Stateful Inspection technology – Our patented Stateful Inspection technology is a premier network security technology. In order to provide accurate and highly efficient traffic inspection, Stateful Inspection extracts and maintains extensive “state information,” i.e., data that provides context for future screening decisions, from all relevant communication layers. Stateful Inspection runs on a network gateway or an endpoint, such as a PC, and enables our products to inspect network traffic at high speed. Our Stateful Inspection technology can be adapted to new protocols, software applications, and security threats. It can be run on a wide range of operating systems.
   
 §
Application Intelligence – Provides a set of advanced capabilities that prevents the exploitation of vulnerabilities in business applications, including vulnerabilities in the application code, communication protocols, and the underlying operating system.
   
 §
Security Management Architecture (SMART) – A core component of our unified security architecture, SMART enables our customers to configure and manage security policies from a central administrative point. This technology enables the definition and ongoing management of security policies for enterprises of all sizes. This object-oriented architecture maps real-world entities, such as networks and users, to graphical representations that can be manipulated in a database. Integrated monitoring and reporting tools improve the manageability of the system by providing administrators with real-time information on the state of network and security systems. These tools also provide longer term trending information that is useful for periodic security management tasks, such as security audits.
 
 
23

 
 
 §
Security and Network Traffic Enforcement technologies – Based on our Stateful Inspection technology, the INSPECT engine scans all incoming and outgoing traffic at security enforcement points. These are typically located at the network perimeter as security gateways, on critical servers, or inside the network, dividing the network into separate segments. We have developed a broad range of technologies that can be implemented by our INSPECT engine. In addition, third party technologies can be implemented through our Open Platform for Security (OPSEC) framework.
   
 §
SecurePlatform – Bundles the Check Point security solutions together with an operating system (OS) in a single package that is easy to deploy. It optimizes the performance of security and operating systems and includes a set of tools that ease setup and network configuration, thus reducing the total cost of ownership. SecurePlatform runs on a variety of open systems, i.e., systems whose key interfaces are based on widely supported standards.
   
 §
ClusterXL – Provides high availability and load sharing to keep businesses running. It distributes traffic between clusters of redundant gateways so that the computing capacity of multiple machines may be combined to increase total throughput. If an individual gateway becomes unreachable, all connections are redirected to a designated backup without interruption.
   
 §
CoreXL – Enables the intelligent balancing of security traffic loads between multiple cores on multi-core processors. It results in a higher level of performance for integrated intrusion prevention.
   
 §
SecureXL – A framework of software and hardware technologies, including third-party technologies, SecureXL is designed to increase performance. By using SecureXL, hardware vendors can accelerate the performance of appliances on which our software is installed. With SecureXL, our products can be integrated into high-performance networks typically found in large enterprises and service providers.
   
 §
TrueVector – A patented, flexible and efficient software technology for enabling high-performance, scalable and robust Internet security of PCs. TrueVector stops attempts to send confidential data to unauthorized parties by malicious software, such as keystroke loggers and Trojan horses. It monitors all applications running on protected computers, allowing trusted applications to engage in network communications, while blocking network connections by untrusted applications.
   
 §
Full Disk Encryption Secure Pre-Boot Environment – Full Disk Encryption (FDE) Secure Pre-Boot Environment (PBE) is a secure, proprietary operating program. PBE, along with FDE’s access control and authentication architecture and Multi-Factor Authentication Engine (MFAE), encrypts all information stored on a PC’s hard disk, i.e., delivers full-disk encryption. The full-disk encryption technology protects every sector of the computer’s hard drive, including the operating system files. This prevents successful attacks on the OS and attacks to gain access to sensitive data on the drive.
   
 §
Hybrid Detection Engine (HDE) – At the heart of the IPS software blade, the HDE utilizes multiple detection and analysis techniques to detect hostile or suspicious traffic. These techniques include the following: signature-based methods to detect known patterns of attacks targeted at the network and at vulnerabilities within the network; protocol analysis to validate that the traffic construct meets the expected standards; anomaly detection to identify instances where network traffic exhibits abnormal characteristics; OS fingerprinting to determine the OS type of the traffic destination, which ensures proper receipt and processing; multi-element correlation to detect widespread illicit activity launched from the same source address; dynamic worm mitigation whereby rapidly proliferating worms are detected and automatically blocked from spreading within the network; as well as other techniques to deliver comprehensive network protection.
 
 
24

 
 
 §
Intrusion Prevention with Confidence Indexing – Based on several analysis data points for every network traffic flow, the IPS software blade determines a level of confidence that a certain traffic flow is an attack. This function reduces the occurrence of false positives by enabling a more granular prevention policy, which allows exploits to be blocked, without the concern of blocking critical business traffic.
   
 §
Precision Virtualization – Virtualizing or emulating a limited set of processes creates a secure segment of the network without the overhead of a full OS virtual machine. This allows powerful but lightweight security just for a targeted area that might otherwise be vulnerable to attacks. WebCheck Secure Browsing software blade utilizes this to provide powerful security for Web-browsing activities.
   
 §
Open Platform for Security (OPSEC) – Our OPSEC framework provides a single platform that enables the integration and interoperability of multi-vendor information security products and technologies. The OPSEC framework allows certified third-party security applications to plug into our solutions through our published application programming interfaces. Products that carry the OPSEC Certified seal have been tested and certified for integration and interoperability within the OPSEC framework.
 
Revenues by category of activity
 
The following table presents our revenues for the last three fiscal years by category of activity:
 
    
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
 
 
(in thousands)
 
       
Category of Activity:      
Products and licenses
  $ 309,785     $ 338,317     $ 361,633  
Software updates, maintenance and services
    421,092       470,173       562,784  
Total revenues
  $ 730,877     $ 808,490     $ 924,417  
 
Our revenues for the last three fiscal years by geographic area are set out in “Item 5 – Operating and Financial Review and Prospects” under the caption “Overview”.
 
Sales and Marketing
 
We sell through a wide network of channel partners, including distributors, resellers, value-added resellers, system integrators and managed services providers. Our agreements with these channel partners are non-exclusive. Almost all of our enterprise sales are to our channel partners and not directly to our end users. Most of our sales to the consumer market are either direct, via our Web sites, or through retail stores.
 
We use various marketing activities and tools to increase awareness and knowledge of our products and to promote sales. These include our corporate Web sites, seminars and tradeshows that we organize and participate in, print media and online advertising, online search optimization and telemarketing campaigns. In addition, in order to encourage trials of our products, we provide current and prospective customers with limited in time software evaluation licenses. We have strategic relationships with various hardware partners, including vendors providing server, workstation, appliance and networking products. These include Crossbeam Systems Inc., Dell Inc., Hewlett-Packard Co., IBM, Microsoft Corporation, Siemens AG and SanDisk.
 
As of December 31, 2009, we had 804 employees dedicated to sales and marketing, customer service and support.
 
Support and Services
 
We operate a worldwide technical services organization which provides a wide range of services including the following: (i) technical customer support programs and plans, such as Enterprise Based Support (“EBS”) and Collaborative Enterprise Support (“CES”), which provides support for a customer’s entire Check Point product install base; (ii) certification and educational training on Check Point products; and (iii) professional services in implementing, upgrading, and optimizing Check Point products, such as design planning, security implementation, and project management.
 
 
25

 
 
Our technical assistance centers in the United States, Israel, Canada and Japan offer support worldwide 24-hour service, seven days per week. There are employees in additional locations supporting our call centers, as well as call centers operated by third parties (for consumer support only). As of December 31, 2009, we had 284 employees dedicated to customer service and support.
 
Our channel partners generally provide their customers with installation, training, maintenance and support, while we provide our high-level technical support to our channel partners. Alternatively, our customers may elect to receive support directly from us. As part of our pre-sale support to our channel partners, we employ technical consultants and systems engineers who work closely with our channel partners to assist them with pre-sale configuration, use and application support. In addition, because of the increased demand for our integrated appliance solutions we have expanded our technical support offerings around the world. This includes, same and next business day replacements and on-site support availability.
 
Research and Product Development
 
We believe that our future success will depend upon our ability to enhance our existing products, develop, acquire and introduce new products to address the increasingly sophisticated needs of our customers. We work closely with existing and potential customers, distribution channels, and major resellers, who provide significant feedback for product development and innovation. Our product development efforts are focused on providing a unified security architecture that functions throughout all layers of the network and devices that carry data. This includes enhancements to our current family of products and the continued development of new products to address network and data security covering perimeter, internal, Web and endpoint security needs, as well as the integrated management of these solutions. We expect to develop most of our new products internally and also expect to leverage the products and technologies recently acquired in our acquisitions of Protect Data AB and NFR Security, Inc., as well as the products and solutions acquired upon the acquisition of Nokia Corporation’s security appliance business. We may decide, based upon timing and cost considerations that it would be more efficient to acquire or license certain technologies or products from third parties, or to make acquisitions of other businesses. Research and development expenses were $81.0 million in 2007, $91.6 million in 2008 and $89.7 million in 2009. These amounts include stock-based compensation in the amount of $4.3 million in 2007, $5.0 million in 2008 and $6.6 million in 2009. As of December 31, 2009, we had 727 employees dedicated to research and development activities and quality assurance.
 
Competition
 
Information concerning competition is provided in “Item 3 – Key Information” under the caption “Risk Factors – Risks Relating to Our Business and Our Market – We may not be able to successfully compete.”
 
Proprietary Rights
 
We use a combination of copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to protect our proprietary rights. We rely on trade secret and copyright laws to protect our software, documentation, and other written materials. These laws provide only limited protection. Further, we generally enter into confidentiality agreements with employees, consultants, customers and potential customers, and limit access and distribution of materials and information that we consider proprietary.
 
We have 11 U.S. patents, over 25 U.S. patents pending, and additional patents issued and patent applications pending worldwide. Our efforts to protect our proprietary rights may not be adequate and/or our competitors may independently develop technology that is similar but is based on our technology. Additional details are provided in “Item 3 – Key Information” under the caption “Risk Factors – Risks Relating to Our Business and Our Market – We may not be able to successfully protect our intellectual property rights.”
 
 
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Effect of Government Regulation on our Business
 
Information concerning regulation is provided in “Item 5 – Operating and Financial Review and Products” under the caption “Taxes on income” and in “Item 10 – Additional Information” under the caption “Israeli taxation, foreign exchange regulation and investment programs.”
 
Organizational Structure
 
We are organized under the laws of the State of Israel. We wholly own the subsidiaries listed below, directly or through other subsidiaries, unless otherwise specified in the footnotes below:
 
NAME OF SUBSIDIARY
 
COUNTRY OF INCORPORATION
     
Check Point Software Technologies, Inc.
 
United States of America (Delaware)
Check Point Software Technologies (Canada) Inc.
 
Canada
Check Point Software Technologies (Japan) Ltd.
 
Japan
Check Point Software Technologies (Singapore) PTE Ltd. (1)
 
Singapore
Check Point Software Technologies (Netherlands) B.V.
 
Netherlands
Check Point Holding (Singapore) PTE Ltd.
 
Singapore
Check Point Holding (Singapore) PTE Ltd. – US Branch (2)
 
United States of America (New York)
Israel Check Point Software Technologies Ltd. China (3)
 
China
Check Point Holding AB (4)
 
Sweden
SofaWare Technologies Ltd. (5)
 
Israel
_______________________
 
(1)
The company filed an application for striking off with the Accounting and Corporate Regulatory Authority in Singapore.
   
(2)
Branch of Check Point Holding (Singapore) PTE Ltd.
   
(3)
Representative office of Check Point Software Technologies Ltd.
   
(4)
Subsidiary of Check Point Holding (Singapore) PTE Ltd. (former name: Protect Data AB)
   
(5)
We own 63% of the outstanding equity of SofaWare (61.3% on a fully diluted basis) as of December 31, 2009.
 
 
27

 
 
Check Point Software Technologies (Netherlands) B.V. acts as a holding company. It wholly owns the principal operating subsidiaries listed below, unless otherwise indicated in the footnotes below:
 
NAME OF SUBSIDIARY
 
COUNTRY OF INCORPORATION
     
Check Point Software Technologies S.A.
 
Argentina
Check Point Software Technologies (Australia) PTY Ltd.
 
Australia
Check Point Software Technologies (Austria) GmbH
 
Austria
Check Point Software Technologies (Belarus) LLC
 
Belarus
Check Point Software Technologies (Belgium) S.A.
 
Belgium
Check Point Software Technologies (Brazil) LTDA
 
Brazil
Check Point Software Technologies (Hong Kong) Ltd. (Guangzhou office) (1)
 
China
Check Point Software Technologies (Hong Kong) Ltd. (Shanghai office) (1)
 
China
Check Point Software Technologies (Czech Republic) s.r.o.
 
Czech Republic
Check Point Software Technologies (Denmark) ApS
 
Denmark
Check Point Software Technologies (Finland) Oy
 
Finland
Check Point Software Technologies SARL
 
France
Check Point Software Technologies GmbH
 
Germany
Check Point Software Technologies (Greece) SA
  Greece
Check Point Software Technologies (Hungary) Ltd.
 
Hungary
Check Point Software Technologies (Hong Kong) Ltd.
 
Hong Kong
Check Point Software Technologies (India) Private Limited
 
India
Check Point Software Technologies (Italia) Srl (2)
 
Italy
Check Point Software Technologies Mexico S.A. de C.V.
 
Mexico
Check Point Software Technologies B.V.
 
Netherlands
Check Point Software Technologies Norway A.S.
 
Norway
Check Point Software Technologies (Poland) Sp.z.o.o.
 
Poland
CPST (Portugal), Sociedade Unipessoal Lda.
 
Portugal
Check Point Software Technologies (RMN) SRL.
 
Romania
Check Point Software Technologies (Russia) OOO
 
Russia
Check Point Software Technologies (Korea) Ltd.
 
S. Korea
Check Point Software Technologies (Spain) S.A.
 
Spain
C.P.S.T. Sweden A.B.
 
Sweden
Check Point Software Technologies (Switzerland) A.G.
 
Switzerland
Check Point Software Technologies (Taiwan) Ltd.
 
Taiwan
Check Point Yazilim Teknolojileri Pazarlama A.S. (3)
 
Turkey
Check Point Software Technologies (UK) Ltd.
 
United Kingdom
_______________________
 
(1)
Representative office of Check Point Software Technologies (Hong Kong) Ltd.
   
(2)
97% owned by Check Point Software Technologies (Netherlands) B.V. and 3% owned by Check Point Software Technologies Ltd.
   
(3)
96% owned by Check Point Software Technologies (Netherlands) B.V., 1% owned by Check Point Software Technologies Ltd., and 3% owned in trust by the directors of Check Point Yazilim Teknolojileri Pazarlama A.S. on behalf of Check Point Software Technologies (Netherlands) B.V.
 
 
28

 
 
 
Protect Data AB wholly owns the subsidiaries listed below, directly or through other subsidiaries:
 
NAME OF SUBSIDIARY
 
COUNTRY OF INCORPORATION
     
Check Point Software Technologies (Sweden) AB
 
Sweden
Pointsec Norway AS
 
Norway
Oy Pointsec Finland AB (1)
 
Finland
Pointsec Mobile Technologies, Inc.
 
United States of America (California)
Pointsec Mobile Technologies Ltd. (2)
 
United Kingdom
Pointsec Mobile Technologies Pty Ltd. (3)
 
Australia
Pointsec Mobile Technologies Limited (4)
 
Hong Kong
Pointsec Mobile Technologies Pte Ltd. (5)
 
Singapore
Reflex Software Ltd. (Jersey)
 
United Kingdom
Reflex Magnetics Ltd.
 
United Kingdom
Reflex Software Luxembourg SARL
 
Luxembourg
 
Check Point Software Technologies Inc. wholly owns the subsidiaries listed below:
 
NAME OF SUBSIDIARY
 
COUNTRY OF INCORPORATION
     
Pointsec Mobile Technologies, LLC.
 
United States of America (California)
NFR Security, Inc.
 
United States of America (Delaware)
Zone Labs, L.L.C.
 
United States of America (California)
_______________________
 
(1)
The company is undergoing liquidation process.
   
(2)
The company filed an application for striking off with the Companies House in the United Kingdom.
   
(3)
The company filed an application for deregistration with the Australian Securities and Investments Commission (ASIC).
   
(4)
The company filed an application for deregistration with the Companies Registry in Hong Kong.
   
(5)
The company filed an application for striking off with the Accounting and Corporate Regulatory Authority in Singapore.
 
 
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Property, Plants and Equipment
 
Our international headquarters are located in Tel Aviv, Israel. We occupy our headquarters pursuant to a lease with the City of Tel Aviv – Jaffa, which expires in August 2059. We are not required to make any additional payments under the lease.
 
Our international headquarters building contains approximately 150,000 square feet of office space. Our international headquarters building is used for administration of our business, including sales and research and development.
 
We also acquired the rights to construct an additional building with approximately 130,000 square feet.
 
In addition, we lease offices in various locations around the world. Our principal offices locations are as follows:
 
Location
 
Primary Usage
 
Space (square feet)
         
Redwood City, California
 
U.S. Headquarters
 
73,127
Irving, Texas
 
Technical support, education and professional services
 
26,725
Stockholm, Sweden
 
Research and development
 
15,123
 
In addition to the above, we lease the following office spaces:
 
Location
 
Primary Usage
 
Space (square feet)
         
EMEA
 
Sales, research and development
 
 53,118
Americas
 
Sales
 
 41,786
Asia Pacific and Japan
 
Sales
 
 12,708
 
Principal Capital Expenditures and Divestitures
 
For more information regarding our principal capital expenditures currently in progress, see “Item 5 – Operating and Financial Review and Prospects” under the caption “Liquidity and Capital Resources.”
 
UNRESOLVED STAFF COMMENTS
 
None.
 
 
30

 
 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following discussion and analysis is based on our consolidated financial statements including the related notes, and should be read in conjunction with them. Our consolidated financial statements are provided in “Item 18 – Financial Statements”.
 
Overview
 
We develop, market and support a wide range of software and combined hardware and software products and services for IT security and offer our customers an extensive portfolio of network and gateway security solutions, data and endpoint security solutions and management solutions. Our solutions operate under a unified security architecture that enables end-to-end security with a single line of unified security gateways and allow a single agent for all endpoint security. We also provide unified management which allows for ease of deployment and centralized control and is supported by and reinforced with real-time security updates. Our products and services are sold to enterprises, service providers, small and medium sized businesses and consumers. Our Open Platform for Security (OPSEC) framework allows customers to extend the capabilities of our products and services with third-party hardware and security software applications. Our products are sold, integrated and serviced by a network of channel partners worldwide.
 
In January 2007, we completed the acquisition of Protect Data AB (“Protect Data”), which at the time was a public company listed on the Stockholm Stock Exchange. Protect Data operates its business through its wholly owned subsidiary, Pointsec Mobile Technologies AB, a worldwide provider of mobile data protection. Pointsec delivers solutions for automatic data encryption that keeps the sensitive information stored on mobile computing devices, such as laptops, PDAs, smartphones, and removable media (e.g., USB devices), confidential and secure. With the acquisition of Protect Data, Check Point entered the data security market.
 
On April 13, 2009, we completed the acquisition of the security appliance business of Nokia Corporation (“Nokia”) pursuant to the terms of an Asset Purchase Agreement entered into on December 22, 2008. Prior to the completion of the acquisition, Check Point had collaborated with Nokia’s security appliance business over the past decade to deliver industry-leading enterprise security solutions. Since completing the acquisition, we have been building upon this collaboration to provide an extended security appliance portfolio that is developed, and supported by Check Point.
 
On November 23, 2009, we completed the acquisition of the FaceTime application and signature database. We plan to utilize the database to bring a new level of granularity to the gateway.
 
As a result of these acquisitions, our expenses in several categories increased commensurate with the costs of operating and integrating the acquired businesses. These increases were primarily attributable to increases in personnel expenses and related costs correlating to increases in cost of revenues, research and development, selling and marketing and general and administrative expenses.
 
Our business is subject to the effects of general global economic conditions and, in particular, market conditions in the IT, Internet security, and data security industries. If general economic and industry conditions fail to improve, or if they deteriorate, demand for our products could be adversely affected.
 
We derive most of our product revenues from sales of integrated appliances Internet security products primarily under our VPN-1 and related brands, as well as related revenues from software updates, maintenance and other services. Following the acquisition of the Nokia security appliances business, we expanded our appliances portfolio with the IP Series that generated a large portion of our products sales. We expect this to continue to be the case in the foreseeable future.
 
 
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We derive our sales primarily through indirect channels. During 2009, we derived approximately 58% of our sales from our ten largest distributors, compared to 50% in 2008. In 2009, the largest distributor accounted for approximately 18% of our sales, and the second largest distributor accounted for approximately 17% of our sales compared to 16% and 14%, respectively, in 2008.
 
The following table presents the percentage of total consolidated revenues that we derive from sales in each of the regions shown:
 
   
Year Ended December 31,
Region:
 
2007
 
2008
 
2009
             
Americas, principally U.S.
 
45%
 
43%
 
43%
Europe, Middle East and Africa
 
44%
 
45%
 
44%
Asia Pacific and Japan
 
11%
 
12%
 
13%
 
For information on the impact of foreign currency fluctuations, please refer to “Item 11 – Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Risk.”
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely, are reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:
 
 
§
Revenue recognition,
     
 
§
Business combinations,
     
 
§
Goodwill,
     
 
§
Realizability of long-lived assets,
     
 
§
Accounting for income taxes,
     
 
§
Equity-based compensation expense,
     
 
§
Allowances for doubtful accounts,
     
 
§
Derivative and hedge accounting, and
     
 
§
Impairment of marketable securities.
 
In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors. You can see a summary of our significant accounting policies in Note 2 to our consolidated financial statements.
 
 
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Revenue recognition
 
We generally derive our revenues from two primary sources:
 
 
§
Software products and combined hardware and software products; and
     
 
§
Software updates, maintenance and services.
 
We apply software revenue recognition guidance, ASC 985-605, “Software Revenue Recognition,” to all transactions involving the sale of software products and hardware products that include software. We recognize product and license revenue when persuasive evidence of an arrangement exists, the product has been delivered, there are no uncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed or determinable, and collection of the license fee is considered probable. Amounts received in advance of meeting these criteria are deferred. Fees for arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer or are actually collected, provided that all other revenue recognition criteria have been met. As required by ASC 985-605, we determine the value of the product component of our multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for the undelivered elements of the support and maintenance agreements. VSOE of fair value is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. For hardware transactions where software is not incidental, we do not separate the license fee and we do not apply separate accounting guidance to the hardware and software elements.
 
Our software updates and maintenance provides customers with rights to unspecified software product upgrades released during the term of the agreement and other security solutions sold as a service or annuity. Our support offerings include multiple services to our customers primarily telephone access to technical support personnel and hardware support services. We recognize revenues from software updates, maintenance and services ratably over the term of the agreement.
 
We determine the fair value for our software updates, maintenance and support services based upon the prices we charge customers for renewal. We offer several levels of services, classified by services offered, response time and availability. We have defined classes of customers, based on the total gross value of licensed software products the customer purchased from us. We price renewals for each service level and each class of customer as a fixed percentage of the total gross value of software products the customer licensed from us.
 
We recognize revenues net of estimated amounts that may be refunded for sales returns and rebate arrangements with customers. Additionally, distributers may rotate our products, subject to varying limitations. We estimate and record these reductions based on our historical experience analysis of credit memo data, stock rotation and other known factors. In each accounting period, we use judgments and estimates of potential future sales credits, returns, and stock rotation, related to current period revenue. These estimates affect our “net revenue” line item on our consolidated statements of income and comprehensive income and affect our “accounts receivable, net” on our consolidated balance sheets.
 
Business combinations
 
In accordance with the revised business combination accounting, adopted on January 1, 2009, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as to in-process research and development based on their estimated fair values. In addition, in accordance with the revised guidance, we expense acquisition-related expenses and restructuring costs as they are incurred. We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
 
 
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Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and relevant market and industry data and are, inherently, uncertain. Critical estimates made in valuing certain of the intangible assets include, but are not limited to, the following: (i) future expected cash flows from license sales, maintenance agreements, customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; (iii) the acquired company’s brand and market position as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and (iv) discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
 
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. See Note 3 to our consolidated financial statements for additional information on accounting for our recent acquisitions.
 
Goodwill
 
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We review goodwill for impairment annually on December 31st and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and other”. Goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
 
We operate in one operating segment, and this segment comprises our only reporting unit. In calculating the fair value of the reporting unit, we used our market equity capitalization.
 
If the carrying value of a reporting unit exceeds its fair value, we then calculate the goodwill’s implied fair value by performing a hypothetical allocation of the reporting unit’s fair value to the underlying assets and liabilities, with the residual being the implied fair value of goodwill. This allocation process involves using significant estimates; include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and assumptions about the future deployment of the long-lived assets of the reporting unit. Other factors we consider are the brand awareness and the market position of the reporting unit and assumptions about the period of time we will continue to use the brand in our product portfolio. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill.
 
Our most recent annual goodwill impairment analysis, which was performed during the fourth quarter of 2009, did not result in an impairment charge.
 
 
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Realizability of long-lived assets
 
We are required to assess the impairment of tangible and intangible long-lived assets subject to amortization, under ASC 360 “Property, Plant and Equipment”, on a periodic basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period.
 
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows from the use of the asset or asset group to the carrying amount of the asset, an impairment charge is recorded for the excess of carrying amount over the fair value. We measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. No impairment charges were recognized during 2007, 2008 and 2009.
 
Accounting for income tax
 
We are subject to income taxes in Israel, the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
 
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalty.
 
Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2009 and 2008 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 11 to our Consolidated Financial Statements for further information regarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
 
 
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Equity-based compensation expense
 
We account for equity-based compensation in accordance with ASC 718 “Compensation – Stock Compensation.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.
 
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon United States treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock options in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical behavioral patterns rates of employee groups by job classification. Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
 
Allowance for doubtful accounts
 
We maintain an allowance for doubtful accounts for losses that may result from the failure of our channel partners to make required payments. We estimate this allowance based on our judgment as to our ability to collect outstanding receivables. We form this judgment based on an analysis of significant outstanding invoices, the age of the receivables, our historical collection experience and current economic trends. If the financial condition of our channel partners were to deteriorate, resulting in their inability to make payments, we would need to increase the allowance for doubtful accounts.
 
Derivative and Hedge Accounting
 
Approximately 56% to 61% of our operating expenses are denominated in U.S. dollars or linked to the U.S. dollar. In 2009 we entered into foreign exchange forward contracts and options to hedge a significant portion of our foreign currency net exposure resulting expenses in major foreign currencies in which we operate, in order to reduce the impact of foreign currency on our results. We also entered into foreign exchange forward contracts and options to reduce the impact of foreign currency on balance sheet items, specifically for the new Israeli Shekel.
 
 
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The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. If the derivatives meet the definition of a hedge and are so designated, depending on the nature of the hedge, changes in the fair value of such derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings. We estimate the fair value of such derivative contracts by reference to forward and spot rates quoted in active markets.
 
Establishing and accounting for foreign exchange contracts involve judgments, such as determining the fair value of the contracts, determining the nature of the exposure, assessing its amount and timing, and evaluating the effectiveness of the hedging arrangement.
 
Although we believe that our estimates are accurate and meet the requirement of hedge accounting, actual results could differ from these estimates, and such difference could cause fluctuation in our recorded operating expenses.
 
Impairment of Marketable Securities
 
All marketable securities are classified as available-for-sale securities. We assess our available-for-sale marketable securities on a regular basis for other-than-temporary impairment. Pursuant to accounting guidance effective April 1, 2009, if we have a security with a fair value less than its amortized cost and we intend to sell the security or it is more likely than not we will be required to sell the security before it recovers, other-than temporary impairment has occurred and we must record the entire amount of the impairment in earnings. If we do not intend to sell the security or it is not more likely than not we will be required to sell the security before it recovers in value, we must estimate the net present value of cash flows expected to be collected. If the amortized cost exceeds the net present value of cash flows, such excess is considered a credit loss and other-than-temporary impairment has occurred. The credit loss component is recognized in earnings and the residual portion of the other-than-temporary impairment is recorded in other comprehensive income. The determination of credit losses requires significant judgment and actual results may be materially different than our estimate. We consider the likely reason for the decline in value, the period of time the fair value was below amortized cost, changes in and performance of the underlying collateral, the ability of the issuer to meet payment obligations, changes in ratings and market trends and conditions. Prior to April 1, 2009, other-than-temporary impairment was recorded based on similar factors, as well as our intent and ability to hold until recovery of loss. Any decline deemed other-than-temporary was recognized in earnings.
 
During 2008 and 2009, we recorded other-than-temporary impairment on our marketable securities net of gain of the sales of marketable securities that were previously impaired in the amount of $11.2 million and $1.3 million pre-tax, respectively.
 
 
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Results of operations
 
The following table presents information concerning our results of operations in 2007, 2008 and 2009:
 
    
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
   
(in thousands)
 
                   
Revenues:
                 
Products and licenses
  $ 309,785     $ 338,317     $ 361,633  
Software updates, maintenance and services
    421,092       470,173       562,784  
Total revenues
    730,877       808,490       924,417  
                         
Operating expenses (*) :
                       
Cost of products and licenses
    27,191       34,648       61,495  
Cost of software updates, maintenance and services
    27,386       33,407       43,551  
Amortization of technology
    27,724       24,554       28,224  
Total cost of revenues
    82,301       92,609       133,270  
Research and development
    80,982       91,629       89,743  
Selling and marketing
    217,491       214,439       220,877  
General and administrative
    53,527       53,313       56,409  
Acquired in process research and development
    17,000              
Restructuring and other acquisition related costs
                9,101  
Total operating expenses
    451,301       451,990       509,400  
                         
Operating income
    279,576       356,500       415,017  
Financial income, net                                                                       
    49,725       40,876       32,058  
Other than temporary impairment net of gain on sale of marketable securities previously impaired (**)
          (11,221 )     (1,277 )
                         
Income before taxes on income
    329,301       386,155       445,798  
Taxes on income
    48,237       62,189       88,275  
Net income
  $ 281,064     $ 323,966     $ 357,523  
_______________________
 
(*) Including pre-tax charges for amortization of intangible assets and stock-based compensation in the following items:
 
Amortization of intangible assets
                 
 Selling and marketing                                                                       
  $ 12,260     $ 12,428     $ 22,429  
Total
  $ 12,260     $ 12,428     $ 22,429  
 
Stock-based compensation
                 
 Cost of products and licenses                                                                      
  $ 65     $ 48     $ 47  
 Cost of software updates, maintenance and services
    668       684       641  
 Research and development                                                                      
    4,309       5,037       6,649  
 Selling and marketing                                                                      
    8,780       6,855       5,032  
 General and administrative                                                                      
    20,230       19,703       18,538  
Total
  $ 34,052     $ 32,327     $ 30,907  
_______________________
 
(**) Year ended December 31, 2008, includes write down of $ 11.2 million, of our marketable securities. Year ended December 31, 2009, includes write down of $ 3.1 million related to our marketable securities net of $1.8 million gain on sale of marketable securities that were written down in 2008.
 
 
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The following table presents information concerning our results of operations as a percentage of revenues for the periods indicated:
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
                   
Revenues:
                 
Products and licenses
    42 %     42 %     39 %
Software updates, maintenance and services
    58       58       61  
Total revenues
    100 %     100 %     100 %
                         
Operating expenses:
                       
Cost of products and licenses
    3       4       6  
Cost of software updates, maintenance and services
    4       4       5  
Amortization of technology
    4       3       3  
Cost of revenues
    11       11       14  
Research and development
    11       11       10  
Selling and marketing
    30       27       24  
General and administrative
    8       7       6  
Acquired in process research and development
    2                  
Restructuring and other acquisition related costs
                1  
Total operating expenses                                                                    
    62       56       55  
                         
Operating income
    38       44       45  
Financial income, net                                                                    
    7       5       3  
Other than temporary impairment net of gain on sale of marketable securities previously written down
          (1 )      
                         
Income before taxes on income
    45       48       48  
Taxes on income
    7       8       9  
Net income
    38 %     40 %     39 %
 
Revenues
 
We derive our revenues mainly from the sale of products and licenses of software, and related software updates, maintenance and other services. Our revenues were $730.9 million in 2007, $808.5 million in 2008 and $924.4 million in 2009.
 
Total revenues in 2009 grew by 14% compared to 2008. Product and license revenues increased by $23.3 million, or 7%, from $338.3 million in 2008 to $361.6 million in 2009, which is attributable mostly to growth in sales of integrated appliances and the acquisition of the Nokia security appliance business. In 2009, product and license revenues as a percentage of total revenues was 39%, compared with 42% in the previous two years. This decrease is due primarily to our shift in an increase in product service offerings. Software updates, maintenance and services revenues increased by $92.6 million, or 20%, from $470.2 million in 2008 to $562.8 million in 2009, primarily as a result of renewals and new sales of maintenance contracts, increasing sales of IPS security services and the revenues from sales of services that we purchased when we acquired the Nokia security appliance business.
 
 
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Total revenues in 2008 grew by 11% compared to 2007. Product and license revenues increased by $28.5 million, or 9%, from $309.8 million in 2007 to $338.3 million in 2008, which is attributable mostly to growth in sales of integrated appliances. Software updates, maintenance and services revenues increased by $49.1 million, or 12%, from $421.1 million in 2007 to $470.2 million in 2008, primarily as a result of renewals and sales of new maintenance contracts and increasing sales of SmartDefense security services.
 
Cost of Revenues
 
Total cost of revenues was $82.3 million in 2007, $92.6 million in 2008 and $133.3 million in 2009. Cost of revenues includes cost of product and licenses, cost of software updates, maintenance and services and amortization of technology. Our cost of products and licenses is comprised of the cost of software and hardware production, manuals, packaging and license fees paid to third parties. Cost of products and licenses was $27.2 million in 2007, $34.6 million in 2008 and $61.5 million in 2009, and represented 4% of revenues in 2007, 4% in 2008 and 7% in 2009. The increase in 2008 was mainly due to increased hardware volume. In 2009, the increase was due primarily to the sale of security appliance products that we acquired from Nokia, which accounted for approximately $22.9 million, and to a lesser extent to continued increases in sales of hardware-based products.
 
           Our cost of software updates, maintenance and services includes the cost of post-sale customer support, training, consulting and license fees paid to third parties. The cost of software updates, maintenance and services was $27.4 million in 2007, $33.4 million in 2008, and $43.6 million in 2009, and represented 4% of revenues in 2007 and 2008, and 5% of revenues in 2009. In 2007, we experienced an increase in cost of software updates, maintenance and services, primarily related to an increase in headcount in our technical services organization, both from organic growth and the inclusion of Protect Data. At the end of 2007, we had 225 employees in our technical services organization, of whom 18 were added as a result of the Protect Data acquisition, compared to 163 at the beginning of 2007. The increase in the number of employees resulted in additional compensation expense of approximately $4.8 million in 2007. In 2008, we experienced an increase in the cost of software updates, maintenance and services primarily related to an increase in compensation and payroll related expenses, as the average headcount in our technical services organization throughout 2008 was higher, in comparison to 2007, and as a result of the effect of exchange rate fluctuations on compensation expenses, which are reported in U.S. dollars but incurred in various currencies. In 2009, we experienced an increase of $10.1 million in cost of software updates, maintenance and services, primarily related to the support of the Nokia security appliance business hardware-based products. In 2007, amortization of technology increased to $27.7 million, with the inclusion of Protect Data and NFR. The intangible assets added in connection with the acquisitions are amortized over their useful lives on a straight-line basis, which represents the expected pattern of usage. In 2008, amortization of technology decreased to $24.6 million. The decrease resulted primarily from Zone Labs’ intangible assets being fully amortized at the beginning of 2008. In 2009, amortization of technology increased to $28.2 million, mainly due to the inclusion of Nokia security appliance business.
 
 
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Research and Development
 
Research and development expenses consist primarily of salaries and other related expenses for personnel, as well as the cost of facilities and depreciation of capital equipment. Research and development expenses were $81.0 million in 2007, $91.6 million in 2008, and $89.7 million in 2009, and represented 11% of revenues in 2007 and 2008 and 10% of revenues in 2009. In 2008, approximately $4.2 million of the increase in research and development expenses compared to 2007 was related to an increase in the average number of research and development employees. In addition, approximately $4.5 million of the referenced increase resulted from the appreciation of the Israeli Shekel, the Euro, and the Swedish Krona compared to the U.S. dollar. In 2009, we had a decrease of $1.9 million in research and development expenses as explained below. Currency fluctuations accounted for a $5.4 million, decrease in compensation expenses,  these were partially offset by an increase in headcount committed to research and development from 679 at the end of 2008 to 740 at the end of 2009, which added $3.9 million in compensation expenses. The majority of our developers are located in Israel, where compensation related expenses are paid in Israeli Shekels, and in Sweden, where compensation related expenses are paid in Swedish Krona, while our research and development expenses are reported in U.S. dollars. Therefore, changes to the exchange rate between the Israeli Shekel, the Swedish Krona and the U.S. dollar, have affected and may in the future affect our expense level. Beginning in 2009 Check Point established forward contracts to hedge against a certain portion of the exposure mentioned above.
 
Selling and Marketing
 
Selling and marketing expenses consist primarily of salaries, commissions, advertising, trade shows, seminars, public relations, travel and other related expenses. Selling and marketing expenses were $217.5 million in 2007, $214.4 million in 2008, and $220.9 million in 2009 and represented 30% of revenues in 2007, 27% of revenues in 2008, and 24% of revenues in 2009. In 2008, the decrease in selling and marketing expenses compared to 2007 was primarily due to a decrease in our sales and marketing headcount, from 717 at the end of 2007 to 701 at the end of 2008. In 2009, the increase in selling and marketing expenses was primarily due to an increase in our sales and marketing headcount, from 701 at the end of 2008 to 804 at the end of 2009, and the associated increase in travel, entertainment and facilities expenses. The increase of 103 employees resulted primarily from the acquisition of the Nokia security appliance business, resulting in a net increase in expenses of approximately $12.1 million. In addition, the amortization of intangible assets related to the Nokia security appliance business increased selling and marketing expenses in 2009 by $10.0 million. These increases were partially offset in the aggregate amount of $15.6 million primarily from currency fluctuations and expense reductions.
 
In 2007 and 2008, the strengthening of the Euro compared to the U.S. dollar contributed approximately $2.2 million and $0.3 million, respectively, to compensation expenses. In 2009, the weakening of the Israeli Shekel, the Euro, and the Swedish Krona compared to the U.S. dollar contributed $6.3 million to the decrease in compensation expenses. Our expenses in Israel and Europe, which primarily relate to compensation, travel, facilities and marketing, are paid in local currencies but are reported in U.S. dollars. Therefore, changes to the exchange rates between the Israeli Shekel, the Euro and the Swedish Krona and the U.S. dollar have affected, and may in the future affect, our expense level. In addition, due to expense management other related expenses decreased by approximately $7.0 million in 2009 as compared to 2008.
 
 
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General and Administrative
 
General and administrative expenses consist primarily of salaries and headcount related expenses, professional fees, insurance costs and other expenses. General and administrative expenses were $53.5 million in 2007, $53.3 million in 2008, and $56.4 million in 2009, and represented 8% of revenues in 2007, 7% of revenues in 2008, and 6% of revenues in 2009. In 2008, the expense level remained flat relative to 2007. In 2009, the increase in general and administrative expenses, as compared to 2008, is mainly due to increase in various donations of $1.9 million and an increase in legal expenses of $2.9 million, which were partly offset by a decrease in stock based compensation expenses of $1.2 million.
 
Restructuring and other acquisition related costs
 
Restructuring and other acquisition related expenses consist primarily of severance payments paid for former Nokia security appliance business employees and other associated costs. Restructuring and other acquisition related expenses were $9.1 million in 2009.
 
In-Process Research and Development
 
Upon the acquisition of Protect Data in January 2007, we recorded a $17 million charge for acquired in-process research and development (IPR&D). This expense was attributable to projects which had not yet reached technological feasibility and had no alternative future use. The value of IPR&D was determined using the discounted cash flow approach. Starting 2009, we are no longer required to expense IPR&D at the acquisition date under the new Business Combination accounting guidance. Such amounts are recognized as an intangible asset pending future completion or abandonment of the project.
 
Operating Margin
 
We had operating margins of 38% in 2007, 44% in 2008, and 45% in 2009.
 
The increase of 6% in operating margin between 2007 and 2008 (or the increase of 3% with the exclusion of IPR&D in 2007) is attributable primarily to revenue growth and the full integration of Protect Data’s operations into our business.
 
The increase of 1% in operating margin between 2008 and 2009 is attributable primarily to the realization of synergies from the integration of Nokia security appliance business into our business.
 
We may experience future fluctuations or declines in operating margins from historical levels due to several factors, as described above in “Item 3 – Key Information” under the caption “Risk Factors – Risks Relating to Our Business and Our Market – Our operating margins may decline.”
 
 
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Financial Income, Net
 
Net financial income consists primarily of interest earned on cash equivalents and marketable securities. Net financial income was $49.7 million in 2007, $40.9 million in 2008, and $32.1 million in 2009. Because we generally hold debt securities until maturity, our current portfolio’s yield is derived primarily from market interest rates and the yield of securities on the date of the investment. Since most of our investments are in U.S. dollars, our financial income is heavily dependent on prevailing U.S. interest rates. The decrease in net financial income in 2008 and 2009 was primarily due to the decrease in interest rates in the U.S.
 
We review various factors in determining whether we should recognize an impairment charge for our marketable securities, including whether the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of their amortized cost basis, the length of time and extent to which the fair value has been less than its cost basis, the credit ratings of the securities, the nature of underlying collateral as applicable and the financial condition, expected cash flow and near-term prospects of the issuer. Based on our consideration of these factors, in 2008 we recognized an other-than-temporary impairment on marketable securities in the total amount of $11.2 million, pretax, out of which $6.3 million, pretax, was related to Auction Rate Securities. The remaining impairment of $4.9 million related to corporate obligations of U.S. corporate issuers with the original principal amounting to $8.0 million. In 2009, we recognized an other-than-temporary impairment on marketable securities in the total amount of $3.1 million, pre-tax, related to our Auction Rate Securities which was offset by a gain of $1.9 million, pre-tax, related to the sale of marketable securities previously impaired in 2008. In evaluating when declines in fair value are other-than-temporary, we considered all available evidence, including market declines subsequent to the end of the period. We may recognize additional losses in the future should the market prospects of the issuers of these securities continue to deteriorate.
 
Because interest rates in the U.S. remained low in the first quarter of 2010 and are not expected to significantly increase during 2010, we believe that this trend will result in a lower portfolio yield in the near term. See also Item 3, “Risk Factors – Risks Related to Our Business and Our Market – We Face the Risk of a Decrease in Our Cash Balances and Losses in Our Investment Portfolio.”
 
Taxes on Income
 
Our effective tax rate was 15% in 2007, 16% in 2008 and 20% in 2009. Our effective tax rate increased in 2008 and again in 2009, despite the decrease in the statutory tax rate in Israel from 27% in 2008 to 26% in 2009, as a result of an increase in taxable income of certain of our foreign subsidiaries and an increase in tax positions. See Note 11 to our consolidated financial statements for further information.
 
Additional details are provided in “Item 10 – Additional Information” under the caption “Israeli taxation, foreign exchange regulation and investment programs” and “Item 3 – Key Information” under the caption “The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes.”
 
 
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Quarterly Results of Operations
 
The following tables set forth certain unaudited quarterly consolidated statements of income data from the reports on Form 6-K that we furnished to the Securities and Exchange Commission, as well as the percentage of our revenues represented by each item. We prepare our unaudited quarterly consolidated financial statements on the same basis as our audited annual consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information. You should read this information in conjunction with our consolidated financial statements, including the related notes, appearing in “Item 18 – Financial Statements.”
 
    
Year Ended December 31, 2008
   
Year Ended December 31, 2009
 
     Q1      Q2      Q3      Q4      Q1      Q2      Q3      Q4  
   
Unaudited
 
   
(in thousands, except per share amounts)
 
                                                                 
Revenues:
                                                               
Products and licenses
  $ 77,379     $ 84,973     $ 81,925     $ 94,040     $ 71,744     $ 82,801     $ 86,883     $ 120,205  
Software updates, maintenance and services
    114,218       114,633       117,795       123,527       123,268       140,840       146,759       151,917  
Total revenues
    191,597       199,606       199,720       217,567       195,012       223,641       233,642       272,122  
Operating expenses:
           
Cost of products and licenses
    7,549       8,608       8,553       9,938       7,686       15,045       17,848       20,916  
Cost of software updates, maintenance and services
    8,194       8,186       8,655       8,372       7,769       12,567       10,783       12,432  
Amortization of technology
    7,154       5,800       5,800       5,800       5,800       7,230       7,471       7,723  
Total cost of revenues
    22,897       22,594       23,008       24,110       21,255       34,842       36,102       41,071  
Research and development
    22,745       23,824       23,193       21,867       19,787       23,468       22,426       24,062  
Selling and marketing
    53,660       56,588       50,796       53,395       47,072       56,939       56,379       60,487  
General and administrative
    13,566       13,005       12,294       14,448       14,617       12,680       13,190       15,922  
Restructuring and other acquisition related costs
                                  9,034       67        
Total operating expenses(*)
    112,868       116,011       109,291       113,820       102,731       136,963       128,164       141,542  
Operating income
    78,729       83,595       90,429       103,747       92,281       86,678       105,478       130,581  
Financial income, net
    12,363       7,949       10,039       10,525       8,413       8,130       7,825       7,690  
Other than temporary impairment net of gain on sale of marketable securities previously written down (**)
                (2,288 )     (8,933 )                       (1,277 )
Income before taxes on income
    91,092       91,544       98,180       105,339       100,694       94,808       113,303       136,993  
Taxes on income
    12,834       12,371       18,119       18,865       19,773       19,205       21,839       27,458  
Net Income
  $ 78,258     $ 79,173     $ 80,061     $ 86,474     $ 80,921     $ 75,603     $ 91,464     $ 109,535  
                                                                 
Basic earnings per share
  $ 0.36     $ 0.37     $ 0.37     $ 0.41     $ 0.39     $ 0.36     $ 0.44     $ 0.52  
Shares used in computing basic earnings per share
    217,065       215,030       213,728       211,731       210,153       209,521       208,738       209,093  
Diluted earnings per share
  $ 0.36     $ 0.36     $ 0.37     $ 0.41     $ 0.38     $ 0.36     $ 0.43     $ 0.51  
Shares used in computing diluted earnings per share
    219,393       217,951       216,567       212,874       212,083       211,615       211,688       213,469  
_______________________
 
(*) Including pre-tax charges for amortization of intangible assets related to our acquisitions and Stock-based compensation in the following items:
 
 
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Year Ended December 31, 2008
   
Year Ended December 31, 2009
 
     Q1    Q2      Q3      Q4      Q1      Q2      Q3      Q4  
   
Unaudited
 
   
(in thousands)
 
             
Amortization of intangible assets
           
Selling and marketing
  $ 3,149     $ 3,093     $ 3,093     $ 3,093     $ 3,093     $ 6,223     $ 6,830     $ 6,283  
                                                                 
Total
    3,149       3,093       3,093       3,093       3,093       6,223       6,830       6,283  
             
Stock-based compensation
           
Cost of products and licenses
  $ 12     $ 15     $ 15     $ 6     $ 8     $ 13     $ 14     $ 12  
Cost of software updates, maintenance and services
    183       194       133       174       193       107       236       105  
Research and development
    1,097       1,204       1,364       1,372       1,258       1,515       1,998       1,878  
Selling and marketing
    2,240       1,926       1,696       993       1,740