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Table of Contents
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
x    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
For the quarterly period ended June 30, 2002 or
 
¨    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from              to                             
 
Commission File Number: 000-32417
 
 
VERISITY LTD.
(Exact name of registrant as specified in its charter)
 
Israel
  
Not Applicable
(State or other Jurisdiction of
  
(I.R.S. Employer
Incorporation or Organization)
  
Identification No.)
     
2041 Landings Drive, Mountain View, California
  
94043
(Address of principal US executive offices)
  
(Zip Code)
 
(650) 934-6800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x     No ¨
 
As of June 30, 2002, there were 19,402,934 of registrant’s ordinary shares, par value NIS 0.01 per share, outstanding.
 

Table of Contents
 
VERISITY LTD.
 
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2002
 
Index
 
         
Page
Part I—
        
Item 1.
        
       
1
       
2
       
3
       
4-6
Item 2.
      
6-11
Item 3.
      
11-12
Part II—
        
Item 1.
      
12
Item 2.
      
12
Item 3.
      
13
Item 4.
      
13-14
Item 5.
      
15
Item 6.
      
15
    
 

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PART I—FINANCIAL INFORMATION
 
Item 1.    Condensed Consolidated Financial Statements
 
VERISITY LTD.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
June 30, 2002
     
December 31, 2001
  
    
Unaudited
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
64,577
 
   
$
58,488
 
Accounts receivable
   
 
11,940
 
   
 
8,498
 
Prepaid expenses and other current assets
   
 
2,972
 
   
 
2,511
 
    
  
Total current assets
   
 
79,489
 
   
 
69,497
 
Property and equipment, net
   
 
2,163
 
   
 
2,112
 
Other assets
   
 
215
 
   
 
229
 
    
  
Total assets
   
$
81,867
 
   
$
71,838
 
    
  
LIABILITIES AND SHAREHOLDERS' EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
698
 
   
$
468
 
Accrued compensation
   
 
3,720
 
   
 
4,574
 
Deferred revenues
   
 
26,298
 
   
 
26,694
 
Other current liabilities
   
 
3,739
 
   
 
2,991
 
    
  
Total current liabilities
   
 
34,455
 
   
 
34,727
 
Accrued severance pay, net
   
 
152
 
   
 
184
 
Long-term portion of deferred revenues
   
 
5,387
 
   
 
2,397
 
Long-term portion of capital lease obligations
   
 
8
 
   
 
13
 
    
  
Total long-term liabilities
   
 
5,547
 
   
 
2,594
 
Shareholders' equity:
                  
Ordinary shares and additional paid-in capital
   
 
53,986
 
   
 
52,501
 
Deferred compensation
   
 
(274
)
   
 
(470
)
Shareholder's loan
   
 
—  
 
   
 
(202
)
Accumulated deficit
   
 
(11,847
)
   
 
(17,312
)
    
  
Total shareholders' equity
   
 
41,865
 
   
 
34,517
 
    
  
Total liabilities and shareholders' equity
   
$
81,867
 
   
$
71,838
 
    
  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERISITY LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
    
Three Months Ended
     
Six Months Ended
    
June 30,
     
June 30,
    
2002
   
2001
     
2002
   
2001
    
Unaudited
     
Unaudited
Revenue:
                              
License
   
$
8,005
   
$
5,554
 
   
$
14,690
   
$
11,393
Maintenance
   
 
4,168
   
 
2,883
 
   
 
8,382
   
 
4,947
Other services
   
 
318
   
 
588
 
   
 
898
   
 
1,231
    
  
  
  
Total revenue
   
 
12,491
   
 
9,025
 
   
 
23,970
   
 
17,571
Cost of revenue:
                              
License
   
 
40
   
 
186
 
   
 
73
   
 
378
Maintenance
   
 
500
   
 
447
 
   
 
1,001
   
 
814
Other services (1)
   
 
135
   
 
305
 
   
 
369
   
 
698
    
  
  
  
Total cost of revenue
   
 
675
   
 
938
 
   
 
1,443
   
 
1,890
    
  
  
  
Gross profit
   
 
11,816
   
 
8,087
 
   
 
22,527
   
 
15,681
    
  
  
  
Operating expenses:
                              
Research and development
   
 
2,145
   
 
2,051
 
   
 
4,433
   
 
4,176
Sales and marketing
   
 
4,689
   
 
3,883
 
   
 
9,408
   
 
7,846
General and administrative
   
 
1,462
   
 
1,319
 
   
 
2,681
   
 
2,355
Non-cash charges related to equity issuances (1)
   
 
60
   
 
216
 
   
 
209
   
 
382
    
  
  
  
Total operating expenses
   
 
8,356
   
 
7,469
 
   
 
16,731
   
 
14,759
    
  
  
  
Operating income
   
 
3,460
   
 
618
 
   
 
5,796
   
 
922
Interest income
   
 
206
   
 
487
 
   
 
400
   
 
721
Interest expense and other income
   
 
—  
   
 
(21
)
   
 
14
   
 
—  
    
  
  
  
Net income before income taxes
   
 
3,666
   
 
1,084
 
   
 
6,210
   
 
1,643
Provision for income taxes
   
 
440
   
 
56
 
   
 
745
   
 
85
    
  
  
  
Net income
   
$
3,226
   
$
1,028
 
   
$
5,465
   
$
1,558
    
  
  
  
Basic earnings per share:
                              
Basic net income per ordinary share
   
$
0.17
   
$
0.06
 
   
$
0.29
   
$
0.12
    
  
  
  
Shares used in per share calculation
   
 
18,825
   
 
17,259
 
   
 
18,702
   
 
12,836
    
  
  
  
Diluted earnings per share:
                              
Diluted net income per ordinary share
   
$
0.15
   
$
0.05
 
   
$
0.26
   
$
0.08
    
  
  
  
Shares used in per share calculation
   
 
21,253
   
 
20,703
 
   
 
21,236
   
 
18,598
    
  
  
  
(1)
 
Non-cash charges related to equity issuances include the following:
 
    
Three Months Ended
   
Six Months Ended
    
June 30,
   
June 30,
    
2002
     
2001
   
2002
   
2001
Cost of other services revenue
   
$
2
 
   
$
4
   
$
4
   
$
9
    
  
  
  
Research and development, net
   
$
18
 
   
$
58
   
$
40
   
$
101
Sales and marketing
   
 
(3
)
   
 
97
   
 
72
   
 
166
General and administrative
   
 
45
 
   
 
61
   
 
97
   
 
115
    
  
  
  
Total included in operating expenses
   
$
60
 
   
$
216
   
$
209
   
$
382
    
  
  
  
 
The accompanying notes are integral part of these condensed consolidated financial statements.
 

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VERISITY LTD.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
    
Unaudited
  
Cash flows from operating activities:
                  
Net income
   
$
5,465
 
   
$
1,558
 
Adjustments to reconcile net income to net cash provided by operating activities :
                  
Depreciation
   
 
427
 
   
 
416
 
Non-cash charges related to equity issuances
   
 
260
 
   
 
545
 
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
(3,442
)
   
 
1,954
 
Prepaid expenses and other current assets
   
 
(461
)
   
 
703
 
Accounts payable
   
 
230
 
   
 
(273
)
Other current liabilities and accrued compensation
   
 
(106
)
   
 
(549
)
Accrued severance pay, net
   
 
(32
)
   
 
13
 
Deferred revenue
   
 
2,594
 
   
 
5,020
 
    
  
Net cash provided by operating activities
   
 
4,935
 
   
 
9,387
 
Cash flows used in investing activities:
                  
Purchases of property and equipment
   
 
(478
)
   
 
(834
)
Purchases of short-term investments
   
 
—  
 
   
 
(883
)
Other assets
   
 
14
 
   
 
(53
)
    
  
Net cash used in investing activities
   
 
(464
)
   
 
(1,770
)
Cash flows from financing activities:
                  
Net proceeds from issuance of ordinary shares
   
 
1,421
 
   
 
22,703
 
Proceeds from repayment of shareholder's loan
   
 
202
 
         
Repayment of bank loan
   
 
—  
 
   
 
(265
)
Payments under capital lease obligations
   
 
(5
)
   
 
(5
)
    
  
Net cash provided by financing activities
   
 
1,618
 
   
 
22,433
 
Net increase in cash and cash equivalents
   
 
6,089
 
   
 
30,050
 
Cash and cash equivalents at beginning of the period
   
 
58,488
 
   
 
18,388
 
    
  
Cash and cash equivalents at end of the period
   
$
64,577
 
   
$
48,438
 
    
  
 
The accompanying notes are integral part of these condensed consolidated financial statements.

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VERISITY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.    Basis of Presentation
 
The Company
 
These unaudited interim condensed consolidated financial statements reflect the Company’s position as of June 30, 2002. The statements also show the Company’s statements of operations for the three and six month periods ended June 30, 2002 and 2001, and the statements of cash flow for the six months period ended June 30, 2002 and 2001. These interim statements include all normal recurring adjustments, which the Company believes are necessary to fairly present the Company’s financial position. All material intercompany balances have been eliminated. Because all of the disclosures required by accounting principles generally accepted in the United States are not included, these interim statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001, included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2002. The December 31, 2001 condensed consolidated balance sheet data was derived from the Company’s audited financial statements and does not include all of the disclosures required by accounting principles generally accepted in the United States. The statements of operations for the periods presented are not necessarily indicative of results for any future period, nor for the entire year.
 
Use of Estimates
 
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
2.    Basic and Diluted Net Income Per Share
 
Basic net income per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus dilutive potential ordinary shares considered outstanding during the period, in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 128, “Earnings per Share.”

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The following table presents the calculation of unaudited diluted net income per share (in thousands, except per share data):
 
    
Three Months Ended
   
Six Months Ended
    
June 30,
   
June 30,
    
2002
   
2001
   
2002
   
2001
    
Unaudited
   
Unaudited
Net income
   
$
3,226
   
$
1,028
   
$
5,465
   
$
1,558
    
  
  
  
Shares used in computing basic net income per ordinary share
   
 
18,825
   
 
17,259
   
 
18,702
   
 
12,836
    
  
  
  
Effect of conversion of preferred shares prior to the IPO
   
 
—  
   
 
—  
   
 
—  
   
 
2,671
Weighted average number of ordinary shares under the treasury method
   
 
2,428
   
 
3,304
   
 
2,527
   
 
2,929
Weighted average number of ordinary shares subject to repurchase
   
 
—  
   
 
140
   
 
7
   
 
162
    
  
  
  
Shares used in computing diluted net income per ordinary share
   
 
21,253
   
 
20,703
   
 
21,236
   
 
18,598
    
  
  
  
Diluted net income per ordinary share
   
$
0.15
   
$
0.05
   
$
0.26
   
$
0.08
    
  
  
  
 
3.    Segment, Customers and Geographic Information
 
The Company operates in one industry segment, the development, marketing and support of software products, which provide systems and semiconductor companies with the ability to automate the functional verification of system and integrated circuit designs. Operations in Israel and in the United States include research and development, sales and marketing. Operations in Europe include sales and marketing.
 
The following is a summary of operations within geographic areas based on the location of the entity making the sales and the location of the long-lived assets:
 
    
Three Months Ended
   
Six Months Ended
    
June 30,
   
June 30,
    
2002
   
2001
   
2002
   
2001
    
Unaudited
   
Unaudited
Revenues from sales to unaffiliated customers:
                            
United States
   
$
9,087
   
$
7,754
   
$
17,209
   
$
14,731
Israel
   
 
873
   
 
540
   
 
1,991
   
 
950
Europe
   
 
2,531
   
 
731
   
 
4,770
   
 
1,890
    
  
  
  
    
$
12,491
   
$
9,025
   
$
23,970
   
$
17,571
    
  
  
  
                             
    
June 30,
   
December 31,
          
    
2002
   
2001
          
    
Unaudited
               
Long lived assets:
                            
United States
   
$
1,126
   
$
1,075
              
Israel
   
 
966
   
 
971
              
Europe
   
 
71
   
 
66
              
    
  
             
    
$
2,163
   
$
2,112
              

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4.    Recently Issued Accounting Standards
 
In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 in the quarter ended March 31, 2002. The adoption of SFAS No. 142 did not have a material effect on the Company’s financial position, operating results or cash flows.
 
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (SFAS 144). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, “ and provides guidance on classification and accounting for such assets when held for sale or abandonment. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 in the quarter ended March 31, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position, operating results or cash flows.
 
Item 2.     Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the statements contained in this Form 10-Q are

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forward looking statements, including but not limited to those specifically identified as such, that involve risks and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements involve 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,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2002 and elsewhere in this quarterly report on Form 10-Q.
 
Description of Business
 
We provide proprietary technologies and software products used to efficiently verify designs of electronic systems and complex integrated circuits (ICs) that are essential to a broad and growing range of applications within the electronics industry. Our products automate the process of detecting flaws in these designs of electronic systems and ICs and enable our customers to deliver higher quality electronic products, accelerate time-to-market and reduce overall product development costs. We were founded in September 1995 and commenced operations in January 1996. In November 1999, we acquired SureFire Verification, Inc. by merging it into our wholly-owned subsidiary, Verisity Design, Inc., a California corporation. The SureFire acquisition was accounted for under the pooling-of-interests method, and the operations of SureFire are therefore included in our results of operations for all periods presented and the discussions thereof.
 
In 1996, we released our original Specman functional verification software product. In the second quarter of 1998, SureFire released our SureCov software product. In the fourth quarter of 1998, we released Specman Elite, an enhanced version of our original Specman product. In the fourth quarter of 1999, we released our SureLint software product. In the second quarter of 2002, we released version 4.0 of Specman Elite, a further enhanced version of our Specman Elite product. We have also introduced several other products and support programs, which enhance the use of our products in the functional verification process.
 
Three and six months ended June 30, 2002 compared to three and six months ended June 30, 2001
 
Total Revenue
 
Our revenue consists of license revenue, maintenance revenue and other services revenue. License revenue consists of fees paid by our customers to license our software products. Maintenance revenue consists of fees for technical support and product updates. Other services revenue consists of training and consulting fees. Our total revenue was $12.5 million for the three months ended June 30, 2002, and $9.0 million for the comparable quarter of 2001, representing an increase of $3.5 million, or 38.4%, and was

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$24.0 million for the six months ended June 30, 2002 and $17.6 million for the comparable period of 2001, representing an increase of $6.4 million, or 36.4%. Approximately 57% of the increase in each period was attributable to additional sales to our existing customers with the balance coming from new customers.
 
License revenue.    Our license revenue was $8.0 million for the three months ended June 30, 2002, and $5.6 million for the comparable quarter of 2001, representing an increase of $2.4 million, or 44.1%, and was $14.7 million for the six months ended June 30, 2002, and $11.4 million for the comparable period of 2001, representing an increase of $3.3 million, or 28.9%. Approximately 55% of these increases were attributable to additional sales to our existing customers, with the balance of the increase representing sales to new customers. These increases resulted from the increased sales of time-based licenses partially offset by slightly lower sales of perpetual licenses.
 
Maintenance revenue.    Our maintenance revenue was $4.2 million for the three months ended June 30, 2002, and $2.9 million for the comparable quarter of 2001, representing an increase of $1.3 million, or 44.6%, and was $8.4 million for the six months ended June 30, 2002, and $4.9 million for the comparable period of 2001, representing an increase of $3.5 million, or 69.4%. These increases were primarily attributable to the recognition of revenue from maintenance services that we sold in connection with the sale of new licenses.
 
Other services revenue.    Our other services revenue was $318,000 for the three months ended June 30, 2002, and $588,000 for the comparable quarter of 2001, representing a decrease of $270,000, or 45.9%, and was $898,000 for the six months ended June 30, 2002, and $1.2 million for the comparable period of 2001, representing a decrease of $0.3 million or 27.1%. These decreases were primarily attributable to fewer training services being requested by our customers, which we believe resulted from reduced travel for security and budgetary purposes.
 
Cost of Revenue
 
Cost of revenue consists of costs associated with generating license, maintenance and other services revenue. Cost of revenue was $675,000 for the three months ended June 30, 2002, and $938,000 for the comparable quarter of 2001, representing a decrease of $263,000, or 28.0%, and was $1.4 million for the six months ended June 30, 2002, and $1.9 million for the comparable period of 2001, representing a decrease of $0.5 million or 23.7%. Cost of revenue as a percentage of total revenue was 5.4% for the three months ended June 30, 2002, and 10.4% for the comparable quarter of 2001, and was 6.0% for the six months ended June 30, 2002, and 10.8% for the comparable period of 2001.
 
Cost of license revenue.    Cost of license revenue was $40,000 for the three months ended June 30, 2002, and $186,000 for the comparable quarter of 2001, representing a decrease of $146,000, or 78.5%, and was $73,000 for the six months ended June 30, 2002, and $378,000 for the comparable period of 2001, representing a decrease of $305,000 or 80.7%. As a percent of license revenue, the cost of license revenue decreased from 3.3% for the three months ended June 30, 2001, to 0.5% for the comparable quarter of 2002, and from 3.3% for the six months ended June 30, 2001, to 0.5% for the comparable period of 2002. These decreases were primarily due to the fact that in the three and six month periods ended June 30, 2001, we accrued for royalties due to the Office of Chief Scientist in Israel (OCS), for which all obligations were fully repaid during the fourth quarter of 2001, resulting in no royalties being owed to the OCS during the first and second quarters of 2002.
 
Cost of maintenance revenue.    Cost of maintenance revenue was $500,000 for the three months ended June 30, 2002, and $447,000 for the comparable quarter of 2001, representing an increase of $53,000, or 11.9%, and was $1.0 million for the six months ended June 30, 2002, and $814,000 for the comparable period of 2001, representing an increase of $0.2 million, or 23.0%. These increases were primarily attributable to additional personnel to support our growing maintenance services. As a percent of maintenance revenue, the cost of maintenance revenue decreased from 15.5% for the three months ended June 30, 2001, to 12.0% for the comparable quarter of 2002, and from 16.5% for the six months ended June 30, 2001, to 11.9% for the comparable period of 2002. These decreases were a result of an increased

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volume of maintenance renewals and continued improvements in product quality. These improvements related primarily to the introduction of upgraded versions of our software products that improved functionality and ease of use. These improvements contributed to the overall operating efficiency of our software and our customer support personnel.
 
Cost of other services revenue.    Cost of other services revenue consists primarily of internal and contracted personnel and other expenses related to providing training and consulting services to our customers. Cost of other services revenue was $135,000 for the three months ended June 30, 2002, and $305,000 for the comparable quarter of 2001, representing a decrease of $170,000, or 55.7%, and was $369,000 for the six months ended June 30, 2002, and $698,000 for the comparable period of 2001, representing a decrease of $329,000 or 47.1%. These decreases were primarily attributable to the decrease in externally contracted training services. As a percent of other services revenue, the cost of other services revenue decreased from 51.9% for the three months ended June 30, 2001, to 42.5% for the comparable quarter of 2002, and from 56.7% for the six months ended June 30, 2001, to 41.1% for the comparable period of 2002.
 
Operating Expenses
 
Research and development.    Research and development expenses consist primarily of costs related to research and development personnel, including salaries and other personnel-related expenses, sub-contracting fees, facilities and computer equipment used in our product and technology development. Research and development expenses remained relatively unchanged and were $2.1 million for the three months ended June 30, 2002, and $2.1 million for the comparable quarter of 2001, and were $4.4 million for the six months ended June 30, 2002, and $4.2 million for the comparable period of 2001, representing an increase of $0.2 million, or 6.1%. The increases in these expenses were primarily related to the increase in the number of software developers employed in the continuing enhancement of our software products and partially offset by a reduction due to currency exchange as a somewhat weaker New Israeli Shekel affected the costs in our Israeli operations. Research and development expenses as a percentage of total revenues were 17.2% for the three months ended June 30, 2002, and 22.7% for the comparable quarter of 2001, and were 18.5% for the six months ended June 30, 2002, and 23.8% for the comparable period of 2001. We believe that significant investment in research and development has been and will continue to be required to develop new products and enhance existing products to allow us to further penetrate our target markets. We anticipate that the absolute dollar amount of research and development expenses will increase in the future.
 
Sales and marketing.    Sales and marketing expenses consist primarily of salaries, commissions, travel and promotional and advertising costs. Sales and marketing expenses were $4.7 million for the three months ended June 30, 2002, and $3.9 million for the comparable quarter of 2001, representing an increase of $0.8 million, or 20.8%, and were $9.4 million for the six months ended June 30, 2002, and $7.8 million for the comparable period of 2001, representing an increase of $1.6 million, or 19.9%. These increases were primarily attributable to the hiring of additional sales and marketing personnel, including related travel and office expenses, for an increase of approximately $0.5 million and $1.1 million in the three and six months periods, respectively. The balances of the increases were primarily due to higher commission expenses resulting from higher revenue levels. Sales and marketing expenses as a percentage of total revenues were 37.5% for the three months ended June 30, 2002, and 43.0% for the comparable period of 2001, and were 39.2% for the six months ended June 30, 2002, and 44.7% for the comparable period of 2001. We expect sales and marketing expenses to increase as we expand our geographic reach, hire additional personnel and expand our strategic programs.
 
General and administrative.    General and administrative expenses consist primarily of salaries and other personnel-related expenses for our administrative, legal, human resources, investor relations, and finance personnel, and expenses for facilities, insurance, and professional services fees. General and administrative expenses were $1.5 million for the three months ended June 30, 2002, and $1.3 million for the comparable quarter of 2001, representing an increase of $0.2 million, or 10.8%, and were $2.7 million for the six months ended June 30, 2002, and $2.4 million for the comparable period of 2001, representing an increase

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of $0.3 million, or 13.8%. These increases were primarily attributable to the increased personnel in our finance, legal and investor relations’ functions and an increase in insurance expenses. General and administrative expenses as a percentage of total revenue were 11.7% for the three months ended June 30, 2002, and 14.6% for the comparable quarter in 2001, and were 11.2% for the six months ended June 30, 2002, and 13.4% for the comparable period of 2001. We expect general and administrative expenses to increase for the foreseeable future as we expand our administrative staff and incur expenses associated with being a public company, including the costs of annual and periodic reporting, investor relations programs and insurance.
 
Non-cash charges related to equity issuances.    Non-cash charges related to equity issuances reflect the amortization of the deferred share-based compensation, representing the difference between the fair value of the ordinary shares for financial reporting purposes and the exercise price of the underlying options at the date of grant, as well as the measurement of the fair value of the non-employee share options. Our share-based compensation expenses, reported in operating expenses, were $60,000 for the three months ended June 30, 2002, and $216,000 for the comparable quarter of 2001, and were $209,000 for the six months ended June 30, 2002, and $382,000 for the comparable period of 2001. In addition, $2,000 was reported in cost of other services for the three months ended June 30, 2002, and $4,000 for the six months ended June 30, 2002. The deferred share-based compensation is amortized over the vesting schedule of the underlying options, generally four years.
 
Interest and other income, net
 
Interest and other income, net consists of interest income, net of interest expense and other miscellaneous expenses or income. Our interest and other income, net decreased from $466,000 for the three months ended June 30, 2001, to $206,000 for the comparable quarter of 2002, and from $721,000 for the six months ended June 30, 2001, to $414,000 for the comparable period of 2002. These decreases were primarily due to lower interest rates received on cash and cash equivalent balances. As a percent of total revenue, interest and other income, net decreased from 5.2% for the three months ended June 30, 2001, to 1.6% for the comparable quarter of 2002, and from 4.1% for the six months ended June 30, 2001, to 1.7% for the comparable period of 2002.
 
Income taxes
 
We recorded provisions for income taxes of $440,000 in the three months ended June 30, 2002, and $56,000 for the comparable quarter of 2001, and $745,000 in the six months ended June 30, 2002, and $85,000 for the comparable period of 2002. The provisions for income taxes in the three and six month periods ended June 30, 2002 relate primarily to U.S. alternative minimum taxes related to the usage of net operating loss carryforwards.
 
We have not recognized any benefit from the future use of loss carryforwards for these periods or for any other period since inception because of uncertainty surrounding their realization. The amount of net operating losses that we can utilize may be limited under tax regulations in some circumstances including acquisition activities.
 
Liquidity And Capital Resources
 
Since our inception, we have financed our operations primarily through the private sale of convertible preferred shares and the public offering of ordinary shares. We have also financed our operations through the sale of ordinary shares, pursuant to our equity incentive plans, equipment financing

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and cash generated from the sale of our products and services. As of June 30, 2002, we had cash and cash equivalents of $64.6 million, an accumulated deficit of $11.8 million and working capital of $45.0 million.
 
On March 26, 2001, we completed our initial public offering (“IPO”) of ordinary shares in which we sold 3,335,000 shares at a price of $7.00 per share. In April 2001 our underwriters exercised their over-allotment option for an additional 500,250 ordinary shares at same price set in the IPO. Total net proceeds, including the exercise of the over-allotment option, less underwriting discounts, were approximately $25.0 million.
 
Net cash provided by operating activities was $4.9 million for the six months ended June 30, 2002, and $9.4 million for the comparable period of 2001. Cash provided by operating activities for each period resulted primarily from the net income and an increase in deferred revenue in those periods, and to a lesser extent, an increase in accounts receivable in the 2002 period and decrease in accounts receivable in the 2001 period.
 
Net cash used in investing activities was $464,000 for the six months ended June 30, 2002, and $1.8 million for the comparable period of 2001. Investing activities in the six months ended June 30, 2002, consisted mostly of capital expenditures. Investing activities in the six months ended June 30, 2001, consisted mainly of $0.8 million capital expenditures and $0.8 million purchases of short-term investments.
 
Net cash provided by financing activities was $1.6 million for the six months ended June 30, 2002, resulting primarily from exercise of share options by employees and the purchase of shares under our equity incentives plans.
 
Net cash provided by financing activities was $22.4 million for the six months ended June 30, 2001, resulting primarily from our initial public offering, partially offset by the repayment in full of our bank term loan.
 
We believe that cash flow from operations will continue to be positive, and together with our current cash and short term investments balances and current credit facilities will be sufficient to meet our operating requirements for at least the next 12 months, including increased operating expenses and purchases of property and equipment.
 
Although we currently have no plans, commitments or agreements with respect to any acquisitions or investments, it is possible that we may decide to undertake those activities during the next 12 months to an extent that could require additional financial resources. In that case, we may be required to raise additional financing through public or private financings, strategic relationships or other arrangements. However, we cannot be certain that this funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants.
 
Item 3.     Quantitative And Qualitative Disclosure About Market Risk
 
We develop products primarily in Israel, and also in North America, and sell those products primarily in North America, Israel, Europe and Eastern Asia. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As substantially all of our sales are currently made in United States dollars, a strengthening of the United States dollar could make our products less competitive in foreign markets.
 
Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents. We maintain a strict investment policy, which ensures the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our cash and cash equivalents as

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of June 30, 2002, consists primarily of short-term U.S. government securities, demand deposits and money market funds held by institutions in the United States. Due to the nature of our cash and cash equivalents we have concluded that we do not have material market risk exposure.
 
Management’s intent and current practice is to invest funds in excess of current operating requirements in:
 
 
•
 
obligations of the United States government and its agencies;
 
 
•
 
investment grade state and local government obligations;
 
 
•
 
securities of corporations in the United States rated A1 or P1 by Standard & Poors’ or Moody’s Ratings; or
 
 
•
 
money market funds, deposits or notes issued or guaranteed by commercial banks meeting certain credit rating and net worth requirements with maturities of less than two years.
 
PART II.    OTHER INFORMATION
 
Item 1.     Legal Proceeding
 
None.
 
Item 2.     Changes In Securities and Use of Proceeds
 
During the three months ended June 30, 2002, we issued an additional 196,318 ordinary shares as a result of the exercise of share option grants and the purchase of ordinary shares pursuant to our equity incentives plans. The aggregate net consideration received by the Company for the issuance of the ordinary shares was $1.1 million. Certain of the ordinary shares were issued pursuant to compensatory plans registered by registration statements, filed with the SEC, on Form S-8. Other ordinary shares were issued pursuant to compensatory plans of the Company that are compliant with Rule 701 promulgated under the Securities Act and in reliance on the exemption from the registration requirements of the Securities Act provided by such rule.
 
On March 26, 2001, we completed our initial public offering in which we sold 3,335,000 ordinary shares at $7.00 per share. The net proceeds we received from this offering after deducting underwriting discounts were approximately $21.7 million.
 
In April 2001, the underwriters of the initial public offering exercised their over-allotment option to purchase an additional 500,250 ordinary shares at $7.00 per share, the initial public offering price of the ordinary shares. The net proceeds received after deducting underwriting discounts were approximately $3.3 million.
 
We intend to use the aggregate net proceeds from our initial public offering, share purchases pursuant to equity incentives plans and cash generated from operation activities for general corporate purposes, capital expenditures and potential acquisitions of complementary businesses, products and technologies. Pending these uses, theses cash balances have been and will continue to be invested in interest bearing, investment grade securities.

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Item 3.     Default Upon Senior Securities.
 
None.
 
Item 4.     Submission of Matters To A Vote Of Security Holders.
 
The 2002 Annual General Meeting of Shareholders of Verisity Ltd. was held at our registered office located at 8-10 Ha’Melacha Street, Rosh Ha’Ayin, Israel, on June 4, 2002, at 10:30 a.m. Israeli time to conduct the business described in our proxy statement. The “Proxy Statement” was filed with the United States Securities and Exchange Commission on April 29, 2002. This was a regular annual meeting. The record date for determining those shareholders who were entitled to notice of, and to attend and vote at, the meeting and at any adjournment thereof was April 29, 2002.
 
The proposals voted on at the meeting, each of which were approved, are summarized below and are more fully described in the Proxy Statement. A table showing the votes for, against, and abstaining for each proposal follows this list. There were no broker non-votes on any proposal. With respect to the election of directors, shareholders were permitted to vote for the nominee or to withhold their vote for the nominee. Shareholders could vote for, against, or abstain from voting for each of the other proposals. Votes were cast representing 9,224,694 shares out of 18,094,744 outstanding shares. This represents 51.0% participation. The Shareholders approved the following actions:
 
1.    The election of Pierre Lamond as our Class I director to hold office for a term that expires in 2005 at the third Annual General Meeting that follows the 2002 Annual General Meeting and until his successor shall be elected and qualified;
 
2.    The election of Michael McNamara as our Class I director to hold office for a term that expires in 2005 at the third Annual General Meeting that follows the 2002 Annual General Meeting and until his successor shall be elected and qualified;
 
3.    The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the amount of 100,000 shares to Moshe Gavrielov, our Director and Chief Executive Officer, with an exercise price of $16.15, the fair market value of our ordinary shares as of the close of business on the date of the 2002 Annual General Meeting;
 
4.    The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 Israeli Share Option Plan in the amount of 100,000 shares to Yoav Hollander, our Director and Chief Technology Officer, with an exercise price of $16.15, the fair market value of our ordinary shares as of the close of business on the date of the 2002 Annual General Meeting;
 
5.    The grant of share options for the right to purchase ordinary shares under the Verisity Ltd. 2000 U.S. Share Incentive Plan in the amount of 30,000 shares to Michael McNamara, our Director and Senior Vice President of Technology, with an exercise price of $16.15, the fair market value of our ordinary shares as of the close of business on the date of the 2002 Annual General Meeting;
 
6.    The salary of Moshe Gavrielov, our Director and Chief Executive Officer;
 
7.    The bonus of Moshe Gavrielov, our Director and Chief Executive Officer;
 
8.    The salary of Yoav Hollander, our Director and Chief Technology Officer;

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  9. The bonus of Yoav Hollander, our Director and Chief Technology Officer;
 
10. The salary of Michael McNamara, our Director and Senior Vice President of Technology;
 
11. The bonus of Michael McNamara, our Director and Senior Vice President of Technology;
 
12. Approve an increase in the number of ordinary shares available for issuance under our 2000 U.S. Share Incentive Plan by 950,000 plus shares that become available for issuance under our prior similar plans;
 
13. Amendment of our Articles of Association to (a) require approval of at least two-thirds of our outstanding shares for any change to the method of removal of any of our directors, as set forth in the Articles of Association, (b) permit the Board of Directors to appoint any person to serve as Chairman of a shareholders meeting, instead of the Chairman of the Board personally, and (c) simplify and clarify our practices relating to proxy voting.
 
14. To approve the selection of Ernst & Young LLP as our independent auditors, with Messrs. Kost Forer & Gabbay, a member of Ernst & Young International, as our Israeli statutory independent auditors for the fiscal year ending December 31, 2002.
 
TABLE OF VOTES CAST
 
Proposition
     
Votes for
     
Votes withhold
     
Votes against
     
Votes abstained
1.
     
7,795,099
     
1,429,565
              
2.
     
7,795,099
     
1,429,565
              
3.
     
7,794,999
            
1,429,695
       
4.
     
7,794,999
            
1,429,695
       
5.
     
7,794,999
            
1,429,695
       
6.
     
7,794,999
            
1,429,695
       
7.
     
7,794,999
            
1,429,695
       
8.
     
7,794,999
            
1,429,695
       
9.
     
7,794,999
            
1,429,695
       
10.
     
7,794,999
            
1,429,695
       
11.
     
7,794,999
            
1,429,695
       
12.
     
6,748,099
            
2,476,595
       
13.
     
6,748,099
            
2,476,595
       
14.
     
7,794,774
            
1,429,920
       

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Item 5.    Other Information.
 
None.
 
Item 6.    Exhibits and Reports on Form 8-K.
 
 
(a)
 
See Exhibit Index on Page 17.
 
(b)
 
None.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VERISITY LTD.
(Registrant)
 
Date: August 10, 2002
 
/s/    Charles G. Alvarez
Charles G. Alvarez
Vice President of Finance and
Administration and Chief Financial
Officer (Principal Accounting Officer)

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Number
   
Description
  3.1*
   
Articles of Association, as amended.
  3.2*
   
Amendment to the Articles of Association
  3.3*
   
Form of Amended and Restated Articles of Association.
  3.4*
   
Memorandum of Association, as amended.
  4.1*
   
Form of Share Certificate.
  4.3*
   
Warrant to Purchase up to an aggregate of 45,618 Series D Preferred Shares.
  4.4*
   
Warrant to Purchase up to an Aggregate of 19,551 Series D Preferred Shares.
10.1*
   
Loan Modification Agreement dated as of December 30, 1999, by and between Verisity Design, Inc. and Silicon Valley Bank.
10.2*
   
Amended and Restated Loan and Security Agreement by and between Silicon Valley Bank and Verisity Design, Inc., dated as of December 31, 1998.
10.3*
   
Unconditional Guaranty (Verisity Ltd.) dated as of December 31, 1998.
10.4*
   
Lease Agreement dated as of July 29, 1997 by and between Mifalei Locky, 1’Bniya Ltd. and Verisity Ltd.
10.5*
   
Rental Agreement by and between Verisity Design, EURL and IOM Business Center GmbH, dated as of October 1, 1999.
10.6*
   
Rental Agreement by and between Verisity Design, EURL and IOM Business Center GmbH, dated May 8, 2000.
10.7*
   
License by and between Chancery Court Business Center Ltd. And Verisity Design, EURL, effective as of August 1, 2000.
10.8*
   
Office Services Agreement by and between Verisity Design, EURL and Vantas, effective as of November 1, 1999.
10.9*
   
Domiciliation Agreement by and between Verisity Design, EURL and “BURO Club,” dated May 11, 1999.
10.10*
   
Landmark Office Center Lease by and between Landmark Investments Limited and Verisity Design, Inc., dated August 10, 1998.
10.11*
   
Landmark Office Center Lease by and between Landmark Investments Limited and Verisity Design, Inc., dated August 10, 1998.
10.12**
   
Lease Agreement dated as of November 28, 2000, by and between W9/TIB Real Estate Limited Partnership and Verisity Design, Inc.
10.13*
   
Office Service Agreement effective as of October 1, 2000 by and between Austin Mopac d/b/a/ Vantos and Verisity Design, Inc.
10.14*
   
Office Service Agreement dated as of November 8, 1999 by and between Plano Executive Suite, Inc. d/b/a HQ Plano, Managing Partner and Verisity Design, Inc.
10.15*
   
Letter Distributor Agreement dated as of December 1, 1998 by and between Verisity Design, Inc. and Integrated Systems Scandinavia AB.
10.16*
   
International Distributor Agreement by and between Verisity Design, Inc. and Cybertec Yugen Kaisha, effective as of January 1, 1999.
10.17*
   
International Distributor Agreement by and between Verisity Design, Inc. and Davan Tech Company, Ltd., dated as of November 10, 1999.
10.18*
   
Employment Agreement effective as of October 26, 1999 by and between Verisity Design, Inc. and Michael McNamara.
10.19*
   
Employment Agreement effective as of March 23, 1998 by and among Verisity Ltd., Verisity Design, Inc. and Moshe Gavrielov.
10.20*
   
Secured Promissory Note from Moshe Gavrielov to Verisity Design, Inc. dated March 23, 1998.
10.21*
   
Form Software License Agreement.

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Number
   
Description
10.23*
   
Share Restriction Agreement effective as of March 23, 1998 by and between Verisity Ltd. and Moshe Gavrielov.
10.24*
   
Stock Option Agreement effective as of December 1, 1999 by and between Verisity Ltd. and Moshe Gavrielov.
10.25
   
Amended and Restated Verisity Ltd. 2000 U.S. Share Incentive Plan, form of Option Agreement for Amended and Restated 2000 U.S. Share Incentive Plan and form of Option Agreement for outside directors under Amended and Restated 2000 U.S. Share Incentive Plan.
10.26*
   
Verisity Ltd. 1999 Israeli Share Option Plan and form of Option Agreement for 1999 Israeli Share Option Plan.
10.27*
   
Verisity Ltd. 1999 Share Incentive Plan and form of Option Agreement for 1999 Share Incentive Plan.
10.28*
   
Sub-Plan for the Issuance of Options to the Company’s Employees created within the framework of the 1997 Israel Share and Option Incentive Plan and form of Option Agreement for Sub-Plan.
10.29*
   
1997 Israel Share and Stock Option Incentive Plan.
10.30*
   
1996 U.S. Stock Option Plan, as amended October 1999, form of Option Agreement for 1996 U.S. Stock Option Plan and form of Amended Option Agreement.
10.31*
   
Verisity Ltd. 2000 Employee Share Purchase Plan.
10.32*
   
Amendment to Amended and Restated Investor Rights Agreement dated as of July 21, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe Gavrielov and certain investors.
10.33*
   
Amended and Restated Investors Rights Agreement dated as of February 26, 1999 by and among Verisity Ltd., Yoav Hollander, Avishai Silvershatz, Moshe Gavrielov and certain investors.
10.34*
   
Technology Exchange Agreement, Addendum to Software License and Volume Purchase Agreement effective as of January 1, 2000 by and between LSI Logic Corporation and Verisity Design, Inc.
10.35*
   
Software License and Volume Purchase Agreement effective as of December 11, 1998 by and between Verisity Design, Inc. and LSI Logic Corporation.
10.36*
   
Software License Agreement by and between Intel Corporation and Verisity Design, Inc., effective as of January 18, 1999.
10.37*
   
Amendment No. 1 to Software and Related Services Agreement, effective as of May 5, 2000 and Intel Corporation Purchase Agreement, Software and Related Services, by and between Intel Corporation and Verisity Design, Inc., effective as of June 21, 1999.
10.38*
   
Verisity Ltd. 2000 Israeli Share Option Plan and form of Option Agreement for 2000 Israeli Share Option Plan.
10.39*
   
Verisity Ltd. 2000 Directed Share Plan.
10.40*
   
International Representative Agreement between Verisity Design, EURL and Integrated Systems Scandinavia EDA AB, effective as of June 15, 2000.
10.41*
   
First Amendment to Verisity Ltd. 1999 Israeli Share Option Plan.
10.42*
   
First Amendment to Verisity Ltd. 2000 Employee Share Purchase Plan.
10.43**
   
Sublease Agreement dated as of February 20, 2002, between Lakewood Property Trust, I/O of Austin Inc. and Verisity Design, Inc.
21.1*
   
List of subsidiaries.
99.2
   
Certification pursuant to 18.U.S.C. Section 1350.
99.3
   
Certification pursuant to 18.U.S.C. Section 1350.
  *
 
Incorporated by reference from the like-numbered exhibit filed with the Registrant’s registration statement on Form S-1 (No. 333-45440) filed on September 8, 2000, as subsequently amended.
**
 
Incorporated by reference from the like-numbered exhibit filed with the annual report on Form 10-K (No. 000-32417) filed on March 26, 2002.

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