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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q   (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from          to          .
 Commission file number: 000-26247 VERITAS Software Corporation (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    77-0507675(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 350 Ellis Street
Mountain View, California 94043
(650) 527-8000(Address, including Zip Code, of Registrants Principal Executive Offices and
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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No o The number of shares of the registrants common stock outstanding as of
May 28, 2004 was 431,842,356 shares.




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VERITAS SOFTWARE CORPORATION INDEX PagePART I: FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements
    
    
    2Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    40PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 5. Other Information
    
    
    43Item 6. Exhibits and Reports on Form 8-K
    
    
    43Signature
    
    
    45EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01
  1




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PART I: FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements VERITAS SOFTWARE CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(in thousands)
    
    (Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    628,394
    
    
    $
    823,171Short-term investments
    
    
    2,055,564
    
    
    
    1,679,844Accounts receivable, net of allowance for doubtful accounts
of $7,479 and $7,807, respectively
    
    
    155,375
    
    
    
    250,098Other current assets
    
    
    67,583
    
    
    
    60,254Deferred income taxes
    
    
    18,841
    
    
    
    30,302Total current assets
    
    
    2,925,757
    
    
    
    2,843,669Property and equipment, net
    
    
    572,824
    
    
    
    572,977Other intangibles, net
    
    
    85,691
    
    
    
    81,344Goodwill, net
    
    
    1,809,309
    
    
    
    1,755,591Other non-current assets
    
    
    23,883
    
    
    
    25,385Deferred income taxes
    
    
    83,854
    
    
    
    69,500$
    5,501,318
    
    
    $
    5,348,466LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,056
    
    
    $
    38,289Accrued compensation and benefits
    
    
    88,223
    
    
    
    124,655Accrued acquisition and restructuring costs
    
    
    24,953
    
    
    
    25,051Other accrued liabilities
    
    
    62,767
    
    
    
    83,184Current portion of long-term debt
    
    
    186,373
    
    
    
    Income taxes payable
    
    
    181,534
    
    
    
    141,623Deferred revenue
    
    
    426,943
    
    
    
    398,772Total current liabilities
    
    
    999,849
    
    
    
    811,574Convertible subordinated notes
    
    
    520,000
    
    
    
    520,000Long-term debt
    
    
    194,257
    
    
    
    380,630Accrued acquisition and restructuring costs
    
    
    63,124
    
    
    
    69,019Other long-term liabilities
    
    
    25,106
    
    
    
    23,649Total liabilities
    
    
    1,802,336
    
    
    
    1,804,872Stockholders equity:Common stock
    
    
    460
    
    
    
    458Additional paid-in capital
    
    
    6,997,443
    
    
    
    6,941,798Accumulated deficit
    
    
    (1,278,028
    )
    
    
    (1,378,076
    )Deferred stock-based compensation
    
    
    (8,849
    )
    
    
    (8,455
    )Accumulated other comprehensive income
    
    
    6,259
    
    
    
    6,172Treasury stock, at cost; 28,609 shares at
March 31, 2004 and December 31, 2003
    
    
    (2,018,303
    )
    
    
    (2,018,303
    )Total stockholders equity
    
    
    3,698,982
    
    
    
    3,543,594$
    5,501,318
    
    
    $
    5,348,466
 See accompanying notes to condensed consolidated financial statements. 2




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VERITAS SOFTWARE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months EndedMarch 31,2004
    
    2003(in thousands, except per share amounts)
    
    (Unaudited)Net revenue:User license fees
    
    $
    302,409
    
    
    $
    247,455Services
    
    
    183,338
    
    
    
    142,681Total net revenue
    
    
    485,747
    
    
    
    390,136Cost of revenue:User license fees
    
    
    9,519
    
    
    
    11,917Services (1)
    
    
    65,843
    
    
    
    52,302Amortization of developed technology
    
    
    3,824
    
    
    
    14,782Total cost of revenue
    
    
    79,186
    
    
    
    79,001Gross profit
    
    
    406,561
    
    
    
    311,135Operating expenses:Selling and marketing (1)
    
    
    143,038
    
    
    
    115,298Research and development (1)
    
    
    79,924
    
    
    
    70,588General and administrative (1)
    
    
    47,749
    
    
    
    38,179Amortization of other intangibles
    
    
    2,394
    
    
    
    18,191In-process research and development
    
    
    400
    
    
    
    4,100Total operating expenses
    
    
    273,505
    
    
    
    246,356Income from operations
    
    
    133,056
    
    
    
    64,779Interest and other income, net
    
    
    11,326
    
    
    
    11,012Interest expense
    
    
    (5,702
    )
    
    
    (7,738
    )Gain (loss) on strategic investments
    
    
    7,496
    
    
    
    (3,518
    )Income before income taxes
    
    
    146,176
    
    
    
    64,535Provision for income taxes
    
    
    46,128
    
    
    
    21,431Net income
    
    $
    100,048
    
    
    $
    43,104Net income per share  basic
    
    $
    0.23
    
    
    $
    0.10Number of shares used in computing per share
amounts  basic
    
    
    430,714
    
    
    
    412,916Net income per share  diluted
    
    $
    0.22
    
    
    $
    0.10Number of shares used in computing per share
amounts  diluted
    
    
    444,921
    
    
    
    419,380
 (1) Amortization of stock-based compensation consists of: Services
    
    $
    237
    
    
    $
    Selling and marketing
    
    
    2,881
    
    
    
    Research and development
    
    
    1,222
    
    
    
    314General and administrative
    
    
    744
    
    
    
    Total amortization of stock-based
compensation
    
    $
    5,084
    
    
    $
    314
 See accompanying notes to condensed consolidated financial statements. 3




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VERITAS SOFTWARE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months EndedMarch 31,2004
    
    2003(in thousands)
    
    (Unaudited)Cash flows from operating activities:Net income
    
    $
    100,048
    
    
    $
    43,104Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    30,075
    
    
    
    31,350Amortization of developed technology
    
    
    3,824
    
    
    
    14,782Amortization of other intangibles
    
    
    2,394
    
    
    
    18,191In-process research and development
    
    
    400
    
    
    
    4,100Provision for allowance for doubtful
accounts
    
    
    518
    
    
    
    708Stock-based compensation
    
    
    5,084
    
    
    
    314Tax benefits from stock plans
    
    
    6,816
    
    
    
    1,642(Gain) loss on strategic investments
    
    
    (7,496
    )
    
    
    3,518Write-off of property and equipment
    
    
    1,083
    
    
    
    59Deferred income taxes
    
    
    (8,320
    )
    
    
    (13,079
    )Changes in operating assets and liabilities, net of
effects of business acquisitions:Accounts receivable
    
    
    93,328
    
    
    
    96,491Other assets
    
    
    (22,600
    )
    
    
    6,756Accounts payable
    
    
    (9,252
    )
    
    
    (1,243
    )Accrued compensation and benefits
    
    
    (36,641
    )
    
    
    (31,469
    )Accrued acquisition and restructuring costs
    
    
    (7,479
    )
    
    
    (4,204
    )Other accrued liabilities
    
    
    (14,696
    )
    
    
    (12,710
    )Income and other taxes payable
    
    
    39,959
    
    
    
    31,704Deferred revenue
    
    
    25,652
    
    
    
    16,835Net cash provided by operating activities
    
    
    202,697
    
    
    
    206,849Cash flows from investing activities:Purchases of investments
    
    
    (947,776
    )
    
    
    (414,877
    )Sales and maturities of investments
    
    
    598,515
    
    
    
    529,812Purchases of property and equipment
    
    
    (28,081
    )
    
    
    (19,939
    )Purchase of businesses and technology, net of cash acquired
    
    
    (60,449
    )
    
    
    (54,524
    )Payments made for prior year business and technology
acquisitions
    
    
    
    
    
    
    (2,106
    )Net cash provided by (used for) investing activities
    
    
    (437,791
    )
    
    
    38,366Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    43,353
    
    
    
    19,950Net cash provided by financing activities
    
    
    43,353
    
    
    
    19,950Effect of exchange rate changes
    
    
    (3,036
    )
    
    
    2,177Net increase (decrease) in cash and cash equivalents
    
    
    (194,777
    )
    
    
    267,342Cash and cash equivalents at beginning of period
    
    
    823,171
    
    
    
    764,062Cash and cash equivalents at end of period
    
    $
    628,394
    
    
    $
    1,031,404Supplemental disclosures:Cash paid for interest
    
    $
    4,822
    
    
    $
    4,312Cash paid for income taxes
    
    $
    18,347
    
    
    $
    1,469
 See accompanying notes to condensed consolidated financial statements. 4




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VERITAS SOFTWARE CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for annual financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a
fair presentation have been included. The results for the interim periods
presented are not necessarily indicative of the results that may be expected
for any future period. The following information should be read in conjunction
with the consolidated financial statements and accompanying notes included in
VERITAS Software Corporations Annual Report on Form 10-K for the year ended
December 31, 2003. 2. Use of Estimates The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. 3. Accounting for Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and the disclosure requirements of SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure  an Amendment of FASB
Statement No. 123. Since the exercise price of options granted under the
Companys stock option plans is equal to the market value on the date of grant,
no compensation cost has been recognized for grants under such plans. In
accordance with APB Opinion No. 25, the Company does not recognize compensation
cost related to its employee stock purchase plan. The following table
illustrates the effect on net income (loss) and net income (loss) per share if
the Company had accounted for its stock option and stock purchase plans under
the fair value method of accounting under SFAS No. 123, Accounting for
Stock-Based Compensation: Three Months Ended March 31,(in thousands, except per share amounts)
    
    2004
    
    2003Net income (loss):As reported
    
    $
    100,048
    
    
    $
    43,104Add:Stock-based employee compensation
expense included in net income,
net of tax
    
    
    3,457
    
    
    
    210Less:Total stock-based employee
compensation expense determined
under the fair value method for
all awards, net of tax
    
    
    (73,237
    )
    
    
    (74,997
    )Pro forma
    
    $
    30,268
    
    
    $
    (31,683
    )Basic income (loss) per share:As reported
    
    $
    0.23
    
    
    $
    0.10Pro forma
    
    $
    0.07
    
    
    $
    (0.08
    )Diluted income (loss) per share:As reported
    
    $
    0.22
    
    
    $
    0.10Pro forma
    
    $
    0.07
    
    
    $
    (0.08
    )
 For purposes of the pro forma disclosures, the expected volatility
assumptions the Company used prior to the fourth quarter of fiscal 2003 were
based solely on the historical volatility of the Companys common stock over
the most recent period commensurate with the estimated expected life of the
Companys stock options. Beginning with the fourth quarter of fiscal 2003, the
Company modified its approach and expected volatility by considering other
relevant factors in accordance with SFAS No. 123. The Company considered
implied volatility in market-traded options on the Companys common stock as
well as historical volatility. The Company will continue to monitor these and
other relevant factors used to measure expected volatility for future option
grants. 5




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Also, beginning with the third quarter of fiscal 2003, the Company
decreased its estimate of the expected life of new options granted to its
employees from 5 years to 4 years. The Company bases its expected life
assumption on historical experience as well as the terms and vesting periods of
the options granted. The reduction in the estimated expected life was a result
of an analysis of the Companys historical experience. For the pro forma amounts determined under SFAS No. 123, as set forth
above, the fair value of each stock option grant under the stock option plans
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    2.58
    %
    
    
    2.91
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Weighted average expected life
    
    4.0 years
    
    5.0 yearsVolatility of common stock
    
    
    55
    %
    
    
    90
    %
 The fair value of the employees purchase rights under the employee stock
purchase plan is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for these rights: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    1.00%-1.87%
    
    
    
    1.20%-1.66%Dividend yield
    
    
    0%
    
    
    
    0%Weighted average expected life
    
    
    6 to 24 months
    
    
    
    6 to 24 monthsVolatility of common stock
    
    
    86%
    
    
    
    90%
 As
a result of the delay in filing the Companys Form 10-K for the year ended December
31, 2003, the Company suspended option-holders ability to use the Companys
registration statements for its stock option plans (the Plans). As a result,
option-holders were unable to exercise options under the Plans until such time
as the Company filed its Form 10-K for the year ended December 31, 2003 and
lifted the suspension on the use of the registration statements. Pursuant to
the terms of the Plans, options held by certain former employees of the Company
were scheduled to expire during the suspension period. On March 15, 2004, the
Company extended the expiration date of such options for a period of 15 days
from the date of filing the Form 10-K, which was considered a modification of
such options. For the three months ended March 31, 2004, $4.3 million was
expensed in the statement of operations as a result of this modification. 4. Net Income per Share The following table sets forth the computation of basic and diluted net
income per share: Three Months Ended March 31,(in thousands, except per share amounts)
    
    2004
    
    2003Numerator:Net income
    
    $
    100,048
    
    
    $
    43,104Denominator:Denominator for basic net income per share
 weighted-average shares outstanding
    
    
    430,714
    
    
    
    412,916Potential common shares
    
    
    14,207
    
    
    
    6,464Denominator for diluted net income per share
    
    
    444,921
    
    
    
    419,380Basic net income per share
    
    $
    0.23
    
    
    $
    0.10Diluted net income per share
    
    $
    0.22
    
    
    $
    0.10
 For the three months ended March 31, 2004 and 2003, potential common
shares consist of employee stock options using the treasury stock method. The
following table sets forth the potential common shares that were excluded from
the net income per share computations as their effect would be antidilutive: Three Months Ended March 31,(in thousands)
    
    2004
    
    2003Employee stock options outstanding(1)
    
    
    27,901
    
    
    
    40,9535.25% convertible subordinated notes(2)
    
    
    
    
    
    
    6,6951.856% convertible subordinated notes(2)
    
    
    
    
    
    
    12,9810.25% convertible subordinated notes(3)
    
    
    11,274
    
    
    
    
 6




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(1)
    
    For the three months ended March 31, 2004 and 2003, 27,901 and 40,953
employee stock options, respectively, were excluded from the computation
of diluted net income per share because the exercise price of these
options was greater than the average market price of the Companys common
stock during the period, and therefore the effect is antidilutive.(2)
    
    For the three months ended March 31, 2003, 6,695 potential common shares
issuable upon the conversion of the Companys 5.25% convertible
subordinated notes and 12,981 potential common shares issuable upon the
conversion of the Companys 1.856% convertible subordinated notes,
respectively, were excluded from the computation of diluted net income per
share because the impact of adding back after tax interest expense
associated with the convertible subordinated notes, and including the
potential common shares, would be antidilutive.(3)
    
    For the three months ended March 31, 2004, 11,274 potential common shares
related to the Companys 0.25% convertible subordinated notes were
excluded from the computation of diluted net income per share because the
specified circumstances under which the 0.25% notes are convertible
prior to maturity have not been met (see Note 9). The weighted average exercise prices of employee stock options with
exercise prices exceeding the average fair value of the Companys common stock
was $33.00 and $56.04 per share for the three months ended March 31, 2004 and
2003, respectively. 5. Business Combinations Ejasent, Inc. In January 2004, the Company acquired all of the outstanding capital
stock of Ejasent, Inc. (Ejasent), a privately held provider of application
virtualization technology for utility computing. The Company acquired Ejasent
to add important application migration technology, which allows IT personnel to
move an application from one server to another without disrupting or
terminating the application, to the Companys growing utility computing
portfolio. The Ejasent acquisition was accounted for using the purchase method
of accounting for total purchase consideration of $61.4 million, which included
$47.8 million in cash and $13.6 million of acquisition-related costs. The
purchase price was allocated to goodwill of $53.7 million, developed technology
of $10.2 million, other intangibles of $1.9 million, in-process research and
development (IPR&D) of $0.4 million, net deferred tax liabilities of $4.6
million and net tangible liabilities of $0.2 million. The weighted average
amortization period for all purchased intangible assets is 4.4 years.
Acquisition-related costs consist of $11.5 million of change in control bonuses
and direct transaction costs of $2.1 million for legal and other professional
fees. Total cash outlays for acquisition-related costs were $12.9 million
through March 31, 2004. The results of operations of Ejasent were included in
the Companys consolidated financial statements from the date of acquisition.
The pro forma impact of the acquisition on the Companys results of operations
is not significant. Precise Software Solutions Ltd. On June 30, 2003, the Company acquired all of the outstanding common stock
of Precise Software Solutions Ltd. (Precise), a provider of application
performance management products. The Company acquired Precise in order to
expand its product and service offerings across storage, databases and
application management. The Precise acquisition was accounted for using the
purchase method of accounting for total purchase consideration of $715.1
million, which included 7.3 million shares of common stock valued at $210.6
million, $397.8 million of cash, $94.0 million relating to the assumption of
Precises outstanding vested and unvested stock options for 4.4 million shares
of the Companys common stock and $12.7 million of acquisition-related costs.
The purchase price was allocated to goodwill of $509.7 million, developed
technology of $27.6 million, other intangibles of $34.3 million, IPR&D of $15.3
million, net deferred tax liabilities of $21.4 million, deferred stock-based
compensation of $7.3 million and net tangible assets of $142.3 million. The
weighted average amortization period for all purchased intangible assets is 3.7
years. The acquired IPR&D of $15.3 million was written off and the related
charge was expensed in the statement of operations in the second quarter of
2003. Acquisition-related costs of $12.7 million consist of $9.0 million
associated with investment banking and other professional fees, $3.3 million
for terminating and satisfying existing lease commitments and $0.4 million for
severance-related costs. Total cash outlays for acquisition-related costs were
approximately $8.7 million for investment banking and other professional fees,
$0.4 million for severance-related costs and $0.3 million for leases through March 31, 2004. The results of operations of Precise are included in the Companys
consolidated financial statements from July 1, 2003. The following
table presents pro forma results of operations and gives effect to the
acquisition of Precise as if the acquisition was consummated at the beginning
of fiscal year 2003. The unaudited pro forma results of operations are not
necessarily indicative of what would have occurred had the acquisition been
made as of the beginning of the period or of the results that may occur in the
future. Net income excludes the write-off of acquired IPR&D of $15.3 million
and includes amortization of intangible assets related to the acquisition of
$4.7 million per quarter and amortization of deferred compensation of $0.5
million per quarter. The unaudited pro forma information is as follows: 7




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Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2003Total net revenue
    
    $
    412,291Net income
    
    
    39,191Net income per share  basic
    
    
    0.09Net income per share  diluted
    
    
    0.09
 Jareva Technologies, Inc. On January 27, 2003, the Company acquired all of the outstanding capital
stock of Jareva Technologies, Inc. (Jareva), a privately held provider of
automated server provisioning products that enable businesses to automatically
deploy additional servers without manual intervention. The Company acquired
Jareva to integrate Jarevas technology into the Companys software products to
enable the Companys customers to optimize their investments in server hardware
by deploying new server resources on demand. The Jareva acquisition was
accounted for using the purchase method of accounting for total purchase
consideration of $68.7 million, which included $58.7 million of cash, $6.8
million relating to the assumption of options exercisable for 426,766 shares of
the Companys common stock and $3.2 million of acquisition-related costs. The
purchase price was allocated to goodwill of $51.3 million, developed technology
of $9.1 million, other intangibles of $1.9 million, IPR&D of $4.1 million, net
deferred tax liabilities of $6.1 million, deferred stock-based compensation of
$4.6 million and net tangible assets of $3.8 million. The weighted average
amortization period for all purchased intangible assets is 3.3 years. The
acquired IPR&D of $4.1 million was written off and the related charge was
expensed in the statement of operations in the first quarter of 2003.
Acquisition-related costs of $3.2 million consist of $2.7 million associated with terminating
and satisfying remaining lease commitments, partially offset by sublease income
net of related sublease costs, and direct transaction costs of $0.5 million for
legal and other professional fees. Total cash outlays for acquisition-related
costs were $1.6 million through March 31, 2004. The results of operations of
Jareva are included in the Companys consolidated financial statements from the
date of acquisition. The pro forma impact on the Companys results of
operations is not significant. 6. Goodwill and Other Intangible Assets On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As a result, the Company no longer amortizes goodwill but
will test it for impairment annually or whenever events or changes in
circumstances suggest that the carrying amount may not be recoverable. The following table sets forth the carrying amount of goodwill. Goodwill
also includes amounts originally allocated to assembled workforce: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Goodwill:Gross carrying amount
    
    $
    3,895,936
    
    
    $
    3,842,218Less  accumulated amortization
    
    
    (2,086,627
    )
    
    
    (2,086,627
    )Net carrying amount of goodwill
    
    $
    1,809,309
    
    
    $
    1,755,591
 During the first quarter of 2004, the Company acquired Ejasent (see Note 5),
which increased goodwill by $53.7 million. The following tables set forth the carrying amount of other intangible
assets that will continue to be amortized: March 31, 2004GrossCarrying
    
    Accumulated
    
    Net Carrying(in thousands)
    
    Amount
    
    Amortization
    
    AmountDeveloped technology
    
    $
    299,749
    
    
    $
    241,244
    
    
    $
    58,505Distribution channels
    
    
    234,800
    
    
    
    234,800
    
    
    
    Trademarks
    
    
    26,650
    
    
    
    25,213
    
    

    
    1,437Other intangible assets
    
    
    52,074
    
    
    
    35,983
    
    
    
    16,091Intangibles related to acquisitions
    
    
    613,273
    
    
    
    537,240
    
    
    
    76,033Convertible subordinated notes issuance costs
    
    
    12,401
    
    
    
    2,743
    
    
    
    9,658Total other intangibles
    
    $
    625,674
    
    
    $
    539,983
    
    
    $
    85,691
 8




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December 31, 2003GrossCarrying
    
    Accumulated
    
    Net Carrying(in thousands)
    
    Amount
    
    Amortization
    
    AmountDeveloped technology
    
    $
    287,949
    
    
    $
    237,043
    
    
    $
    50,906Distribution channels
    
    
    234,800
    
    
    
    234,800
    
    
    
    Trademarks
    
    
    26,650
    
    
    
    24,925
    
    
    
    1,725Other intangible assets
    
    
    51,734
    
    
    
    33,714
    
    
    
    18,020Intangibles related to business acquisitions
    
    
    601,133
    
    
    
    530,482
    
    
    
    70,651Convertible subordinated notes issuance costs
    
    
    12,401
    
    
    
    1,708
    
    
    
    10,693Total other intangibles
    
    $
    613,534
    
    
    $
    532,190
    
    
    $
    81,344
 Total amortization expense of intangible assets related to acquisitions is
set forth in the table below: Three Months Ended March 31,(in thousands)
    
    2004
    
    2003Developed technology
    
    $
    4,201
    
    
    $
    15,098Distribution channels
    
    
    
    
    
    
    14,675Trademarks
    
    
    288
    
    
    
    1,522Other intangible assets
    
    
    2,269
    
    
    
    2,056Total amortization expense
    
    $
    6,758
    
    
    $
    33,351
 For the three months ended March 31, 2004 and 2003, total amortization
expense for intangible assets includes approximately
$0.5 million and $0.4 million, respectively, that is included in cost of user
license fees. The total expected future annual amortization of intangible assets related
to acquisitions is set forth in the table below: Future(in thousands)
    
    Amortization2004
    
    $
    18,9662005
    
    
    23,1672006
    
    
    21,1442007
    
    
    10,6992008
    
    
    1,9122009
    
    
    145Total
    
    $
    76,033
 7. Strategic Investments The Company holds investments in capital stock of several privately-held
companies. The total carrying amount of these strategic investments was $2.9
million at March 31, 2004 and $5.4 million at December 31, 2003. These
strategic investments are included in other non-current assets. During the
three months ended March 31, 2004, the Company realized a gain of $7.5 million
on the sale of a strategic investment. The Company recorded no impairment
losses on strategic investments for the three months ended March 31, 2004 and
$3.5 million of impairment losses for the three months ended March 31, 2003.
The losses realized represent other-than-temporary declines in the fair value
of the investment and were determined based on the value of the investees
stock, its inability to obtain additional private financing, its cash position
and current burn rate, the status and competitive position of the investees
products and the uncertainty of its financial condition, among other factors. 8. Accrued Acquisition and Restructuring Costs In the fourth quarter of 2002, the Companys board of directors approved a
facility restructuring plan to exit and consolidate certain of its facilities
located in 17 metropolitan areas worldwide. The facility restructuring plan was
adopted to address overcapacity in the Companys facilities as a result of
lower than planned headcount growth in these metropolitan areas. In connection
with this facility restructuring plan, the Company recorded a net restructuring
charge to operating expenses of $96.1 million in the fourth quarter of 2002.
This restructuring charge is comprised of $86.9 million associated with
terminating and satisfying remaining lease commitments, partially offset by
sublease income net of related sublease costs, and $9.2 million for net asset
write-offs. Total cash outlays under this restructuring plan are expected to be
approximately $86.9 million. Restructuring costs will generally be paid over the remaining lease terms,
ending at various dates through 2021, or over a shorter period as the Company
may negotiate with its lessors. The Company expects the majority of costs will
be paid by the year ending December 31, 2008. 9




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The Company began vacating facilities during the fourth quarter of 2002
and completed vacating facilities as of January 31, 2004. The Company is in
the process of seeking suitable subtenants for these facilities. The Companys
estimates of the facility restructure charge may vary significantly, depending
in part on factors that are beyond the Companys control, including the
commercial real estate market in the applicable metropolitan areas, the
Companys ability to obtain subleases related to these facilities and the time
period to do so, the sublease rental market rates and the outcome of
negotiations with lessors regarding terminations of some of the leases.
Adjustments to the accrued restructuring costs will be made if actual lease
exit costs or sublease income differ from amounts currently expected. As a
portion of the accrued restructuring costs relates to international locations,
the accrual will be affected by exchange rate fluctuations. The impact of
exchange rate fluctuations is recorded in accumulated other comprehensive
income on the balance sheet. The portion of the accrual expected to be utilized through March 31, 2005
of $18.0 million has been classified in the current portion of accrued
acquisition and restructuring costs. The portion of the accrual expected to be
utilized in periods subsequent to March 31, 2005 of $58.6 million has been
classified in the non-current portion of accrued acquisition and restructuring
costs. The components of the accrued restructuring costs and movements within
these components through March 31, 2004 were as follows: Net Rent
    
    Asset(in millions)
    
    Commitments
    
    Write-offs
    
    TotalBalance at December 31, 2003
    
    $
    79.8
    
    
    $
    2.1
    
    
    $
    81.9Cash payments
    
    
    (3.8
    )
    
    
    
    
    
    
    (3.8
    )Asset write-offs
    
    
    
    
    
    
    (2.1
    )
    
    
    (2.1
    )Impact of exchange rates
    
    
    0.6
    
    
    
    
    
    
    
    0.6Balance at March 31, 2004
    
    $
    76.6
    
    
    $
    
    
    
    $
    76.6
 In 2002, the Company also recorded incremental restructuring costs of
$3.2 million related to
restructuring plans initiated in 1999, resulting in total
restructuring costs of $99.3 million for the year ended
December 31, 2002. Included in total accrued acquisition and
restructuring costs of $88.0 million as of
March 31, 2004 is the $76.6 million balance related to the facility restructuring plan discussed above, the
remaining acquisition costs to be paid in connection with the
Company's 2003 acquisition (see Note 5) and
the remaining restructuring costs to be paid for other restructuring plans. 9. Convertible Subordinated Notes In August 2003, the Company issued $520.0 million of 0.25% convertible
subordinated notes due August 1, 2013 (the 0.25% Notes), to several initial
purchasers in a private offering, for which the Company received net proceeds
of approximately $508.2 million. The 0.25% Notes were issued at their face
value and provide for semi-annual interest payments of $0.7 million each
February 1 and August 1, beginning February 1, 2004. Effective as of January
28, 2004, the 0.25% Notes began accruing additional interest at a rate of 0.25%
as a result of the Companys registration statement having not been declared
effective by the Securities and Exchange Commission on or before the 180th day following the original issuance
of the 0.25% Notes and the 0.25% Notes continued to accrue such additional
interest until April 27, 2004, the 90th day following such registration
default. As of April 27, 2004, the 0.25% Notes began to accrue additional
interest at a rate of 0.50% and will accrue such additional interest until the
registration statement is declared effective or until the Company is no longer
required to maintain the effectiveness of the registration statement. 10. Long-Term Debt In 1999 and 2000, the Company entered into three build-to-suit lease
agreements for office buildings in Mountain View, California, Roseville,
Minnesota and Milpitas, California. The Company began occupying the Roseville
and Mountain View facilities in May and June 2001, respectively, and began
occupying the Milpitas facility in April 2003. The Mountain View facility
includes 425,000 square feet and serves as the Companys corporate headquarters
and for research and development functions. The Milpitas facility includes
466,000 square feet and is primarily used for technical support, sales and
general corporate functions. The Roseville facility includes 204,000 square
feet and provides space for technical support and research and development
functions. A syndicate of financial institutions financed the acquisition and
development of these properties. Prior to July 1, 2003, the Company accounted
for these properties as operating leases in accordance with SFAS No. 13,
Accounting for Leases, as amended. On July 1, 2003, the
Company adopted Financial Accounting Standards Board
(FASB) Interpretation Number (FIN 46)
Consolidation of Variable Interest Entities.
Under FIN 46, the lessors of the facilities are considered variable interest
entities, and the Company is considered the primary beneficiary. Accordingly,
the Company began consolidating these variable interest entities on July 1,
2003 and has included the property and equipment and long-term debt on its
balance sheet at March 31, 2004 and December 31, 2003 and the results of their
operations in its consolidated statement of operations for the quarter ended
March 31, 2004. As of March 31, 2004, approximately $186.4 million of debt has
been classified as current as the lease terms for Mountain View and Roseville
facilities expire in March 2005. Interest only payments under the debt agreements relating to the
facilities are generally paid quarterly and are equal to the termination value
of the outstanding debt obligations multiplied by the Companys cost of funds,
which is based on London Inter Bank Offered Rate (LIBOR) using 30-day to
180-day LIBOR contracts and adjusted for the Companys credit spread. The
termination 10




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values of the debt agreements are approximately $145.2 million, $41.2 million
and $194.2 million for the Mountain View, Roseville and Milpitas leases,
respectively. The terms of these debt agreements are five years with an option
to extend the lease terms for two successive periods of one year each, if
agreed to by the financial institutions that financed the facilities. The terms
of these debt agreements began March 2000 for the Mountain View and Roseville
facilities and July 2000 for the Milpitas facility. The Company has the option
to purchase the three facilities for the aggregate termination value of $380.6
million or, at the end of the term, to arrange for the sale of the properties
to third parties while the Company retains an obligation to the financial
institutions that financed the facilities in an amount equal to the difference
between the sales price and the guaranteed residual value up to an aggregate
$344.6 million if the sales price is less than this amount, subject to the
specific terms of the debt agreements. In addition, the Company is entitled to
any proceeds from a sale of the facilities in excess of the termination values. In January 2002, the Company entered into two three-year pay fixed,
receive floating, interest rate swaps for the purpose of hedging the cash
payments related to the Mountain View and Roseville agreements (see Note 12). Under the terms of these interest rate swaps, the
Company makes payments based on the fixed rate and will receive interest
payments based on the 3-month LIBOR rate. For the quarters ended March 31, 2004
and 2003, the aggregate payments, including the net payments on the interest
rate swaps, were $4.0 million and $4.1 million, respectively. The payments for
the quarter ended March 31, 2004 were included in interest expense in the
consolidated statement of operations in accordance with FIN 46. The payments
made for the quarter ended March 31, 2003 were classified as rent expense and
included in cost of revenue and operating expenses, in accordance with SFAS No.
13. The agreements for the facilities described above require that the Company
maintain specified financial covenants, all of which the Company was in
compliance with as of March 31, 2004. The specified financial covenants as of
March 31, 2004 require the Company to maintain a minimum rolling four quarters
earnings before interest, taxes, depreciation and amortization (EBITDA) of
$400.0 million, a minimum ratio of cash and cash equivalents and accounts
receivable to current liabilities plus the debt consolidated under the
build-to-suit lease agreements of 1.2 to 1, and a leverage ratio of total
funded indebtedness to rolling four quarter EBITDA of not more than 2 to 1. For
purposes of these financial covenants, EBITDA represents the Companys net
income for the applicable period, plus interest expense, taxes, depreciation
and amortization and all non-cash restructuring charges, less software
development expenses classified as capital expenditures. In order to secure the
obligation under each agreement, each of the facilities is subject to a deed of
trust in favor of the financial institutions that financed the development and
acquisition of the respective facility. Bank of America, N.A. was the agent for
the syndicate of banks that funded the development of the Mountain
View and Roseville facilities, and ABN AMRO Bank, N.V. was the
agent for the syndicate of banks that funded the development of the
Milpitas facility. The Company has received waivers from the respective
syndicate of banks for each facility in relation to any non-compliance that
would have resulted from the delay in filing its 2003 Form 10-K or this Form
10-Q. 11. Comprehensive Income The following are the components of comprehensive income: Three Months Ended March 31,(in thousands)
    
    2004
    
    2003Net income
    
    $
    100,048
    
    
    $
    43,104Other comprehensive income, net of tax:Foreign currency translation adjustments
    
    
    (2,128
    )
    
    
    3,910Derivative financial instrument adjustments
    
    
    920
    
    
    
    (571
    )Unrealized gain (loss) on marketable securities
    
    
    1,295
    
    
    
    (197
    )Comprehensive income
    
    $
    100,135
    
    
    $
    46,246
 The components of accumulated other comprehensive income are: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Foreign currency translation adjustments
    
    $
    11,328
    
    
    $
    13,456Derivative financial instrument adjustments
    
    
    (6,862
    )
    
    
    (7,782
    )Unrealized gain on marketable securities
    
    
    1,793
    
    
    
    498Accumulated other comprehensive income
    
    $
    6,259
    
    
    $
    6,172
 12. Derivative Financial Instruments In September 2000, the Company entered into a three-year cross currency
cash flow hedge against foreign exchange fluctuations 11




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on foreign currency denominated cash flows under an intercompany loan
receivable. Under the terms of this derivative financial instrument, Euro
denominated fixed principal and interest payments to be received under the
intercompany loan were swapped for U.S. dollar-fixed principal and interest
payments. In September 2003, the intercompany loan was paid in full and the
derivative financial instrument was settled. In January 2002, the Company entered into two three-year pay fixed,
receive floating, interest rate swaps for the purpose of hedging cash flows on
variable interest rate debt related to Mountain View, California and Roseville,
Minnesota build-to-suit lease agreements. Under the terms of these interest
rate swaps, the Company makes payments based on the fixed rate and will receive
interest payments based on the 3-month LIBOR. The Companys payments on its
build-to-suit lease agreements are based upon a 3-month LIBOR plus a credit
spread. If critical terms of the interest rate swap or the hedged item do not
change, the interest rate swap will be considered to be highly effective with
all changes in the fair value included in other comprehensive income. If
critical terms of the interest rate swap or the hedged item change, the hedge
may become partially or fully ineffective, which could result in all or a
portion of the changes in fair value of the derivative recorded in the
statement of operations. The interest rate swaps settle the first day of
January, April, July and October until expiration. As of March 31, 2004, the
fair value of the interest rate swaps was $(6.9) million and was recorded in
other long-term liabilities. As a result of entering into the interest rate
swaps, the Company has mitigated its exposure to variable cash flows associated
with interest rate fluctuations. Because the rental payments on the leases are
based on the 3-month LIBOR and the Company receives 3-month LIBOR from the
interest rate swap counter-party, the Company has eliminated any impact to
raising interest rates related to its rent payments under the build-to-suit
lease agreements. On July 1, 2003, the Company began accounting for its
variable interest rate debt in accordance with FIN 46 (see Note 10). In accordance
with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, the Company had designated the interest rate swap as a cash
flow hedge of the variability embedded in the rent expense as it was based on a
3-moth LIBOR. However, with the adoption of FIN 46, the Company redesignated
the interest rate swap as a cash flow hedge of variability in interest expense
and it remains highly effective with all changes in the fair value included in
other comprehensive income. As of March 31, 2004, the total gross notional amount of the Companys
forward contracts was approximately $348.5 million, all hedging intercompany
accounts of certain of its international subsidiaries. The forward contracts
had terms of 35 days or less and settled on April 30, 2004. All foreign
currency transactions and all outstanding forward contracts are
marked-to-market at the end of the period with unrealized gains and losses
included in other income. The unrealized gain (loss) on the outstanding forward
contracts at March 31, 2004 was not material to the Companys consolidated
financial statements. 13. Segment Information The Company operates in one segment, storage and infrastructure software
solutions. The Companys products and services are sold throughout the world,
both directly to end-users and through a variety of indirect sales channels.
The Companys chief operating decision maker, the chief executive officer,
evaluates the performance of the Company based upon stand-alone revenue of
product channels and the geographic regions of the segment and does not receive
discrete financial information about asset allocation, expense allocation or
profitability from the Companys storage products or services. Geographic Information Three Months Ended March 31,(in thousands)
    
    2004
    
    2003User license fees (1):United States
    
    $
    172,510
    
    
    $
    157,891Europe (2)
    
    
    89,699
    
    
    
    58,264Other (3)
    
    
    40,200
    
    
    
    31,300Total user license fees
    
    
    302,409
    
    
    
    247,455Services (1):United States
    
    
    125,738
    
    
    
    100,953Europe (2)
    
    
    41,000
    
    
    
    29,928Other (3)
    
    
    16,600
    
    
    
    11,800Total services
    
    
    183,338
    
    
    
    142,681Total net revenue
    
    $
    485,747
    
    
    $
    390,136
 March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Long-lived assets (4):United States
    
    $
    1,959,407
    
    
    $
    1,902,181Europe (2)
    
    
    485,695
    
    
    
    483,315Other (3)
    
    
    13,064
    
    
    
    13,723Total
    
    $
    2,458,166
    
    
    $
    2,399,219
   12




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##### Table of Contents



(1)
    
    License and services revenues are attributed to geographic regions based
on location of customers.(2)
    
    Europe includes the Middle East and Africa.(3)
    
    Other includes Canada, Latin America, Japan and the Asia Pacific region.(4)
    
    Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes. Reconciliation
to total assets reported is as follows: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Total long-lived assets
    
    $
    2,458,166
    
    
    $
    2,399,219Other assets, including current
    
    
    3,043,152
    
    
    
    2,949,247Total consolidated assets
    
    $
    5,501,318
    
    
    $
    5,348,466
 For
the three months ended March 31, 2004, no end-user customer
accounted for 10% or
more of the Companys net revenue. For the three months ended March 31, 2003,
a distributor that sells the Companys products and
services through resellers, accounted for 10% of the Companys net revenue. User License Fees Information The Company markets and distributes its software products both as
stand-alone software products and as integrated product suites, also referenced
as application solutions. The Company derives its user license fees from the
licensing of its technology, segregated into three product areas: Data
Protection, which includes its NetBackup and Backup Exec product families;
Storage Management, which includes its File Systems, Volume Manager,
replication, Database Editions and storage resource management product
families; and Utility Computing Infrastructure, which includes its clustering,
high-availability offerings, application performance management, OpForce and
CommandCentral Service product families. User license fees from data
protection were $161.8 million and $139.3 million for the three months ended
March 31, 2004 and 2003, respectively. User license fees from storage
management were $83.9 million and $61.2 million for the three months ended
March 31, 2004 and 2003, respectively. User license fees from utility
computing infrastructure were $56.7 million and $47.0 million for the three
months ended March 31, 2004 and 2003, respectively. 14. Credit Facility During 2002, the Companys Japanese subsidiary entered into a short-term
credit facility with a multinational Japanese bank in the amount of 1.0 billion
Japanese yen ($9.5 million USD). At March 31, 2004, no amount was outstanding.
The short-term credit facility was renewed in March 2004 and is due to expire
in March 2005. Borrowings under the short-term credit facility bear interest at
Tokyo Inter Bank Offered Rate plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by VERITAS Software
Global LLC, a wholly-owned subsidiary of the Company. 15. Commitments and Contingencies Acquired Technology On October 1, 2002, the Company acquired volume replicator software
technology for $6.0 million and contingent payments of up to another $6.0
million based on future revenues generated by the acquired technology. The
contingent payments will be paid quarterly over 40 quarters, in amounts between
$150,000 and $300,000. The Company issued a promissory note payable in the
principal amount of $5.0 million, representing the present value of the
Companys minimum payment obligations under the purchase agreement for the
acquired technology, which are payable quarterly commencing in the first
quarter of 2003 and ending in the fourth quarter of 2012. The contingent
payments in excess of the quarterly minimum obligations will be paid as they
may become due. The outstanding balance of the note payable was $4.5 million as
of March 31, 2004 and $4.6 million as of December 31, 2003 and is included in
other long-term liabilities. SEC Related Matters 13




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##### Table of Contents



SEC
Investigation.As previously disclosed, since the third quarter of
2002, the Company has received subpoenas issued by the Securities Exchange
Commission in the investigation entitled In the Matter of AOL/Time Warner.The
SEC has requested information concerning the facts and circumstances
surrounding the Companys transactions with AOL Time Warner, or AOL, and
related accounting and disclosure matters. The Companys transactions with
AOL, entered into in September 2000, involved a software and services purchase
by AOL at a stated value of $50.0 million and the purchase by the Company of
advertising services from AOL at a stated value of $20.0 million. In March
2003, the Company restated its financial statements for 2001 and 2000 to
reflect a reduction in revenues and expenses of $20.0 million. The restatement
included an additional reduction in revenues and expenses of $1.0 million
related to two other contemporaneous transactions with other parties entered
into in 2000 that involved software licenses and the purchase of on-line
advertising services. In
June 2004, the Company restated its
financial statements for 2002 and 2001 and revised its previously
announced financial results for 2003. Prior to the restatement, the Company voluntarily disclosed to the staff of the SEC past accounting
practices applicable to its 2002 and 2001 financial statements that
the Company determined were not in
compliance with GAAP. For more information regarding the restatement of the Companys financial statements for
2002 and 2001, including the corresponding interim periods for 2002
and 2001,
and the interim periods ended March, June and September 2003, see Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Restatement of Consolidated Financial Statements,
Financial Statements and Supplementary Data  Selected
Quarterly Results of Operations and
Note 2 of the Notes to Consolidated Financial Statements in the
Companys Annual Report
on Form 10-K for the year ended December 31, 2003. The Company and its audit committee continue to cooperate with the SEC in
its review of these matters. At this time, the Company cannot predict the
outcome of the SECs review. Securities Class Actions.After the Company announced in January 2003 that
it would restate its financial results as a result of transactions entered into
with AOL in September 2000, numerous separate complaints purporting to be class
actions were filed in the United States District Court for the Northern
District of California alleging that the Company and some of its officers and
directors violated provisions of the Securities Exchange Act of 1934. The
complaints contain varying allegations, including that the Company made
materially false and misleading statements with respect to our 2000, 2001 and
2002 financial results included in its filings with the SEC, press releases and
other public disclosures. On May 2, 2003, a lead plaintiff and lead counsel
were appointed. A consolidated complaint was filed by the lead plaintiff on
July 18, 2003. On December 10, 2003, the District Court granted the defendants
motion to dismiss the consolidated complaint, with leave to amend. On May 19,
2004, the District Court granted the defendants motion to dismiss the
plaintiffs first amended complaint, with leave to amend. In addition, in 2003
several complaints purporting to be derivative actions were filed in California
state court against some of the Companys directors and officers. These
complaints are based on the same facts and circumstances as the class actions
and generally allege that the named directors and officers breached their
fiduciary duties by failing to oversee adequately the Companys financial
reporting. The state court complaints have been consolidated into the
action In
Re VERITAS Software Corporation Derivative Litigation, which was filed on May
8, 2003 in the Superior Court of Santa Clara County and is currently pending.
All of the complaints generally seek an unspecified amount of damages. The
cases are still in the preliminary stages, and it is not possible for the
Company to quantify the extent of its potential liability, if any. An
unfavorable outcome in any of these matters could have a material adverse
effect on the Companys business, financial condition, results of operations
and cash flow. In addition, defending any litigation may be costly and divert
managements attention from the day-to-day operations of the Companys
business. Other Litigation On January 10, 2003, Raytheon Company sued VERITAS along with Brocade
Communications Systems, Oracle Corporation, Overland Storage Inc., Qualstar
Corporation, QLogic Corporation, Ricoh Corporation and Spectra Logic Corporation in
the United States District Court for the Eastern District of Texas. Raytheon
alleged infringement of a patent entitled Mass Data Storage Library and sought
damages and an injunction against all defendants. On February 26, 2004, a
confidential settlement was agreed to by Raytheon and VERITAS, and on March 17,
2004, the case was dismissed with prejudice pursuant to the settlement
agreement. The settlement agreement did not have a material impact on the
Companys financial position or overall results of operations. On October 23, 2001, Storage Computer Corporation sued VERITAS in the
United States District Court for the Northern District of Texas alleging
infringement of one of Storage Computer Corporations patents. Currently,
Storage Computer Corporation is alleging the Company infringed two of their
U.S. patents. The Company has denied all material allegations in the
complaints, filed counterclaims for declaratory judgment of invalidity and
non-infringement of the patents-in-suit and alleged their infringement of one
of the Companys patents. Storage Computer Corporation is seeking damages of
approximately $50.0 million, treble damages, costs of suit and attorneys fees
and a permanent injunction from further alleged infringement. On March 12,
2004, the Court granted 14




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VERITAS motions for summary judgment of non-infringement of the two patents at
issue, and denied Storage Computers motion for partial summary judgment. The
Court did not address additional matters raised in VERITAS motion. Storage
Computer Corporation recently filed a notice of appeal. In addition to the legal proceedings listed above, the Company is also
party to various other legal proceedings that have arisen in the ordinary
course of business. While the Company currently believes that the ultimate
outcome of these proceedings, individually and in the aggregate, will not have
a material adverse effect on its financial position or overall trends in
results of operations, litigation is subject to inherent uncertainties. Were an
unfavorable ruling to occur, there exists the possibility of a material adverse
impact on the Companys results of operations and cash flows for the period in
which the ruling occurs. The estimate of the potential impact on the Companys
financial position or overall results of operations for the above discussed
legal proceedings could change in the future. For each of the matters noted, the Company does not believe that it is
probable that a liability has been incurred nor does it believe that the amount
of any loss can be reasonably estimated. Accordingly, no liability has been
accrued for these matters. 15




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations This quarterly report onForm 10-Qcontains forward-looking statements
within the meaning of the Securities Exchange Act of 1934 and the Securities
Act of 1933 that involve risks and uncertainties. These forward-looking
statements include statements about our revenue, revenue mix, gross margin,
operating expense levels, financial outlook, commitments under existing leases,
research and development initiatives, sales and marketing initiatives and
competition. In some cases, forward-looking statements are identified by words
such as believe, anticipate, expect, intend, plan, will, may and
similar expressions. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this quarterly
report onForm 10-Q. All of these forward-looking statements are based on
information available to us at this time, and we assume no obligation to update
any of these statements. Actual results could differ from those projected in
these forward-looking statements as a result of many factors, including those
identified in the section captioned Factors That May Affect Future Results
below, and elsewhere in this quarterly report. We urge you to review and
consider the various disclosures made by us in this report, and those detailed
from time to time in our filings with the Securities and Exchange Commission,
that attempt to advise you of the risks and factors that may affect our future
results. The following discussion should be read in conjunction with our financial
statements and accompanying notes, which appear elsewhere in this quarterly
report on Form 10-Q. Unless expressly stated or the context otherwise requires,
the terms we, our, us and VERITAS refer to VERITAS Software Corporation
and its subsidiaries. Overview The following Managements Discussion and Analysis of Financial Condition
and Results of Operations, or MD&A, is intended to help the reader understand
our company. MD&A is provided as a supplement to  and should be read in
conjunction with  our consolidated financial statements and the accompanying
notes. Our Business VERITAS Software Corporation is a leading independent supplier of storage
and infrastructure software products and services. Our software products
operate across a variety of computing environments, from PCs and workgroup
servers to enterprise servers and networking platforms in corporate data
centers. Our products protect, archive and recover business-critical data,
provide high levels of application availability, enhance and tune system and
application performance and enable recovery from disasters. Our solutions
enable businesses to reduce costs by efficiently and effectively managing their
IT infrastructure as they seek to maximize value from their IT investments. We generate revenues, income and cash flows by licensing software products
and selling related services to our customers, which include many leading
global corporations and small and medium-sized enterprises around the world
operating in a wide variety of industries. We market our products and related
services both directly and through a variety of indirect sales channels, which
include value added resellers, or VARs, distributors, system integrators, or
SIs, and original equipment manufacturers, or OEMs. Specifically, the channel
mix for the quarter ended March 31, 2004 was 60% from sales to end-users and
through VARs, and 40% from other indirect sales channels, which includes 10%
from our OEM partners. We invest significantly in research and development activities and for the
quarter ended March 31, 2004, we spent $79.9 million on research and
development. Our research and development efforts have been directed toward
developing new products for UNIX, Linux and Windows, developing new features
and functionality for existing products, integrating products across our
existing product lines, porting new and existing products to different
operating systems and expanding our product portfolio into new markets such as
application performance management, server provisioning and centralized service
level management. In the fourth quarter of 2003, we revised our revenue reporting categories
to more closely align them with the way we manage our business. Historically, we
categorized our revenue between Core and Emerging technologies. We
believe these new revenue categories will provide investors with
better insight into our results of operations. These new categories are Data Protection, Storage Management and
Utility Computing Infrastructure. Our revenue performance in these categories
is described in the User License Fees section of MD&A. Our Strategy Our strategy is to continue to compete in our current markets while
expanding and integrating our product portfolio in the area of utility
computing infrastructure, to continue to expand our product offering across key
operating system platforms, including UNIX, Linux and Windows, and to continue
to invest for growth in international markets. We expect to continue to grow the company organically and through
acquisitions. In 2003, we completed two key acquisitions that provided us with
essential components of our utility computing infrastructure product strategy,
including application performance 16




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management software and server provisioning technology. In January 2004, we
completed the acquisition of Ejasent, Inc., which added application migration
technology to our utility computing infrastructure portfolio. We will continue
to evaluate new strategic acquisitions in the future. For the quarter ended March 31, 2004, revenue from international sales,
consisting of sales of license and services to customers located outside the
United States, was $187.5 million, up 43% from the quarter ended March 31,
2003, and represented 39% of our total revenue. This growth is primarily the
result of our increased sales investment in our international geographies,
market strength in the emerging market areas in Europe and Asia and a favorable
impact of changes in foreign currency exchange rates related to the weaker U.S.
dollar. We expect to continue to grow international revenue faster than total
revenue by increasing the size and breadth of our international operations. Our Financial Position In the fiscal year ended December 31, 2003 and continuing through the
quarter ended March 31, 2004, our operating results were impacted by several
factors, including IT spending trends, the growing need of enterprises to
effectively manage storage and computing infrastructure, the strength of our
product offerings and the contribution of our recent acquisitions. In the first
quarter of 2004, we continued to experience stronger IT spending in our
customer base, resulting in stronger demand for our products and growth in our
user license fees. The acquisition of Precise and the integration of the
acquired products into our product offerings contributed to our growth, as did
our increased sales penetration in international markets and the favorable
impact of changes in foreign currency exchange rates. Additionally, our
services revenue grew significantly due to new service contracts associated
with user license fees as well as our success in increasing support contract
renewals within our customer base. Net revenue and net income per share are key measurements of our financial
condition. For the quarter ended March 31, 2004, net revenue was $485.7
million, an increase of 25% from the quarter ended March 31, 2003. Revenue from
user license fees was $302.4 million, an increase of 22% from 2003 and
representing 62% of total revenue. Services revenue in the quarter ended March
31, 2004 was $183.3 million, an increase of 28% from 2003, and representing 38%
of total net revenue. Diluted net income per share for the quarter ended March
31, 2004 was $0.22, up significantly from $0.10 in 2003, primarily as a result
of earnings leverage from revenue growth. We continue to retain a significant balance of cash and short-term
investments and to generate cash from operations. As of March 31, 2004, we had
approximately $2,684.0 million in cash, cash equivalents and short-term
investments, which represented approximately 74% of our tangible assets. We
generated approximately $202.7 million of cash from operating activities for
the quarter ended March 31, 2004. We utilize cash in ways that management
believes provides an optimal return on investment. Principal uses of our cash
include purchases of property and equipment, acquisition of businesses and
technologies and repurchase of common stock. Recent Acquisitions In January 2004, we acquired Ejasent, Inc., or Ejasent, a privately held
provider of application virtualization technology for utility computing. We
acquired Ejasent to add important application migration technology, which
allows IT personnel to move an application from one server to another without
disrupting or terminating the application. We accounted for the Ejasent
acquisition using the purchase method of accounting for total purchase
consideration of $61.4 million. We have included the results of operations of
Ejasent in our consolidated financial statements beginning January 20, 2004.
In connection with the acquisition of Ejasent, we allocated approximately $0.4
million of the purchase price to in-process research and development, or IPR&D,
that had not yet reached technological feasibility and had no alternative
future use. We have expensed this amount as a non-tax deductible charge in our
consolidated statement of operations for the quarter ended March 31, 2004. In June 2003, we acquired Precise, a provider of application performance
management products. We acquired Precise to expand our product and service
offerings into application performance management. We accounted for the Precise
acquisition using the purchase method of accounting for total purchase
consideration of $715.1 million. We have included the results of operations of
Precise in our consolidated financial statements beginning July 1, 2003. In
connection with the acquisition of Precise, we allocated approximately $15.3
million of the purchase price to IPR&D that had not yet reached technological
feasibility and had no alternative future use. We have expensed this amount as
a non-tax deductible charge in our consolidated statement of operations for the
year ended December 31, 2003. In January 2003, we acquired Jareva Technologies, Inc., or Jareva, a
privately held provider of automated server provisioning products that enable
businesses to automatically deploy additional servers without manual
intervention. We acquired Jareva to integrate its technology into our software
products. This technology enables our customers to optimize their investments
in server hardware by deploying new server resources on demand. We accounted
for the Jareva acquisition using the purchase method of 17




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accounting for total purchase consideration of $68.7 million. We have expensed
the acquired IPR&D of $4.1 million in our consolidated statement of operations
in the quarter ended March 31, 2003. Critical Accounting Policies and Estimates We believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and other significant areas that involve
managements judgments and estimates. These critical accounting policies and
estimates include:  
    
    revenue recognition;
    
    restructuring expenses and related accruals;
    
    impairment of long-lived assets; and
    
    accounting for income taxes. These policies and estimates and our procedures related to these policies
and estimates are described in detail below and under specific areas within the
discussion and analysis of our financial condition and results of operations.
Please refer to the Notes to Consolidated Financial Statements in our annual
report on Form 10-K for the year ended December 31, 2003 for further discussion
of our accounting policies and estimates. Revenue Recognition We make significant judgments related to revenue recognition. For each
arrangement, we make significant judgments regarding the fair value of multiple
elements contained in our arrangements, judgments regarding whether our fees
are fixed or determinable and judgments regarding whether collectibility is
probable. We also make significant judgments when accounting for concurrent
transactions with our suppliers and in our accounting for potential product
returns and, in some cases, we have discretion over the timing of product
shipments. These judgments, and their effect on revenue recognition, are
discussed below. Multiple Element Arrangements We typically enter into arrangements with customers that include perpetual
software licenses, maintenance and technical support. Some arrangements may
also include consulting and education services. Software licenses are sold as
site licenses or on a per copy basis. Site licenses give customers the right to
copy licensed software on either a limited or unlimited basis during a
specified term. Per copy licenses give customers the right to use a single copy
of licensed software. We make judgments regarding the fair value of each
element in the arrangement and generally account for each element separately. Assuming all other revenue recognition criteria are met, license revenue
is recognized upon delivery using the residual method in accordance with SOP
No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions. Under the residual method, we allocate and
defer revenue for the undelivered elements based on vendor-specific objective
evidence, or VSOE, of fair value, and recognize the difference between the
total arrangement fee and the amount deferred for the undelivered elements as
revenue. Undelivered elements typically include maintenance and technical
support, consulting and education services. The determination of fair value of
each undelivered element in multiple element arrangements is based on the price
charged when the same element is sold separately. If sufficient evidence of
fair value cannot be determined for any undelivered item, all revenue from the
arrangement will be deferred until VSOE of fair value can be established or
until all elements of the arrangement have been delivered. If the only
undelivered element is maintenance and technical support for which we cannot
establish VSOE, we will recognize the entire arrangement fees ratably over the
maintenance and support term. Our VSOE of fair value for maintenance and technical support is based upon
stated renewal rates for site licenses and historical renewal rates for per
copy licenses. Maintenance and technical support revenue is recognized ratably
over the maintenance term. Our VSOE of fair value for education services is
based upon the price charged when sold separately. Revenue is recognized when
the customer has completed the course. For annual education passes, revenue is
recognized ratably over the one-year term. Our VSOE of fair value for
consulting is based upon the price charged when sold separately. Consulting
revenue is recognized as work is performed when reasonably dependable estimates
can be made of the extent of progress toward completion, contract revenue and
contract costs. Otherwise, consulting revenue is recognized when the services
are complete. The Fee is Fixed or Determinable 18




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We make judgments, at the outset of an arrangement, regarding whether the
fees are fixed or determinable. Our customary payment terms are generally
within 30 days after invoice date. Arrangements with payment terms extending
beyond 90 days after invoice date are not considered to be fixed or
determinable, in which case revenue is recognized as the fees become due and
payable. Collection is Probable We also make judgments at the outset of an arrangement regarding whether
collection is probable. Probability of collection is assessed on a
customer-by-customer basis. We typically sell to customers with whom we have a
history of successful collections. New customers are subjected to a credit
review process to evaluate the customers financial position and ability to
pay. If it is determined at the outset of an arrangement that collection is not
probable, revenue is recognized upon receipt of payment. Indirect Channel Sales We generally recognize revenue from licensing of software products through
our indirect sales channel upon sell-through or when evidence of an end-user
exists. For certain types of customers, such as distributors, we recognize
revenue upon receipt of a point of sales report, which is our evidence that the
products have been sold through to an end user. For resellers, we recognize
revenue when we obtain evidence that an end user exists, which is usually when
the software is delivered. For licensing of our software to original equipment
manufacturers, or OEMs, royalty revenue is recognized when the OEM reports the
sale of the software products to an end-user customer, generally on a quarterly basis. In
addition to license royalties, some OEMs pay an annual flat fee and/or support
royalties for the right to sell maintenance and technical support to the
end-user. We recognize revenue from OEM support royalties and fees ratably over
the term of the support agreement. Transactions with our Suppliers Some of our customers are also our suppliers. Occasionally, in the normal
course of business, we purchase goods or services for our operations from these
suppliers at or about the same time we license our software to them. We also
have multi-year agreements under which we receive sub-licensing royalty
payments from OEMs from whom we may also purchase goods or services. We
identify and review significant transactions to confirm that they are
separately negotiated at terms we consider to be arms length. In cases where
the transactions are not separately negotiated, we apply the provisions of
Accounting Principles Board, or APB, Opinion No. 29, Accounting for Nonmonetary
Transactions, and Emerging Issues Task Force Issue, or EITF, No. 01-02,
Interpretations of APB Opinion 29. If the fair values are reasonably
determinable, revenue is recorded at the fair values of the products delivered
or products or services received, whichever is more readily determinable. If
we cannot determine fair value of either of the goods or services involved
within reasonable limits, we record the transaction on a net basis. License
revenue associated with software licenses entered into with our suppliers at or
about the same time that we purchase goods or services from them is not material to
our consolidated financial statements. Product Returns We estimate
potential future product returns based on our analysis of historical
return rates and reduce current period product revenue
accordingly. Actual returns may vary from estimates if we experience a change from historical sales and returns patterns
or if there are unanticipated changes in competitive or economic conditions
that affect our actual returns. Delivery of Software Products Delivery of our software products is a prerequisite to the recognition of
software license revenue. We consider delivery complete when the
software products have been shipped and the customer has access to license keys. If arrangements
include an acceptance provision, we defer the revenue and recognize it upon the
earlier of receipt of written customer acceptance or expiration of the
acceptance period. In some cases, we have discretion over the timing of
product shipments, which affects the
timing of revenue recognition for software license orders. In those cases, we
consider a number of factors, including: the impact of the related license
revenue on our business plan; the delivery dates requested by customers and
resellers; the amount of software license orders received in the quarter; the
amount of software license orders shipped in the quarter; the degree to which
software license orders received are concentrated at the end of a quarter; and
our operational capacity to fulfill software license orders at the end of a
quarter. Restructuring Expenses and Related Accruals 19




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We monitor and regularly evaluate our organizational structure and
associated operating expenses. Depending on events and circumstances, we may
decide to restructure our operations to reduce operating costs. We applied the provisions of EITF Issue No. 94-3, Liability Recognized for
Certain Employee Termination Benefits and other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring), to all of our
restructuring activities initiated before January 1, 2003. For exit or disposal
activities initiated on or after January 1, 2003, we apply the provisions of
Statement of Financial Accounting Standards, or SFAS, No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Our restructuring costs and any resulting accruals involve significant
estimates made by management using the best information available at the time
the estimates are made, some of which may be provided by third parties. These
estimates include facility exit costs, such as lease termination costs, and
amount and timing of sublease income and related sublease expense costs, such
as brokerage fees. We regularly evaluate a number of factors to determine the appropriateness
and reasonableness of our restructuring accruals. These factors include, but
are not limited to, our ability to enter into sublease or lease termination
agreements and market data about lease rates, timing and term of potential
subleases and costs associated with terminating certain leases on vacated
facilities. Our estimates involve a number of risks and uncertainties, some of which
are beyond our control, including future real estate market conditions and our
ability to successfully enter into subleases or lease termination agreements
upon terms as favorable as those assumed under our restructuring plan. Actual
results may differ significantly from our estimates and may require adjustments
to our restructuring accruals and operating results in future periods. For
example, if the actual proceeds from our sublease agreements were to differ by
10% from the estimate we included in our facility restructuring plan, the
facility restructuring charge recorded in operating expenses during the fourth
quarter of 2002 would have been different by approximately $6 million. Impairment of Long-Lived Assets We review our goodwill for impairment annually or whenever events or
changes in circumstances suggest that the carrying amount may not be
recoverable or at least once a year. We are required to test our goodwill for
impairment at the reporting unit level. We have determined that we have only
one reporting unit. The test for goodwill impairment is a two-step process:     We completed this test during the fourth quarter of 2003 and were not
required to record an impairment loss on goodwill. We review our long-lived assets, including property and equipment and
other intangibles, for impairment whenever events indicate that their carrying
amount may not be recoverable. When we determine that one or more impairment
indicators are present for an asset, we compare the carrying amount of the
asset to net future undiscounted cash flows that the asset is expected to
generate. If the carrying amount of the asset is greater than the net future
undiscounted cash flows that the asset is expected to generate, we would
compare the fair value to the book value of the asset. If the fair value is
less than the book value, we would recognize an impairment loss. The impairment
loss would be the excess of the carrying amount of the asset over its fair
value. Some of the events that we consider as impairment indicators for our
long-lived assets, including goodwill, are:  
    
    significant underperformance of our company relative to expected operating results;
    
    our net book value compared to our market capitalization;
    
    significant adverse economic and industry trends;
    
    significant decrease in the market value of the asset;
    
    the extent to which we use an asset or changes in the manner which we use it; and
    
    significant changes to the asset since we acquired it. 20




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Significant assumptions and estimates are made when determining if our
goodwill or other long-lived assets have been impaired or if there are
indicators of impairment. We base our estimates on assumptions that we believe
to be reasonable, but actual future results may differ from those estimates as
our assumptions are inherently unpredictable and uncertain. Our estimates
include estimates of future market growth and trends, forecasted revenue and
costs, expected periods of asset utilization, appropriate discount rates and
other variables. Based on our assumptions and estimates, we do not expect to
record an impairment loss on our long-lived assets in the near future. Accounting for Income Taxes We are required to estimate our income taxes in each federal, state and
international jurisdiction in which we operate. This process requires that we
estimate the current tax exposure as well as assess temporary differences
between the accounting and tax treatment of assets and liabilities, including
items such as accruals and allowances not currently deductible for tax
purposes. The income tax effects of the differences we identify are classified
as current or long-term deferred tax assets and liabilities in our consolidated
balance sheets. Our judgments, assumptions and estimates relative to the
current provision for income tax take into account current tax laws, our
interpretation of current tax laws and possible outcomes of current and future
audits conducted by foreign and domestic tax authorities. Changes in tax laws
or our interpretation of tax laws and the resolution of current and future tax
audits could significantly impact the amounts provided for income taxes in our
balance sheet and results of operations. We must also assess the likelihood
that deferred tax assets will be realized from future taxable income and, based
on this assessment, establish a valuation allowance, if required. As of March
31, 2004, we determined the valuation allowance to be $138.4 million based upon
uncertainties related to our ability to recover certain deferred tax assets.
These deferred tax assets are in specific geographical or jurisdictional
locations or are related to losses on strategic investments that will only be
realized with the generation of future capital gains within a limited time
period. Our determination of our valuation allowance is based upon a number of
assumptions, judgments and estimates, including forecasted earnings, future
taxable income and the relative proportions of revenue and income before taxes
in the various domestic and international jurisdictions in which we operate.
Future results may vary from these estimates, and at this time it is not
practicable to determine if we will need to establish an additional valuation
allowance and if it would have a material impact on our financial statements. Restatement of Consolidated Financial Statements As a result of the findings of an investigation into past accounting
practices, we restated our financial statements for the years ended December
31, 2002 and 2001, including the corresponding interim periods for
2002 and 2001, and
the interim periods ended March, June and September 2003. We also revised our
previously announced financial results as of and for the quarter ended March
31, 2004 and for the quarter and year ended December 31, 2003. For the quarter
ended March 31, 2004, these adjustments impacted our previously announced
financial results as follows: total net revenue decreased from $487 million to
$486 million and net income decreased from $103 million to $100 million.
Diluted earnings per share for the quarter ended March 31, 2004 decreased from
$0.23 to $0.22. For the quarter ended March 31, 2003, these adjustments
impacted our previously issued financial results as follows: total net revenue
decreased from $394 million to $390 million and net income
remained at approximately $43 million.
Diluted earnings per share for the quarter ended March 31, 2003 remained
unchanged at $0.10. Please refer to our annual report on Form 10-K for the year
ended December 31, 2003 for additional information regarding the impact of the restatement on our quarterly
results during the years ended December 31, 2003, 2002 and 2001. Results of Operations Net Revenues Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeTotal net revenue
    
    $
    485.7
    
    
    $
    390.1
    
    
    
    25
    %
 For the quarter ended March 31, 2004, our total net revenue increased by
$95.6 million or 25% due primarily to the growth in user license fees,
increased sales penetration of international markets, revenues as a result of
our acquisition of Precise and the continued growth of our services
businesses. During 2003 and 2004, as part of our strategy to increase our net
revenues, we continued expanding our product portfolio and offerings,
increased the computer platforms supported by our software and continued to
invest in sales and service capacity internationally. While we believe that
the increase in total net revenue achieved in recent periods is not
necessarily indicative of future results, we expect total net revenue to
continue to increase in 2004 assuming increased penetration of international
markets, the benefit of new product offerings and continued growth of services
revenue, as well as improved general 21




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economic conditions. International Sales and Operations Our international sales consist of sales of licenses and services to
customer locations outside the United States and are generated primarily
through our international sales subsidiaries. International revenue, a
majority of which is collectible in foreign currencies, accounted for
approximately 39% and 34% of our total net revenue for the quarters ended March
31, 2004 and 2003, respectively. Our international revenue increased 43% to
$187.5 million year-over-year. During 2003 and through the first quarter of
2004, our international revenue increased across all geographic areas and we
saw greater strength in the emerging markets in Europe, Asia-Pacific and
Japan. Additionally, during 2004 our international sales benefited from
favorable foreign currency exchange rate movements relative to the weaker U.S.
dollar. Excluding the benefit from foreign currency movement, the increase in
international sales would have been 32% over the first quarter of 2003. We expect that our international revenue will continue to
increase in absolute dollars and as a percent of total revenue for the

remainder of 2004 because of the continued expansion of international markets
and the focus and increased investment by our company in these markets. We believe that a key component of our growth strategy is the continued
expansion of our international operations. We currently have sales and services
offices and resellers located in Europe, Asia-Pacific and Japan, Latin America,
Canada, Africa and the Middle East, and research and development centers in
India, the United Kingdom and Israel. International expansion will require us
to establish additional foreign offices, hire additional personnel and recruit
new international resellers, resulting in the diversion of management attention
and the expenditure of financial resources. To the extent that we are unable to
meet these additional requirements, growth in international sales will be
limited, which would have an adverse effect on our business, operating results
and financial condition. User License Fees We market and distribute our software products both as standalone software
products and as integrated product suites, which we also refer to as
application solutions. We derive our user license fees from the licensing of
our technology, segregated into three product areas: Data Protection, which
includes our NetBackup and Backup Exec product families; Storage Management,
which includes our File Systems, Volume Manager, replication, Database Editions
and storage resource management product families; and Utility Computing
Infrastructure, which includes our clustering, high-availability offerings,
application performance management, or APM, OpForce and CommandCentral Service
product families. Three Months EndedMarch 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeUser license fees:Data protection
    
    $
    161.8
    
    
    $
    139.3
    
    
    
    16
    %Storage management
    
    
    83.9
    
    
    
    61.2
    
    
    
    37Utility computing infrastructure
    
    
    56.7
    
    
    
    47.0
    
    
    
    21Total user license fees
    
    $
    302.4
    
    
    $
    247.5
    
    
    
    22
    %As a percentage of user license fees:Data protection
    
    
    53
    %
    
    
    56
    %Storage management
    
    
    28
    
    
    
    25Utility computing infrastructure
    
    
    19
    
    
    
    19Total user license fees
    
    
    100
    %
    
    
    100
    %As a
percentage of total net revenue
    
    
    62
    %
    
    
    63
    %
 For the quarter ended March 31, 2004 compared to March 31, 2003, user
license fees increased by $54.9 million or 22% due to increases across each
product category. Data protection increased by $22.5 million due primarily to
increases in our core backup family of products, including NetBackup 5.0 which
was introduced during the fourth quarter of 2003. Storage management increased
$22.7 million due primarily to increases in our replication and storage
resource management products, including the introduction of Storage Foundation
Suite 4.0 which was introduced during the first quarter of 2004. Utility
computing infrastructure increased by $9.7 million due primarily to increases
in clustering, Database Editions/Advanced Cluster and the addition of APM
products as a result of our acquisition of Precise. User license fees from OEMs accounted for 12% of user license fees for
the quarters ended March 31, 2004 and 2003. Unfilled
license orders and deferred license revenue were approximately
$78 million and $53 million at March 31, 2004 and
2003, respectively. Unfilled license orders represent cancelable and
non-cancelable license orders that have been received from our
customers for the license of our software products but have not been
shipped as of the end of the applicable fiscal period. Deferred
license revenue represents license orders for our software products
that have been billed to and paid by the customer and for which
revenue has not yet been earned, but is generally earned within the
next year. 22




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For the quarter ended March 31, 2004, we completed 25 transactions valued
at over $1.0 million, including services, and 246 transactions valued at over
$100,000. For the quarter ended March 31, 2003, we completed 12 transactions
valued at over $1.0 million, including services, and 202 transactions valued
at over $100,000. Services Revenue Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeServices revenue
    
    $
    183.3
    
    
    $
    142.7
    
    
    
    28
    %As a percentage of net revenue
    
    
    38
    %
    
    
    37
    %
 We derive our services revenue primarily from contracts for software
maintenance and technical support and, to a lesser extent, consulting and
education and training services. The increase in services revenue for the first
quarter of 2004 over 2003 was due primarily to the increase in software
maintenance and technical support revenue of 30%. The increase in software
maintenance and technical support revenue in the first quarter of 2004 was the
result of a larger installed base of customers and a greater focus on renewing
customer support contracts, particularly internationally. We expect our
services revenue to increase in absolute dollars and as a percentage of net
revenue as we continue to grow our installed base of customers, continue our
focus on renewing our software maintenance and technical support contracts, and
increase demand for our consulting and education and training services. Deferred
services revenue, which in the case of maintenance and technical
support is generally recognized over the maintenance and support period of twelve months,
or in the case of professional services, training or consulting services
is generally recognized over the period the specifics service are rendered, was approximately $400
million and $269 million at March 31, 2004 and 2003, respectively. The increase
in deferred services revenue is the result of significant growth in our
installed base of customers under software maintenance and technical support

contracts and our continued focus on maintenance and technical support contract
renewals. Cost of Revenue Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeCost of revenue
    
    $
    79.2
    
    
    $
    79.0
    
    
    
    As a percentage of net revenue
    
    
    16
    %
    
    
    20
    %
 Gross
profit on user
license fees, excluding amortization of developed
technology, is substantially higher than gross profit on services revenue,
reflecting the low materials, packaging and other costs of software products
compared with the relatively high personnel costs associated with providing
maintenance and technical support, consulting and education services. Cost of
services varies depending upon the mix of maintenance and technical support,
consulting and education services. We expect gross profit to fluctuate in the
future, reflecting changes in royalty rates on licensed technologies, the mix
of license and services revenue and the timing of continued investment in our
services organization and the recognition of revenue that we expect as a result
of those investments. Cost of User License Fees (including amortization of developed technology) Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeCost of user license fees:User license fees
    
    $
    9.5
    
    
    $
    11.9
    
    
    
    (20
    )%Amortization of developed technology
    
    
    3.8
    
    
    
    14.8
    
    
    
    (74
    )%Total cost of user license fees
    
    $
    13.3
    
    
    $
    26.7
    
    
    
    (50
    )%Gross profit:User license fees including amortization of developed
technology
    
    
    96
    %
    
    
    89
    %
 23




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Cost of user license fees consists primarily of amortization of developed
technology, royalties, media, manuals and distribution costs. The amortization
of developed technology is related primarily to acquisitions completed during
1999 and the first and second quarters of 2003. If we had excluded the
amortization of developed technology from the cost of user license fees, the
gross profit on user license fees would have been 97% and 95% for the quarters
ended March 31, 2004 and 2003, respectively. The gross profit on user license
fees may vary from period to period based on the license revenue mix because
some of our products carry higher royalty rates than others. Excluding the
amortization of developed technology, we expect gross profits on user license
fees to remain relatively constant. The decrease in amortization of developed technology for the first quarter
of 2004 over 2003 was primarily the result of the developed technology related
to the 1999 acquisitions reaching full amortization in 2003. This decrease was
partially offset by the amortization of developed technology related to the
Precise, Jareva and Ejasent acquisitions. We expect amortization of developed
technology to be approximately $4 million per quarter for the remainder of 2004
for our current intangible assets. Cost of Services Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeCost of service revenue
    
    $
    65.8
    
    
    $
    52.3
    
    
    
    26
    %Gross profit
    
    
    64
    %
    
    
    63
    %
 Cost of services consists primarily of personnel-related costs in
providing maintenance and technical support, consulting and education to
customers. The gross profit improvement for the first quarter of 2004 over 2003
was primarily the result of the increase in maintenance and support revenues of
30%, while related expenses increased only 27% as we continued to take
advantage of the economies of scale of the larger installed customer base. We
expect gross profit on services revenue to remain stable or increase slightly
as a result of higher maintenance and support revenue and reductions in labor
costs associated with technical support services by increasing our use of lower
cost operations in India. Operating Expenses Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeOperating expenses
    
    $
    273.5
    
    
    $
    246.4
    
    
    
    11
    %As a percentage of net revenue
    
    
    56
    %
    
    
    63
    %
 Operating expenses for the quarter ended March 31, 2004 increased by $27.1
million compared to 2003 due primarily to an increase in selling and marketing,
research and development and general and administrative expenses. The
increase in operating
expenses was the result of an overall increase in operations offset by a
decrease from the first quarter of 2003 of $15.8 million for
amortization of other intangibles from
our 1999 acquisitions reaching full amortization in 2003 and a decrease of $3.7
million of IPR&D year over year. We believe that the percentage changes in
total operating expenses in these periods are not necessarily indicative of
future results. Our operating expenses include selling and marketing expenses,
research and development expenses, general and administrative expenses,
amortization of other intangibles and IPR&D. Selling and Marketing Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeSelling and marketing
    
    $
    143.0
    
    
    $
    115.3
    
    
    
    24
    %As a percentage of net revenue
    
    
    29
    %
    
    
    30
    %
 Selling and marketing expenses consist primarily of salaries, related
benefits, commissions, consultant fees and other costs associated with our
sales and marketing efforts. The increase for the first quarter of 2004 over
2003 of $27.7 million was primarily the result of an increase in sales
commissions, compensation and benefit costs due to an increase in personnel
partially resulting from the Precise acquisition and higher sales commissions
resulting from the increase in license revenues. Although our selling and
marketing expenses decreased as a percentage of total revenues, they remained
relatively constant when compared to user license fees at 24




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approximately 47% for each of the first quarters of 2004 and 2003. We expect
selling and marketing expenses to continue to grow in absolute dollars for 2004
and to remain relatively constant as a percentage of user license fees for
fiscal year 2004. Research and Development Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeResearch and development
    
    $
    79.9
    
    
    $
    70.6
    
    
    
    13
    %As a percentage of net revenue
    
    
    16
    %
    
    
    18
    %
 Research and development expenses consist primarily of salaries, related
benefits, third-party consultant fees and other engineering related costs. The
increase of $9.3 million for the first quarter of 2004 over 2003 was primarily
the result of increases in compensation costs from an increase in staffing
levels partially due to the Precise acquisition and an increase in outside
services used to supplement engineering personnel. We believe that a
significant level of research and development investment is required to remain
competitive and we expect to continue to invest in research and development in
2004 at current levels as a percentage of revenue, including increasing our use
of lower cost operations in India. General and Administrative Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeGeneral and administrative
    
    $
    47.7
    
    
    $
    38.2
    
    
    
    25
    %As a percentage of net revenue
    
    
    10
    %
    
    
    10
    %
 General and administrative expenses consist primarily of salaries, related
benefits and fees for professional services, such as legal and accounting
services. The increase of $9.5 million for the first quarter of 2004 over 2003
was primarily the result of an increase in compensation and benefit costs,
depreciation expense as a result of consolidating certain leased buildings
costs associated with our recent restatement and compliance with our corporate
governance initiatives, including those requirements under the Sarbanes-Oxley
Act of 2002. We expect to incur costs related to our restatement in the second
quarter of 2004 and expect general and administrative expenses to remain
relatively constant as a percentage of revenue in 2004. Amortization of Other Intangibles Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeAmortization of other intangibles
    
    $
    2.4
    
    
    $
    18.2
    
    
    
    (87
    )%As a percentage of net revenue
    
    
    
    %
    
    
    5
    %
 Amortization of other intangibles principally represents amortization of
distribution channels, trademarks and other intangibles related to
acquisitions. The decrease in amortization of other intangibles for the first
quarter of 2004 over 2003 was primarily due to other intangibles related to the
1999 acquisitions reaching full amortization during the second quarter of 2003.
The amortization of other intangibles also includes intangibles from the
acquisition of Precise, Jareva and Ejasent which are being amortized over the
estimated useful lives of two to four years. We expect amortization of other
intangibles to be approximately $2 million per quarter for the remainder of
2004 for our current intangible assets. In-Process Research and Development In connection with our acquisition of Ejasent in January 2004, we
allocated $0.4 million of the purchase price to IPR&D, which represents
technology we identified as having not reached technological feasibility and
having no alternative future use. In connection with our acquisition of Jareva
in January 2003, we allocated $4.1 million of the purchase price to IPR&D. Interest and Other Income, Net 25




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Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    

    % ChangeInterest and other income, net
    
    $
    11.3
    
    
    $
    11.0
    
    
    
    3
    %As a percentage of net revenue
    
    
    2
    %
    
    
    3
    %
 Interest and other income, net, includes interest income on our cash and
investments held and, to a lesser extent, foreign currency exchange gains or
losses. Interest Expense Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeInterest expense
    
    $
    5.7
    
    
    $
    7.7
    
    
    
    (26
    )%As a percentage of net revenue
    
    
    1
    %
    
    
    2
    %
 Interest expense for the quarter ended March 31, 2004 consisted of
interest recorded under the 0.25% convertible subordinated notes issued in
August 2003 and interest of approximately $4 million per quarter, beginning in
July 2003, as a result of our adoption of Financial Accounting Standards Board,
or FASB, Interpretation Number, or FIN, 46, Consolidation of Variable Interest
Entities, which required us to consolidate the properties from our
build-to-suit lease agreements and related debt in our financial statements.
Previously, interest on the build-to-suit lease agreements was recorded as rent
expense in cost of revenue and operating expenses. Interest expense for the
quarter ended March 31, 2003 consisted of interest recorded under the 1.856%
convertible subordinated notes issued in August 1999 and partially redeemed for
cash and partially converted to common stock in August 2003 and interest
recorded under the 5.25% convertible subordinated notes issued in October 1997
and converted to common stock in August 2003. We expect interest expense for
the second quarter of 2004 to be approximately $5 million representing the
interest on the 0.25% convertible subordinated notes, including the additional
interest as a result of our registration statement having not been declared
effective by the SEC on or before the 180th day following the original issuance
date of the 0.25% convertible subordinated notes, and the interest on the
build-to-suit lease agreements. Gain (Loss) on Strategic Investments Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeGain (loss) on strategic investments
    
    $
    7.5
    
    
    $
    (3.5
    )
    
    
    (314
    )%As a percentage of net revenue
    
    
    2
    %
    
    
    (1
    )%
 For the quarter ended March 31, 2004, we recognized a gain on strategic
investments of $7.5 million related to the sale of one of our investments.
During the first quarter of 2003, we recognized impairment losses of $3.5
million on our strategic investments when we determined that there had been a
decline in the fair value of these investments that was other than temporary.
These losses represented write-downs of the carrying amount of our investments. Provision for Income Taxes Three MonthsEnded March 31,(in millions, except percentages)
    
    2004
    
    2003
    
    % ChangeIncome taxes
    
    $
    46.1
    
    
    $
    21.4
    
    
    
    115
    %As a percentage of net revenue
    
    
    9
    %
    
    
    5
    %
 Our effective tax rate for the first quarter of 2004 differed from the
combined federal and state statutory rates due primarily to the tax effect of
international operations and amortization of intangible assets. Our effective
tax rate for the quarter ended March 31, 2004 was approximately 32% compared to
33% for the quarter ended March 31, 2003. The reduction in our effective tax
rate for the first quarter of 2004 over the first quarter of 2003 is primarily
the result of the increased share of international revenue as a percentage of
total worldwide revenue combined with a lower effective tax rate associated
with our international operations. Accrued Acquisition and Restructuring Costs In the fourth quarter of 2002, our board of directors approved a facility
restructuring plan to exit and consolidate certain of our facilities located in
17 metropolitan areas worldwide. The facility restructuring plan was adopted to
address overcapacity in our facilities as a result of lower than planned
headcount growth in these metropolitan areas. In connection with this facility
restructuring 26




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plan, we recorded a net restructuring charge to operating expenses of $96.1
million in the fourth quarter of 2002. This restructuring charge is comprised
of (i) $86.9 million associated with terminating and satisfying remaining lease
commitments, partially offset by sublease income net of related sublease costs
and (ii) write-offs of $9.2 million for net assets. Total cash outlays under
this restructuring plan are expected to be approximately $86.9 million. Restructuring costs will generally be paid over the remaining lease terms,
ending at various dates through 2021, or over a shorter period as we may
negotiate with our lessors. We expect the majority of costs will be paid by the
year ending December 31, 2008. During
the fourth quarter of 2002, we began vacating excess facilities, and
by January 31, 2004 we had vacated all excess facilities associated with this
restructuring. We began realizing cost savings from the exiting of these
facilities during the third quarter of 2003. We are in the process of seeking
suitable subtenants for these facilities. Our estimates of the facility
restructure charge may vary significantly depending, in part, on factors that
are beyond our control, including the commercial real estate market in the
applicable metropolitan areas, our ability to obtain subleases related to these
facilities and the time period to do so, the sublease rental market rates and
the outcome of negotiations with lessors regarding terminations of some of the
leases. Adjustments to the accrued restructuring costs will be made if actual
lease exit costs or sublease income differ from amounts currently expected.
Because a portion of the accrued restructuring costs relate to international
locations, the accrual will be affected by exchange rate fluctuations. For the quarter ended March 31, 2004, we incurred acquisition related
costs of $13.6 million related to the acquisition of Ejasent. As of December
31, 2003, accrued acquisition and restructuring costs consisted of the facility
restructuring plan discussed above and other accrued acquisition and
restructuring charges incurred from 1999 through 2003, net of cash payments
made. The components of the accrued acquisition and restructuring costs and
movements within these components through March 31, 2004 were as follows: Direct
    
    InvoluntaryTransaction
    
    Termination
    
    Facility
    
    Asset(in millions)
    
    Costs
    
    Benefits
    
    Related Costs
    
    Write-offs
    
    TotalBalance at December 31, 2003
    
    $
    0.6
    
    
    $
    
    
    
    $
    91.4
    
    
    $
    2.1
    
    
    $
    94.1Additions
    
    
    2.1
    
    
    
    11.4
    
    
    
    0.1
    
    
    
    
    
    
    
    13.6Cash payments
    
    
    (1.8
    )
    
    
    (11.3
    )
    
    
    (5.2
    )
    
    
    
    
    
    
    (18.3
    )Non-cash charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (2.1
    )Impact of exchange rates
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7Balance at March 31, 2004
    
    $
    0.9
    
    
    $
    0.1
    
    
    $
    87.0
    
    
    $
    
    
    
    $
    88.0
 Recent Accounting Pronouncements There are no applicable recent accounting pronouncements requiring
disclosure. Liquidity and Capital Resources Cash Flows Our cash, cash equivalents and short-term investments totaled $2,684.0
million at March 31, 2004 and represented 74% of our tangible assets. Our
cash, cash equivalents and short-term investments totaled $2,503.0 million at
December 31, 2003 and represented 71% of our tangible assets. Cash and cash
equivalents are highly liquid with original maturities of 90 days or less.
Short-term investments consist mainly of commercial paper, medium-term notes,
corporate notes, government securities (taxable and non-taxable), asset-backed
securities and auction market securities. Operating activities provided cash of $202.7 million for the three months
ended March 31, 2004, primarily due to net income of $100.0 million, adjusted
for depreciation and amortization of $30.1 million, a decrease in accounts
receivable of $93.3 million and increases in income and other taxes payable of
$40.0 million and deferred revenue of $25.7 million which were partially offset
by an increase in other assets of $22.6 million and decrease in accounts
payable of $9.3 million, accrued compensation of $36.6 million and other
accrued liabilities of $14.7 million. Operating activities provided cash of
$206.8 million for the three months ended March 31, 2003, primarily due to net
income of $43.1 million, adjusted for depreciation and amortization of $31.4
million, amortization of other intangibles and developed technology of $33.0
million, a decrease in accounts receivable of $96.5 million and an increase in
income and other taxes payable of $31.7 million and deferred revenue of $16.8
million, partially offset by a decrease in deferred income taxes of $13.1
million, in accrued compensation of $31.5 million and other accrued liabilities
of $12.7 million. We expect cash flows from operating activities to decrease in
the second quarter of 2004. 27




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Investing activities used cash of $437.8 million for the three months
ended March 31, 2004, primarily due to net purchases of short-term investments
of $349.3 million, purchases of property and equipment of $28.1 million and
purchases of businesses and technology net of cash acquired of $60.4 million.
Investing activities provided cash of $38.4 million for the three months ended
March 31, 2003, primarily due to the net sales of short-term investments of
$114.9 million partially offset by purchases of property and equipment of $19.9
million and purchases of businesses and technology, net of cash acquired of
$56.6 million. Financing activities provided cash of $43.4 million and $20.0 million for
the three months ended March 31, 2004 and 2003, respectively, as a result of
the issuance of common stock under our employee stock plans. We continue to evaluate alternative uses of our cash including, but not
limited to, exercising our purchase option for the properties subject to the
build-to-suit lease arrangements, repurchasing additional amounts of our common
stock and strategic acquisitions, any of which could reduce the amount of
available cash and cash equivalents. Convertible Subordinated Notes In August 2003, we issued $520.0 million of 0.25% convertible subordinated
notes due August 1, 2013, or 0.25% Notes, for which we received net proceeds of
approximately $508.2 million, to several initial purchasers in a private
offering. The 0.25% Notes were issued at their face value and provide for
semi-annual interest payments of $0.7 million each February 1 and August 1,
beginning February 1, 2004. Effective as of January 28, 2004, the 0.25% Notes
began accruing additional interest at a rate of 0.25% as a result of our
registration statement having not been declared effective by the SEC on or
before the 180th day following the original issuance of the 0.25% Notes and the
0.25% Notes continued to accrue additional interest at that rate until April
27, 2004, the 90th day following such registration default. As of April 27,
2004, the 0.25% Notes began to accrue additional interest at a rate of 0.50%
and will accrue such additional interest until the registration statement is
declared effective or until we are no longer required to maintain the
effectiveness of the registration statement. At March 31, 2004, we had a ratio of long-term debt to total
capitalization of approximately 16%. The degree to which we are leveraged could
materially and adversely affect our ability to obtain financing for working
capital, acquisitions or other purposes and could make us more vulnerable to
industry downturns and competitive pressures. We will require substantial
amounts of cash to fund scheduled payments of principal and interest on our
indebtedness, future capital expenditures and any increased working capital
requirements. Long-Term Debt In 1999 and 2000, we entered into three build-to-suit lease agreements for
office buildings in Mountain View, California, Roseville, Minnesota and
Milpitas, California. We began occupying the Roseville and Mountain View
facilities in May and June 2001, respectively, and began occupying the Milpitas
facility in April 2003. A syndicate of financial institutions financed the
acquisition and development of these properties. Prior to July 1, 2003, we
accounted for these properties as operating leases in accordance with SFAS No.
13, Accounting for Leases, as amended. On July 1, 2003, we adopted FIN 46.
Under FIN 46, the lessors of the facilities are considered variable interest
entities, and we are considered the primary beneficiary. Accordingly, we began
consolidating the variable interest entities on July 1, 2003 and have included
the property and equipment and long-term debt on our balance sheet at March 31,
2004 and December 31, 2003 and the results of their operations in our
consolidated statement of operations for the quarter ended March 31, 2004. As
of March 31, 2004, approximately $186.4 million of debt has been classified as
current as the lease terms for the Mountain View and Roseville facilities
expire in March 2005. Interest only payments under our debt agreements relating to the
facilities are generally paid quarterly and are equal to the termination value
of the outstanding debt obligations multiplied by our cost of funds, which is
based on London Inter Bank Offered Rate, or LIBOR, using 30-day to 180-day
LIBOR contracts and adjusted for our credit spread. The termination values of
the debt agreements are approximately $145.2 million, $41.2 million and $194.2
million for the Mountain View, Roseville and Milpitas leases, respectively. The
terms of these debt agreements are five years with an option to extend the
lease terms for two successive periods of one year each, if agreed to by the
financial institutions that financed the facilities. The terms of these debt
agreements began March 2000 for the Mountain View and Roseville facilities and
July 2000 for the Milpitas facility. We have the option to purchase the three 28




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facilities for the aggregate termination value of $380.6 million or, at the end
of the term, to arrange for the sale of the properties to third parties while
we retain an obligation to the financial institutions that financed the
facilities in an amount equal to the difference between the sales price and the
guaranteed residual value up to an aggregate $344.6 million if the sales price
is less than this amount, subject to the specific terms of the debt agreements.
In addition, we are entitled to any proceeds from a sale of the facilities in
excess of the termination values. Payment of the purchase price for these
properties would reduce the amount of cash, cash equivalents and short-term
investments available for funding our research and development efforts,
geographic expansion and strategic acquisitions in the future. In January 2002, we entered into two three-year pay fixed, receive
floating, interest rate swaps for the purpose of hedging the cash payments
related to the Mountain View and Roseville agreements.
Under the terms of these interest rate swaps, we make payments based on the
fixed rate and will receive interest payments based on the 3-month LIBOR rate.
For the quarter ended March 31, 2004, our aggregate payments on the debt
agreements, including the net payments on the interest rate swaps, were $4.0
million and were included in interest expense in the consolidated statement of
operations in accordance with FIN 46. The payments for the quarter ended March
31, 2003 of $4.1 million were classified as rent expense and included in cost
of revenue and operating expenses, in accordance with SFAS No. 13. We expect
future interest expense from the build-to-suit agreements to be approximately
$4 million per quarter. The agreements for each of the facilities described above require that we
maintain specified financial covenants, all of which we were in compliance with
as of March 31, 2004. The specified financial covenants as of March 31, 2004
require us to maintain a minimum rolling four quarter earnings before interest,
taxes, depreciation and amortization of EBITDA of $400.0 million, a minimum
ratio of cash and cash equivalents and accounts receivable to current
liabilities plus the debt consolidated under the build-to-suit lease agreements
of 1.2 to 1, and a leverage ratio of total funded indebtedness to rolling four
quarter EBITDA of not more than 2 to 1. For purposes of these financial
covenants, EBITDA represents our net income for the applicable period, plus
interest expense, taxes, depreciation and amortization and all non-cash
restructuring charges, less software development expenses classified as capital
expenditures. In order to secure the obligation under each agreement, each of
the facilities is subject to a deed of trust in favor of the financial
institutions that financed the acquisition and development of the respective
facility. Bank of America, N.A. was the agent for the syndicate of banks that
funded the development of the Mountain View and Roseville
facilities, and ABN AMRO Bank, N.V. was the agent for the syndicate
of banks that funded the development of the Milpitas facility. We
have received waivers from the respective syndicate of banks for each facility
in relation to any non-compliance that would have resulted from the delay in
filing this Form 10-Q or our 2003 Form 10-K. Credit Facility During 2002, our Japanese subsidiary entered into a short-term credit
facility with a multinational Japanese bank in the amount of 1.0 billion
Japanese yen ($9.5 million USD). At March 31, 2004, no amount was outstanding.
The short-term credit facility was renewed in March 2004 and is due to expire
in March 2005. Borrowings under the short-term credit facility bear interest
at Tokyo Inter Bank Offered Rate, plus 0.5%. There are no covenants on the
short-term credit facility and the loan has been guaranteed by VERITAS Software
Global LLC, one of our wholly-owned subsidiaries. Acquired Technology Commitments On October 1, 2002, we acquired volume replicator software technology for
$6.0 million and contingent payments of up to another $6.0 million based on
future revenues generated by the acquired technology. The contingent payments
will be paid quarterly over 40 quarters, in amounts between $150,000 and
$300,000, which includes interest. We issued a promissory note payable in the
principal amount of $5.0 million, representing the present value of our minimum
payment obligations under the purchase agreement for the acquired technology,
which are payable quarterly commencing in the first quarter of 2003 and ending
in the fourth quarter of 2012. The contingent payments in excess of the
quarterly minimum obligations will be paid as they may become due. The
outstanding balance of the note payable was $4.5 million as of March 31, 2004
and $4.6 million as of December 31, 2003 and is included in other long-term
liabilities. Contractual Commitments The following table is a summary of the contractual commitments, including
principal and interest payments, associated with our obligations as of March
31, 2004: (in thousands)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalOperating lease
commitments
    
    $
    44,446
    
    
    $
    50,107
    
    
    $
    42,406
    
    
    $
    37,043
    
    
    $
    33,128
    
    
    $
    167,457
    
    
    $
    374,587Convertible
subordinated notes
    
    
    975
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    525,958
    
    
    
    532,133Long-term debt
    
    
    12,691
    
    
    
    385,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398,379Other long-term
liabilities
    
    
    450
    
    
    
    600
    
    
    
    600
    
    
    
    600
    
    
    
    600
    
    
    
    2,400
    
    
    
    5,250Total
contractual
commitments
    
    $
    58,562
    
    
    $
    437,695
    
    
    $
    44,306
    
    
    $
    38,943
    
    
    $
    35,028
    
    
    $
    695,815
    
    
    $
    1,310,349
 29




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We believe that our current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. After that time, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financing or from other
sources. We cannot assure you that additional financing will be available at
all or that if available, we will be able to obtain it on terms favorable to
us. Factors That May Affect Future Results In addition to the other information in this quarterly report on Form
10-Q, you should consider carefully the following factors in evaluating VERITAS
and our business. If we experience lower-than-anticipated revenue in any particular quarter, or
if we announce that we expect lower revenue or earnings than previously
forecasted, the market price of our securities could decline. Our revenue is difficult to forecast and is likely to fluctuate from
quarter to quarter due to many factors outside of our control. Any significant
revenue shortfall or lowered revenue or earnings forecast could cause the
market price of our securities to decline substantially. Factors that could
lower our revenue or affect our revenue and earnings forecast include:  
    
    the possibility that our customers may cancel, defer or limit
purchases as a result of reduced IT budgets or weak and uncertain
economic and industry conditions;
    
    the possibility that our customers may defer purchases of our
products in anticipation of new products or product updates from us or
our competitors;
    
    changes in the competitive landscape due to mergers, acquisitions or
strategic alliances that could allow our competitors to gain market
share;
    
    the possibility that our strategic partners will introduce, market
and sell products that compete with our products;
    
    the unpredictability of the timing and magnitude of our sales through
direct sales channels and indirect sales channels, including value-added
resellers, or VARs, and other distributors, which tend to occur later in
a quarter than revenues received through our original equipment
manufacturer, or OEM, partners;
    
    the timing of new product introductions by us and the market
acceptance of new products, which may be delayed as a result of weak and
uncertain economic and industry conditions;
    
    the seasonal nature of our sales;
    
    the rate of adoption and long sales cycles for new solutions such as
utility computing, storage resource management technology and
replication;
    
    changes in our pricing and distribution terms or those of our
competitors; and
    
    the possibility that our business will be adversely affected as a
result of the threat of terrorism, terrorism or military actions taken
by the United States or its allies. You should not rely on the results of prior periods as an indication of
our future performance. Our operating expense levels are based, in significant
part, on our expectations of future revenue. If we have a shortfall in revenue
or orders in any given quarter, we may not be able to reduce our operating
expenses quickly in response. Therefore, any significant shortfall in revenue
or orders could have an immediate adverse effect on our operating results for
that quarter. In addition, if we fail to manage our business effectively over
the long term, we may experience high operating expenses, and our operating
results may fall below the expectations of securities analysts or investors. Because we derive a majority of our license revenue from sales of a few product
lines, any decline in demand for these products could severely harm our ability
to generate revenue. We derive a majority of our revenue from a small number of software
products, including our NetBackup and Backup Exec data protection products. In
addition, our software products are concentrated within the market for data
storage. For example, in 2003, we derived approximately 56% of our user license
fees from the NetBackup and Backup Exec products, and a similar percentage of
our services revenue from associated maintenance and technical support. As a
result, we are particularly vulnerable to fluctuations in 30




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demand for these products, whether as a result of competition, product
obsolescence, technological change, budget constraints of our potential
customers or other factors. If our revenue derived from these software products
were to decline significantly, our business and operating results would be
adversely affected. In addition, because our software products are concentrated
within the market for data storage, a decline in the demand for storage
devices, storage software applications or storage capacity could result in a
significant reduction in our revenue and adversely affect our business and
operating results. If we fail to manage our distribution channels effectively, or if our partners
choose not to market and sell our products to their customers, our sales could
decline. We market our products and related services both directly to end-users and
through a variety of indirect sales channels, which include VARs, distributors,
system integrators and OEMs. If we fail to manage our distribution channels
successfully, our distribution channels may conflict with one another or
otherwise fail to perform as we anticipate which could reduce our sales and
increase our expenses, as well as weaken our competitive position. Direct Sales. A significant portion of our revenue is derived from sales
by our direct sales force to end-users. This sales channel involves special
risks, including:  
    
    longer sales cycles are associated with direct sales efforts;
    
    we may have difficulty hiring, training, retaining and motivating our direct sales force; and
    
    sales representatives require a substantial amount of training to
become productive, and training must be updated to cover new and revised
products. Indirect Sales Channels.A significant portion of our revenue is also
derived from sales through indirect sales channels, including distributors that
sell our products to end-users and other resellers. This channel involves a
number of special risks, including:  
    
    our lack of control over the delivery of our products to end-users;
    
    our resellers and distributors are not subject to minimum sales
requirements or any obligation to market our products to their
customers;
    
    our resellers and distributors may terminate their relationships with us at any time; and
    
    our resellers and distributors may market and distribute competing products. OEMs.A portion of our revenue is derived from sales through our OEM
partners that incorporate our products into their products. Our reliance on
this sales channel involves many risks, including:  
    
    our lack of control over the shipping dates or volume of systems
shipped;
    
    our OEM partners are not subject to minimum sales requirements or any
obligation to market our products to their customers;
    
    our OEM partners may terminate or renegotiate their arrangements with
us and new terms may be less favorable in recognition of our
increasingly competitive relationship with certain partners;
    
    the development work that we must generally undertake under our
agreements with our OEM partners may require us to invest significant
resources and incur significant costs with little or no associated
revenue;
    
    the time and expense required for the sales and marketing
organizations of our OEM partners to become familiar with our products
make it more difficult to introduce those products to the market; and
    
    our OEM partners may develop, market and distribute their own
products and market and distribute products of our competitors, which
could reduce our sales. We face intense competition, and our competitors may gain market share in the
markets for our products, which could adversely affect the growth of our
business and cause our revenues to decline. We have many competitors in the markets for our products. If existing or
new competitors gain market share in any of these markets, we may experience a
decline in revenues, which could adversely affect our business and operating
results. Our competitors include the internal development groups of our
strategic partners. These groups develop storage management software and
utility computing infrastructure for the storage and server hardware products
marketed by the strategic partners. We also face competition 31




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from software vendors that offer products that directly compete with our
products or bundle their software products with storage software offered by
another vendor. Many of our strategic partners and storage hardware vendors offer software
products that compete with our products or have announced their intention to
focus on developing or acquiring their own storage software products. Storage
hardware companies may choose not to offer our products to their customers or
limit our access to their hardware platforms. End-user customers may prefer to
purchase storage software and hardware that is manufactured by the same company
because of greater product breadth offered by the company, perceived advantages
in price, technical support, compatibility or other issues. In addition,
software vendors may choose to bundle their software, such as an operating
system, with their own or other vendors storage software. They may also limit
our access to standard product interfaces for their software and inhibit our
ability to develop products for their platform. Many of our competitors have greater financial, technical, sales,
marketing and other resources than we do and consequentially may have an
ability to influence customers to purchase their products that compete with
ours. Our future and existing competitors could introduce products with
superior features, scalability and functionality at lower prices than our
products, and could also bundle existing or new products with other more
established products in order to compete with us. Our competitors could also
gain market share by acquiring or forming strategic alliances with our other
competitors. Finally, because new distribution methods offered by the Internet
and electronic commerce have removed many of the barriers to entry historically
faced by start-up companies in the software industry, we may face additional
sources of competition in the future. If we are unable to develop new and enhanced products that achieve widespread
market acceptance, we may be unable to recover product development costs, and
our earnings and revenue may decline. Our future success depends on our ability to address the rapidly changing
needs of our customers by developing, acquiring and introducing new products,
product updates and services on a timely basis. We must also extend the
operation of our products to new platforms and keep pace with technological
developments and emerging industry standards. We intend to commit substantial
resources to developing new software products and services, including software
products and services for the utility computing infrastructure, the storage
area networking and the storage resource management markets. Each of these
markets is new and unproven, and industry standards for these markets are
evolving and changing. They also may require development of new channels. If
these markets do not develop as anticipated, or if demand for our products and
services in these markets does not materialize or occurs more slowly than we
expect, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected. We have provided standards-setting organizations and various partners with
access to our standard product interfaces through our VERITAS Enabled Program.
If these standards-setting organizations or our partners do not accept our
standard product interfaces for use with other products, or if our partners are
able to use our standard product interfaces to improve their competitive
position against us, then our business and operating results could be adversely
affected. Our international sales and operations involve special risks that could
increase our expenses, adversely affect our operating results and require
increased time and attention of our management. We derive a substantial portion of our revenue from customers located
outside of the U.S. and have significant operations outside of the U.S.,
including engineering, sales, customer support and production operations. We
plan to expand our international operations and our planned growth is
contingent upon the successful expansion of our international revenue. Our
international operations are subject to risks in addition to those faced by our
domestic operations, including:  
    
    potential loss of proprietary information due to piracy,
misappropriation or laws that may be less protective of our intellectual
property rights;
    
    imposition of foreign laws and other governmental controls, including
trade and employment restrictions;
    
    fluctuations in currency exchange rates and economic instability such
as higher interest rates and inflation, which could reduce our
customers ability to obtain financing for software products or which
could make our products more expensive in those countries;
    
    limitations on future growth or inability to maintain current levels
of revenue from international sales if we do not invest sufficiently in
our international operations;
    
    difficulties in hedging foreign currency transaction exposures;
    
    longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable; 32




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
    
    difficulties in staffing, managing and operating our international
operations, including difficulties related to administering our stock
plans in some foreign countries;
    
    difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;
    
    seasonal reductions in business activity in the summer months in Europe and in other periods in other countries;
    
    costs and delays associated with developing software in multiple languages; and
    
    political unrest, war or terrorism, particularly in areas in which we have facilities. In addition, we receive significant tax benefits from sales to our
non-U.S. customers. These benefits are contingent upon existing tax regulations
in both the U.S. and in the countries in which our international operations are
located. Future changes in domestic or international tax regulations could
adversely affect our ability to continue to realize these tax benefits. Our products may contain significant defects, which may subject us to liability
for damages suffered by end-users. Software products frequently contain errors or failures, especially when
first introduced or when new versions are released. Our end-user customers use
our products in applications that are critical to their businesses, including
for data backup and recovery, and may have a greater sensitivity to defects in
our products than to defects in other, less critical software products. If a
customer loses critical data as a result of an error in or failure of our
software products or as a result of the customers misuse of our software
products, the customer could suffer significant damages and seek to recover
those damages from us. Although our software licenses generally contain
protective provisions limiting our liability, a court could rule that these
provisions are unenforceable. If a customer is successful in proving its
damages and a court does not enforce our protective provisions, we could be
liable for the damages suffered by our customers, which could adversely affect
our operating results. In addition, product defects could cause delays in new product releases or
product upgrades, or our products might not work in combination with other
hardware or software, which could adversely affect market acceptance of our
products. If our customers were dissatisfied with product functionality or
performance, or if we were to experience significant delays in the release of
new products or new versions of products, we could lose competitive position
and revenue and our business and operating results could be adversely affected. If we lose key personnel or fail to integrate replacement personnel
successfully, our ability to manage our business could be impaired. Our future success depends upon the continued service of our key
management, technical, sales and other critical personnel. Whether we are able
to execute effectively on our business strategy will depend in large part on
how well key management and other personnel perform in their positions and are
integrated within our company. Our officers and other key personnel are
employees-at-will, and we cannot assure you that we will be able to retain
them. Key personnel have left our company over the years, and there may be
additional departures of key personnel from time to time. The loss of any key
employee could result in significant disruptions to our operations, including
adversely affecting the timeliness of product releases, the successful
implementation and completion of company initiatives and the results of our
operations. In addition, the integration of replacement personnel could be time
consuming, may cause additional disruptions to our operations and may be
unsuccessful. If we are unable to attract and retain qualified employees and manage our
employee base effectively, we may be unable to develop new and enhanced
products, expand our business or increase our revenue. We believe that our success depends in part on our ability to hire and
retain qualified employees. As our company grows, and our customers demand for
our products and services increase, we will need to hire additional management,
technical, sales and other personnel. However, competition for people with the
specific skills that we require is significant. If we are unable to hire and
retain qualified employees, or conversely, if we fail to manage employee
performance or reduce staffing levels when required by market conditions, our
business and operating results could be adversely affected. Historically, we have provided stock-based compensation, such as stock
option grants and the availability of discounted shares in our Employee Stock
Purchase Plan, as an important incentive for our employees. The volatility in
our stock price may from time to time adversely affect our ability to retain or
attract key employees. In addition, if we are unable to get stockholder
approval for anticipated future increases in the number of shares of common
stock authorized under our stock plans, or if changes in accounting rules
require us to treat all stock-based compensation as an expense, we may reduce
the amount of stock-based compensation awarded to employees. Reductions in our
stock-based compensation practices may make it more difficult for us to attract
and retain employees, which may negatively affect our ability to manage and
operate our business. 33




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We incur considerable expenses to develop products for operating systems that
are either owned by others or that are part of the Open Source Community. If we
do not receive cooperation in our development efforts from others and access to
operating system technologies, we may face higher expenses or fail to expand
our product lines and revenues. Many of our products operate primarily on the Windows, UNIX and Linux
computer operating systems. As part of our efforts to develop products for
operating systems that are part of the Open Source Community, we may have to
license portions of our products on a royalty free basis or may have to expose
our source code. We continue to develop new products for these operating
systems. We may not accomplish our development efforts quickly or
cost-effectively, and it is not clear what the relative growth rates of these
operating systems will be. Our development efforts require substantial capital
investment, the devotion of substantial employee resources and the cooperation
of the owners of the operating systems to or for which the products are being
ported or developed. If the market for a particular operating system does not
develop as anticipated, or demand for our products and services in such market
does not materialize or occurs more slowly than we expect, we will have
expended substantial resources and capital without realizing sufficient
revenue, and our business and operating results could be adversely affected. In addition, for some operating systems, we must obtain from the owner of
the operating system a source code license to portions of the operating system
software to port some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in these porting
or development efforts. If they do not grant us a license or if they do not
renew our license, we may not be able to expand our product line into other
areas. We derive a large amount of revenue from one of our distributors, the loss of
which could cause our revenues to decline. We derive a large amount of revenue from a distributor that sells our
products and services through resellers. For the quarter ended March 31, 2004,
this distributor accounted for less than 10% of our net revenue. If this
distributor were to reduce purchases of our products or services, our revenues
would decline unless we were able to increase sales through other distributors
or direct sales to customers. Our contract does not require this distributor to
purchase any specified amount of our product or services. Accordingly, we
cannot be sure that this distributor will continue to market and sell our
products and services at current levels. Cooperating with the SEC in its investigation of our transactions with AOL Time
Warner, and in connection with our recent
audit committee investigation and related restatement, has
required, and may continue to require, a large amount of management time and
attention, as well as accounting and legal expense, which may reduce net income
or interfere with our ability to manage our business. Since the third quarter of 2002, we have received subpoenas and other
requests for information issued by the SEC in the investigation entitled In the
Matter of AOL/Time Warner.We continue to furnish information requested by the
SEC and otherwise cooperate with regard to this investigation and
related accounting and disclosure matters. In addition, in
the first quarter of 2004, we voluntarily disclosed to the SEC past accounting
practices that we determined were not in compliance with GAAP. We are cooperating with the SECs
requests for information regarding these matters. The SECs investigation and
inquiries may continue to require significant management attention and
accounting and legal resources, or require us to amend our periodic reports for
2003 or prior periods, which could adversely affect our business, results of
operations and cash flows. We have been named as a party to several class action and derivative action
lawsuits, and we may be named in additional litigation, all of which could
require significant management time and attention and result in significant
legal expenses. An unfavorable outcome in one or more of these lawsuits could
have a material adverse effect on our business, financial condition, results of
operations and cash flows. After we announced in January 2003 that we would restate our financial
results as a result of transactions entered into with AOL Time Warner in
September 2000, numerous separate complaints purporting to be class actions
were filed in federal court alleging that we and some of our officers and
directors violated provisions of the Securities Exchange Act of 1934. Several
similar complaints purporting to be derivative actions have been filed in state
court against some of our directors and officers. In addition, as a result of
the current restatement, we are subject to an increased risk that we will be
the subject of additional class action securities litigation. The expense of
defending any such litigation may be costly and divert managements attention
from the day-to-day operations of our business, which could adversely affect
our business, results of operations and cash flows. In addition, an
unfavorable outcome in any such litigation could have a material adverse effect
on our business, results of operations and cash flows. We have received notification from The Nasdaq Stock Market that our securities
may be delisted if we are unable to comply with certain filing deadlines, which
delisting could materially and adversely affect the liquidity and trading price
of our common stock. On March 17, 2004, we received a letter from The Nasdaq Stock Market, or
Nasdaq, stating that due to our delinquency in filing our annual report on Form
10-K, our securities are subject to delisting from Nasdaq. We received a
similar letter from Nasdaq on 34




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May 19, 2004, relating to our delinquency in filing this quarterly report
on Form 10-Q. After a hearing before The Nasdaq Listing Qualifications Panel
we received a written determination providing for the continued listing of our
common stock provided that, among other things, we file with the SEC
and deliver to Nasdaq
our annual report on Form 10-K and this quarterly report on Form 10-Q on or
before June 22, 2004. The Panel determination further stated that we must
timely file with the SEC and deliver to Nasdaq periodic reports for all reporting
periods ending on or before June 30, 2005. Should we fail to comply with these
requirements, our securities could be delisted, which would materially and
adversely affect the liquidity and trading price of our common stock. Our business strategy includes possible growth through business acquisitions,
which involve special risks that could increase our expenses, cause our stock
price to decline and divert the time and attention of management. As part of our business strategy, we have in the past acquired and expect
in the future to acquire other businesses, business units and technologies.
Acquisitions involve a number of special risks and challenges, including:  
    
    diversion of managements attention from our business;
    
    integration of acquired business operations and employees into our
existing business, including coordination of geographically dispersed
operations, which in the past has taken longer and has been more complex
than initially expected;
    
    incorporation of acquired products and business technology into our
existing product lines, including consolidating technology with
duplicative functionality or designed on different technological
architecture, and our ability to sell the acquired products through our
existing or acquired sales channels;
    
    loss or termination of employees, including costly litigation resulting from the termination of those employees;
    
    dilution of our then-current stockholders percentage ownership;
    
    dilution of earnings if synergies with the acquired business are not achieved;
    
    assumption of liabilities of the acquired business, including costly
litigation related to alleged liabilities of the acquired business;
    
    presentation of a unified corporate image to our customers and our employees; and
    
    risk of impairment charges related to potential write-down of acquired assets in future acquisitions. Acquisitions of businesses, business units and technologies are inherently
risky and create many challenges. We cannot provide any assurance that our
previous or any future acquisitions will achieve the desired objectives. Our effective tax rate may increase or fluctuate, which could increase our
income tax expense and reduce our net income. Our effective tax rate could be adversely affected by several factors,
many of which are outside of our control. Our effective tax rate is directly
affected by the relative proportions of revenue and income before taxes in the
various domestic and international jurisdictions in which we operate. We are
also subject to changing tax laws, regulations and interpretations in multiple
jurisdictions in which we operate as well as the requirements of certain tax
rulings. In particular, we are subject to a number of tax rulings from the
country of Israel related to the activities of Precise. Failure to comply with
the terms and conditions of such rulings could significantly impact our
effective tax rate. The use of tax benefits available under such rulings is
dependent upon the scope of future activities in Israel related to the historic
Precise business. We do not have a substantial history of audit activity from
various taxing authorities and while we believe we are in compliance with all
federal, state and international tax laws, there are various interpretations of
their application that could result in additional tax assessments. Our
effective tax rate is also influenced by the tax effects of purchase accounting
for acquisitions and non-recurring charges, which may cause fluctuations
between reporting periods, and may also be influenced by tax assessments
against acquired entities with respect to tax periods prior to the acquisition,
which may significantly affect our effective tax rate for the period in which
the settlements take place. Changes to current accounting policies could have a significant effect on our
reported financial results or the way in which we conduct our business. We prepare our financial statements in conformity with accounting
principles generally accepted in the U.S., which are subject to interpretation
by the American Institute of Certified Public Accountants, the Public Company
Accounting Oversight Board, the SEC and various bodies formed to interpret and
create appropriate accounting policies. A change in these policies could have a
significant effect on our reported results and may even retroactively affect
previously reported transactions. Our accounting policies that recently have
been or may in the future be affected by changes in the accounting rules are as
follows: 35




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
    
    software revenue recognition;
    
    accounting for stock-based compensation;
    
    accounting for variable interest entities; and
    
    accounting for goodwill and other intangible assets. Changes in these or other rules, or the questioning of current practices,
may have a significant adverse effect on our reported financial results or in
the way in which we conduct our business. See our discussion above under
Critical Accounting Policies and Estimates for additional information about
our critical accounting policies and estimates and associated risks. If we do not protect our proprietary information and prevent third parties from
making unauthorized use of our products and technology, our revenues could be
harmed. We rely on a combination of copyright, patent, trademark and trade secret
laws, confidentiality procedures, contractual provisions and other measures to
protect our proprietary information. All of these measures afford only limited
protection. These measures may be invalidated, circumvented or challenged, and
others may develop technologies or processes that are similar or superior to
our technology. We may not have the proprietary information controls and
procedures in place that we need to protect our proprietary information
adequately. In addition, because we license the source code for some of our
products to third parties, there is a higher likelihood of misappropriation or
other misuse of our intellectual property. We also license some of our products
under shrink-wrap license agreements that are not signed by licensees and
therefore may be unenforceable under the laws of some jurisdictions. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy our products or obtain or use information that we regard as
proprietary, which could harm our revenues. Third parties claiming that we infringe their proprietary rights could cause us
to incur significant legal expenses and prevent us from selling our products. From time to time, we receive claims that we have infringed the
intellectual property rights of others. As the number of products in the
software industry increases and the functionality of these products further
overlap, we believe that we may become increasingly subject to infringement
claims, including patent, copyright and trademark infringement claims. We have
received several trademark claims in the past and may receive more claims in
the future from third parties who may also be using the VERITAS name or another
name that may be similar to one of our trademarks or service marks. We have
also received patent infringement claims in the past and may receive more
claims in the future based on allegations that our products infringe upon
patents held by third parties. In addition, former employers of our former,
current or future employees may assert claims that such employees have
improperly disclosed to us the confidential or proprietary information of these
former employers. Any such claim, with or without merit, could:  
    
    be time consuming to defend;
    
    result in costly litigation;
    
    divert managements attention from our core business;
    
    require us to stop selling, to delay shipping or to redesign our product; and
    
    require us to pay monetary amounts as damages, for royalty or
licensing arrangements, or to satisfy indemnification obligations that
we have with some of our customers. In addition, we license and use software from third parties in our
business. These third party software licenses may not continue to be available
to us on acceptable terms. Also, these third parties may from time to time
receive claims that they have infringed the intellectual property rights of
others, including patent and copyright infringement claims, which may affect
our ability to continue licensing this software. Our inability to use any of
this third party software could result in shipment delays or other disruptions
in our business, which could materially and adversely affect our operating
results. Any disruption in our operations caused by a catastrophic natural disaster or
other events outside of our control could have a material adverse effect on our
business, resulting in a loss of revenue or in higher expenses. Our business is highly automated and any disruptions or failures in our
operations due to a catastrophic natural disaster, such as an earthquake or a
flood, or to manmade problems, such as inadvertent errors, malicious software
programs or terrorism, may result in a loss of revenue or in higher expenses,
harming our operating results. Most of our primary operations, which include a
significant portion of our research and development activities and other
critical business operations, are located near San Francisco, California, an 36




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area known for seismic activity. A catastrophic event, such as a major
earthquake, which results in the destruction or disruption of our primary
operations, could severely and adversely affect our business, including both
our primary data center and other internal operations and our ability to
communicate with our customers or sell our products over the Internet. In our highly automated environment, we have tightly integrated systems
that support our enterprise, including our financial accounting and e-commerce
systems. Maintaining the integrity and security of this enterprise is an issue
of critical importance for VERITAS and our customers. Any hardware or software
failure or breach in security due to inadvertent error, malicious software
programs, such as viruses and worms, break-ins or unauthorized tampering with
our computer systems could, if wide-spread and destructive, have a negative
effect on our internal operations and could adversely affect our business. We
take significant and costly measures which have been effective in protecting
our enterprise from such events, however, there is no assurance that these
measures will be equally as effective in the future. In addition, other events
outside of our control, such as war or acts of terrorism, could have a material
adverse and potentially devastating effect on our business, operating results
and financial condition. Some provisions in our charter documents and our stockholder rights plan may
prevent or deter an acquisition of VERITAS. Some of the provisions in our charter documents may deter or prevent
certain corporate actions, such as a merger, tender offer or proxy contest,
which could affect the market value of our securities. These provisions
include:  
    
    our board of directors is authorized to issue preferred stock with any rights it may determine;
    
    our board of directors is classified into three groups, with each group of directors to hold office for three years;
    
    our stockholders are not entitled to cumulate votes for directors and
may not take any action by written consent without a meeting; and
    
    special meetings of our stockholders may be called only by our board
of directors, by the chairman of the board or by our chief executive
officer, and may not be called by our stockholders. We also have in place a stockholder rights plan that is designed to
discourage coercive takeover offers. In general, our stockholder rights plan
provides our existing stockholders (other than an existing stockholder that
becomes an acquiring person) with rights to acquire shares of our common stock
at 50% of its trading price if a person or entity acquires, or announces its
intention to acquire, 15% or more of the outstanding shares of our common
stock, unless our board of directors elects to redeem these rights. Our board of directors could utilize the provisions of our charter
documents and stockholder rights plan to resist an offer from a third party to
acquire VERITAS, including an offer to acquire our common stock at a premium to
its trading price or an offer that is otherwise considered favorable by our
stockholders. Our stock price may be volatile in the future, and you could lose the value of
your investment. The market price of our common stock has experienced significant
fluctuations and may continue to fluctuate significantly, and you could lose
the value of your investment. The market price of our common stock may be
affected by a number of factors, including:  
    
    announcements of our quarterly operating results and revenue and
earnings forecasts or those of our competitors or our customers;
    
    rumors, announcements or press articles regarding changes in our
management, organization, operations or prior financial statements;
    
    inquiries by the SEC, Nasdaq, law enforcement or other regulatory bodies;
    
    changes in revenues and earnings estimates by securities analysts;
    
    announcements of planned acquisitions by us or by our competitors;
    
    gain or loss of a significant customer;
    
    announcements of new products by us, our competitors or our OEM customers; and
    
    acts of terrorism, the threat of war and economic slowdowns in general. 37




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The stock market in general, and the market prices of stocks of other
technology companies in particular, have experienced extreme price volatility,
which has adversely affected and may continue to adversely affect the market
price of our common stock for reasons unrelated to our business or operating
results. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk We are subject to market risk associated with changes in foreign currency
exchange rates, interest rates and our equity investments, as discussed more
fully below. In order to manage the volatility relating to our more significant
market risks, we enter into various hedging arrangements described below. We
do not execute transactions or hold derivative financial instruments for
speculative trading purposes. We do not anticipate any material changes in
our primary market risk exposures in fiscal 2004. Foreign Currency Risk We transact business in various foreign currencies and have established a
foreign currency hedging program, utilizing foreign currency forward exchange
contracts, or forward contracts, to hedge certain foreign currency transaction
exposures. Under this program, increases or decreases in our foreign currency
transactions are offset by gains and losses on the forward contracts, so as to
mitigate the possibility of foreign currency transaction gains and losses. We
do not use forward contracts for speculative or trading purposes. All foreign
currency transactions and all outstanding forward contracts are
marked-to-market at the end of the period with unrealized gains and losses
included in other income (expense). The unrealized gain (loss) on the
outstanding forward contracts at March 31, 2004 was immaterial to our
consolidated financial statements. Our outstanding forward contracts as of March 31, 2004 are presented in
the table below. All forward contract amounts are representative of the
expected payments to be made under these instruments. As of March 31, 2004, all
forward contracts mature in 35 days or less: Fair MarketValue atLocal Currency
    
    
    
    
    
    
    
    
    
    March 31, 2004(in thousands)
    
    Contract Amount
    
    Contract Amount
    
    (US$)Contracts to Buy US $Australian dollar
    
    
    1,100.0
    
    
    AUD
    
    
    822.1
    
    
    USD
    
    
    20.1British pound
    
    
    1,900.0
    
    
    GBP
    
    
    3,445.8
    
    
    USD
    
    
    56.9Euro
    
    
    38,844.0
    
    
    EUR
    
    
    47,176.8
    
    
    USD
    
    
    636.2Indian rupee
    
    
    177,000.0
    
    
    INR
    
    
    4,013.6
    
    
    USD
    
    
    46.0Israel shekel
    
    
    13,500.0
    
    
    ILS
    
    
    2,980.3
    
    
    USD
    
    
    1.8Japanese yen
    
    
    53,000.0
    
    
    JPY
    
    
    503.0
    
    
    USD
    
    
    5.6Mexican peso
    
    
    11,200.0
    
    
    MXN
    
    
    999.3
    
    
    USD
    
    
    7.1Singapore dollars
    
    
    25,600.0
    
    
    SGD
    
    
    15,158.6
    
    
    EUR
    
    
    126.8Contracts to Sell US $Brazilian real
    
    
    7,400.0
    
    
    BRL
    
    
    2,479.1
    
    
    USD
    
    
    402.9Canadian dollar
    
    
    12,400.0
    
    
    CAD
    
    
    9,467.4
    
    
    USD
    
    
    0.3Euro
    
    
    58,819.5
    
    
    EUR
    
    
    71,456.6
    
    
    USD
    
    
    (631.6
    )Contracts to Buy Euro Danish krona
    
    
    5,400.0
    
    
    DKK
    
    
    725.3
    
    
    EUR
    
    
    Indian rupee
    
    
    45,200.0
    
    
    INR
    
    
    843.3
    
    
    EUR
    
    
    (1.3
    )South African rand
    
    
    5,100.0
    
    
    ZAR
    
    
    653.5
    
    
    EUR
    
    
    8.2Swiss franc
    
    
    1,050.0
    
    
    CHF
    
    
    673.2
    
    
    EUR
    
    
    0.6Swedish krona
    
    
    12,400.0
    
    
    SEK
    
    
    1,338.8
    
    
    EUR
    
    
    (4.1
    )United States dollar
    
    
    35,000.0
    
    
    USD
    
    
    28,806.6
    
    
    EUR
    
    
    (372.1
    )Contracts to Sell Euro British pound
    
    
    43,100.0
    
    
    GBP
    
    
    64,411.0
    
    
    EUR
    
    
    (157.7
    )Indian rupee
    
    
    195,500.0
    
    
    INR
    
    
    3,645.1
    
    
    EUR
    
    
    2.9Japanese yen
    
    
    2,453,000.0
    
    
    JPY
    
    
    19,178.3
    
    
    EUR
    
    
    67.5Singapore dollars
    
    
    8,400.0
    
    
    SGD
    
    
    4,104.2
    
    
    EUR
    
    
    37.0UAE dirham
    
    
    17,200.0
    
    
    AED
    
    
    3,849.9
    
    
    EUR
    
    
    57.1United States dollar
    
    
    22,000.0
    
    
    USD
    
    
    18,262.1
    
    
    EUR
    
    
    226.5Contracts to Buy SGD $Australian dollar
    
    
    11,300.0
    
    
    AUD
    
    
    14,225.0
    
    
    SGD
    
    
    (96.7
    )Indian rupee
    
    
    24,700.0
    
    
    INR
    
    
    944.2
    
    
    SGD
    
    
    2.7South Korean won
    
    
    331,000.0
    
    
    KRW
    
    
    483.4
    
    
    SGD
    
    
    (0.1
    )Contracts to Sell SGD $Hong Kong dollar
    
    
    21,500.0
    
    
    HKD
    
    
    4,656.5
    
    
    SGD
    
    
    20.8
 In January 2002, we entered into two three-year pay fixed, receive
floating, interest rate swaps for the purpose of hedging cash flows on variable
interest rate debt of two of our build-to-suit agreements. Under the terms of
these interest rate swaps, we make payments based on the fixed rate and will
receive interest payments based on the 3-month London Inter Bank Offered Rate,
or LIBOR. The payments on our build-to-suit lease agreements are based upon a
3-month LIBOR plus a credit spread. If critical terms of the interest rate swap
or the hedged item do not change, the interest rate swap will be considered to
be highly effective with all 38




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changes in the fair value included in other comprehensive income. If
critical terms of the interest rate swap or the hedged item change, the hedge
may become partially or fully ineffective, which could result in all or a
portion of the changes in fair value of the derivative recorded in the
statement of operations. The interest rate swaps settle the first day of
January, April, July and October until expiration. As of March 31, 2004, the
fair value of the interest rate swaps was $(6.9) million. As a result of
entering into the interest rate swaps, we have mitigated our exposure to
variable cash flows associated with interest rate fluctuations. Because the
rental payments on the leases are based on the 3-month LIBOR and we receive
3-month LIBOR from the interest rate swap counter-party, we have eliminated any
impact to raising interest rates related to our rent payments under the
build-to-suit lease agreements. We have deemed this hedge to be highly effective as
of March 31, 2004. On July 1, 2003, we began accounting for our variable
interest rate debt in accordance with FIN 46. In accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities,
we had designated the interest rate swap as a cash flow hedge of the
variability embedded in the rent expense as it is based on the 3-month LIBOR.
However, with the adoption of FIN 46, we redesignated the interest rate swap as
a cash flow hedge of variability in interest expense and it remains highly
effective with all changes in the fair value included in other comprehensive
income. Interest Rate Risk We are exposed to interest rate risk primarily on our investment portfolio
and the build-to-suit lease agreement for the facility located in Milpitas,
California. Our primary investment objective is to preserve principal while at
the same time maximizing yields without significantly increasing risk. Our
portfolio primarily includes money markets funds, commercial paper, corporate
notes, government securities (taxable and non-taxable), asset-backed securities
and auction market securities. The diversity of our portfolio helps us to
achieve our investment objective. Debt obligations consist of $520.0 million of our 0.25% convertible
subordinated notes due August 1, 2013 and $380.6 million of our debt related to
our build-to-suit lease agreements. The nominal interest rate on the 0.25%
Notes is fixed and the notes provide for semi-annual interest payments of
approximately $0.7 million each February 1 and August 1, beginning February 1,
2004. Effective as of January 28, 2004, the 0.25% Notes began accruing
additional interest at a rate of 0.25% as a result of our registration
statement having not been declared effective by the SEC on or before the 180th
day following the original issuance of the 0.25% Notes and the 0.25% Notes
continued to accrue such additional interest until April 27, 2004, the 90th day
following such registration default. As of April 27, 2004, the 0.25% Notes
began to accrue additional interest at a rate of 0.50% and will accrue such
additional interest until the registration statement is declared effective or
we are no longer required to maintain the effectiveness of the registration
statement. The 0.25% Notes are convertible, under specified conditions, into
shares of our common stock unless previously redeemed or repurchased and are
subject to adjustment under the terms of the notes. Long-term debt consists of
the three build-to-suit agreements. The interest rates on the build-to-suit
agreements are variable based on a 3-month LIBOR plus a credit spread and
provide for quarterly interest payments in January, April, July and October
(see Managements Discussion and Analysis of Financial Condition and Results
of Operations  Long-Term Debt for more information regarding debt payout). The following table presents the amounts of our cash equivalents,
short-term investments and long-term obligations, according to maturity date,
that may be subject to interest rate risk and the average interest rates as of
March 31, 2004 by year of maturity: Amortized CostDue in
    
    
    
    
    
    
    
    
    
    20032005 and
    
    
    
    
    
    2004 Fair
    
    Amortized(in thousands, except percentages)
    
    Due in 2004
    
    Thereafter
    
    Total
    
    Value
    
    CostCash equivalents and
short-term investments:Fixed rate
    
    $
    358,811
    
    
    $
    941,445
    
    
    $
    1,300,256
    
    
    $
    1,302,255
    
    
    $
    1,235,767Average fixed rate
    
    
    1.68
    %
    
    
    2.42
    %
    
    
    2.22
    %
    
    
    2.22
    %
    
    
    2.11
    %Variable rate
    
    $
    471,937
    
    
    $
    372,277
    
    
    $
    844,214
    
    
    $
    844,725
    
    
    $
    509,727Average variable rate
    
    
    1.13
    %
    
    
    1.46
    %
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.40
    %Total cash equivalents
and short-term
investments
    
    $
    830,748
    
    
    $
    1,313,722
    
    
    $
    2,144,470
    
    
    $
    2,146,980
    
    
    $
    1,745,494Average rate
    
    
    1.37
    %
    
    
    2.15
    %
    
    
    1.85
    %
    
    
    1.85
    %
    
    
    1.90
    %Long-term obligations:Fixed rate
    
    $
    330
    
    
    $
    524,142
    
    
    $
    524,472
    
    
    $
    524,472
    
    
    $
    524,578Average fixed rate (1)
    
    
    3.68
    %
    
    
    0.28
    %
    
    
    0.28
    %
    
    
    0.28
    %
    
    
    0.28
    %Variable rate (2)
    
    $
    186,373
    
    
    $
    194,257
    
    
    $
    380,630
    
    
    $
    380,630
    
    
    $
    380,630Average variable rate
    
    
    2.45
    %
    
    
    2.45
    %
    
    
    2.45
    %
    
    
    2.45
    %
    
    
    2.45
    %
  (1)
    
    Not included in the average fixed rate is the amortization of the
underwriting and issuance costs for the $520.0 million convertible
subordinated notes. If this was included, our average fixed rate for
these notes would be 1.04% for 2005 and thereafter. 39




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(2)
    
    $186.4 million of the variable rate long-term debt is, in effect, a
fixed rate as the result of the interest rate swaps (see Note 12,
Derivative Financial Instruments in the Notes to Consolidated
Financial Statements) entered into by VERITAS. Including the effect of
these interest rate swaps, the average fixed rate would be 6.14%. Equity Price Risk We have made investments in development-stage companies that we believe
provide strategic opportunities for us. We intend that these investments will
provide access to new technologies and emerging markets, and create
opportunities for additional sales of our products and services. We recognize
impairment losses on our strategic investments when we determine that there has
been a decline in the fair value of the investment that is other than
temporary. For the three months ended March 31, 2004, we realized a gain of
$7.5 million on the sale of a strategic investment. For the three months ended
March 31, 2003, we recognized impairment losses of $3.5 million on our
strategic investments when we determined that there had been a decline in the
fair value of the investments that was other than temporary. The losses
represented other-than-temporary declines in the fair value of our investments
and were determined based on the value of the investees stock, its inability
to obtain additional private financing, its cash position and current burn
rate, the status and competitive position of the investees products and the
uncertainty of its financial condition among other factors. As of March 31,
2004, our strategic investments had a carrying value of $2.9 million, and we
determined that there was no further impairment in these investments at that
date. We cannot assure you that our investments will have the above mentioned
results, or even that we will not lose all or any part of these investments. 
 Item 4. Controls and Procedures We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as of March 31, 2004, which
included an evaluation of disclosure controls and procedures applicable to the
period covered by and existing through the filing of this periodic report.
This evaluation has allowed us to make conclusions, as set forth below,
regarding the state of our disclosure controls and procedures. As noted
below, we have identified a material weakness in our internal controls that
existed during 2003 and prior periods. Our disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, such as this quarterly report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms. Our disclosure controls and procedures
are also designed to ensure that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. Our internal controls are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of our financial statements in conformity with generally accepted accounting
principles. Our chief executive officer and chief financial officer, with the
assistance of our disclosure committee, conducted an evaluation of the
effectiveness of our disclosure controls and procedures as of March 31, 2004.
Our evaluation process included the identification, review and evaluation of
the effectiveness of our disclosure controls and procedures applicable to the
period covered under and existing through the filing of this periodic report.
In addition, we sought to identify any changes to our internal controls during
the quarter ended March 31, 2004 that would have a material effect on our
internal controls, any significant deficiencies or material weaknesses in our
internal controls and any acts of fraud involving personnel who had a
significant role in our internal controls. We perform this type of evaluation
on a quarterly basis so that the conclusions concerning the effectiveness of
our disclosure controls can be reported in our quarterly reports on Form 10-Q
and annual report on Form 10-K. As more fully described in our annual report on Form 10-K for the year
ended December 31, 2003, we determined in March 2004 to restate our financial
statements for 2002 and 2001 and to revise our previously announced financial
results for 2003. Our decision to restate resulted from the findings of an
independent investigation under the direction of our audit committee into past
accounting practices that occurred in 2002 and prior periods. Following the
investigation and our determination to restate our financial statements, we
performed additional procedures to ensure the accuracy of our financial
information. These additional procedures included a further review of internal
documents, tests of certain system controls, cut-off procedures and a review of
revenue transactions and other cost and expense accounts. As a result, we
determined to correct additional errors made in 2003 and prior periods,
including errors that were previously not recorded because in each such case
and in aggregate we believed the amount of any such error was not material to
our consolidated financial statements. We also made certain revenue, expense and
balance sheet reclassifications. In
connection with our restatement, we and KPMG LLP, our independent registered public
accounting firm, identified and reported to our audit committee significant
internal control deficiencies that collectively constituted a material
weakness (as such term is defined under standards established by the American
Institute of Certified Public Accountants) in our internal controls that
existed during 2003 and prior periods. These internal control deficiencies
related to the conduct of certain former financial management and accounting
personnel in over-riding internal controls; insufficient documentation and
training around standard financial policies and 40




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procedures; insufficient review procedures; and insufficient supporting
documentation for general ledger account reconciliations and manual journal
entries. Since the latter part of 2002, we have adopted and implemented numerous
measures in connection with our ongoing efforts to improve our control
processes and corporate governance, some of which have been enhanced further or
implemented in connection with the restatement process. These measures
included the following:  
    
    We have formalized a Standards of Business Conduct and a Financial
Code of Ethics. Our Financial Code of Ethics is designed to promote
ethical conduct and full, fair and accurate disclosure in our periodic
reports. We have re-emphasized to our finance and accounting
personnel the importance of these requirements.
    
    We have recruited new personnel to our finance organization who have
expertise in financial controls and reporting, including a new chief
financial officer, a senior vice president of finance and a corporate
controller, and made other changes in finance personnel to improve the
overall quality and level of experience of our finance organization
globally.
    
    We have reorganized our finance and general and administrative
organizations to create a single global organization to improve
financial oversight.
    
    We have made changes in our organizational structure to
provide a clearer segregation of responsibilities in connection with account
reconciliations, manual journal entries, and the preparation and
review of documentation to support our quarterly and annual financial
statements.
    
    We have implemented an enhanced quarterly financial review process,
including a formal closing meeting each quarter chaired by the chief
financial officer and attended by a broader cross-section of senior
financial management.
    
    We have adopted and implemented standard financial policies and
procedures on a global basis. Since January 2003 we have documented
over 45 financial policies, all of which are readily available to our
employees via our intranet site. These policies provide global
finance and accounting guidance and include process documentation
designed to ensure consistent application of our global policies and
procedures.
    
    We have implemented a global account reconciliation policy which
requires the monthly reconciliation of all balance sheet accounts and
the use of standard methodology and templates for account reconciliations.
    
    We have implemented and communicated formal reporting systems to
enable employees to identify potential financial or ethical issues on
an anonymous basis. We continue to implement remedial measures in response to specific
accounting and reporting issues related to the restatement. These remedial
measures include personnel and organizational changes to improve supervision
and increased training for finance and accounting personnel. We will continue
to develop new policies and procedures and educate and train our employees on
our existing policies and procedures in our effort to constantly improve our
internal controls and control environment. Our disclosure controls and procedures are not capable of preventing all
instances of error or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system will be attained. Our disclosure controls and
procedures can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the control.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected on a timely
basis. Based on an evaluation of the effectiveness of our disclosure controls and
procedures as of March 31, 2004, which included an evaluation of the
effectiveness of our disclosure controls and procedures applicable to the
period covered by and existing through the filing of this periodic report, and
subject to the information set forth in this Item 4, our chief executive
officer and chief financial officer have concluded that our disclosure controls
and procedures are effective to provide reasonable assurance that material
information required to be included in our Exchange Act reports, including this
report on Form 10-Q, is made known to them on a timely basis. Except for the
improvements described above, there have been no other changes in our internal
control over financial reporting during the quarter ended March 31, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Appearing as exhibits to this periodic report are the certifications of
our chief executive officer and the chief financial officer required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The disclosures
set forth in this Item 4 contain information concerning the evaluation of our
disclosure controls and procedures, and changes in internal control over
financial reporting, referred to in paragraphs 4(b) and (c) of the
certifications. This Item 4 should be read in conjunction with the
certifications for a more complete understanding of the topics presented. 
 PART II: OTHER INFORMATION 41




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Item 1.Legal Proceedings SEC Related Matters SEC
Investigation.As previously disclosed, since the third quarter of
2002, we have received subpoenas issued by the Securities Exchange Commission
in the investigation entitled In the Matter of AOL/Time Warner.The SEC has
requested information concerning the facts and circumstances surrounding our
transactions with AOL Time Warner, or AOL, and related accounting and
disclosure matters. Our transactions with AOL, entered into in September 2000,
involved a software and services purchase by AOL at a stated value of $50.0
million and the purchase by us of advertising services from AOL at a stated
value of $20.0 million. In March 2003, we restated our financial statements
for 2001 and 2000 to reflect a reduction in revenues and expenses of $20.0
million. The restatement included an additional reduction in revenues and
expenses of $1.0 million related to two other contemporaneous transactions with
other parties entered into in 2000 that involved software licenses and the
purchase of on-line advertising services. In
June 2004, we restated our financial
statements for 2002 and 2001 and revised our previously announced financial
results for 2003. Prior to the restatement, we voluntarily disclosed to the
staff of the SEC past accounting practices applicable to our 2002 and 2001
financial statements that we determined were not in compliance with GAAP. For more
information regarding the restatement
of our financial statements for 2002 and 2001, including the corresponding
interim periods for 2002 and 2001, and the interim periods ended March, June and
September 2003, and the revision of our financial results for
2003, see Managements Discussion and Analysis of Financial
Condition and Results of Operations  Restatement of Consolidated Financial
Statements, Financial Statements and Supplementary Data
 Selected Quarterly Results of Operations and Note 2
of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10K for the year ended December 31,
2003. We and our audit committee continue to cooperate with the SEC in its
review of these matters. At this time, we cannot predict the outcome of the
SECs review. Securities Class Actions.After we announced in January 2003 that we would
restate our financial results as a result of transactions entered into with AOL
in September 2000, numerous separate complaints purporting to be class actions
were filed in the United States District Court for the Northern District of
California alleging that we and some of our officers and directors violated
provisions of the Securities Exchange Act of 1934. The complaints contain
varying allegations, including that we made materially false and misleading
statements with respect to our 2000, 2001 and 2002 financial results included
in our filings with the SEC, press releases and other public disclosures. On
May 2, 2003, a lead plaintiff and lead counsel were appointed. A consolidated
complaint was filed by the lead plaintiff on July 18, 2003. On December 10,
2003, the District Court granted the defendants motion to dismiss the
consolidated complaint, with leave to amend. On May 19, 2004, the District
Court granted the defendants motion to dismiss the plaintiffs first amended
complaint, with leave to amend. In addition, in 2003 several complaints
purporting to be derivative actions were filed in California state court
against some of our directors and officers. These complaints are based on the
same facts and circumstances as the class actions and generally allege that the
named directors and officers breached their fiduciary duties by failing to
oversee adequately our financial reporting. The state court complaints have
been consolidated into the action In Re VERITAS Software Corporation Derivative
Litigation, which was filed on May 8, 2003 in the Superior Court of Santa Clara
County and is currently pending. All of the complaints generally seek an
unspecified amount of damages. The cases are still in the preliminary stages,
and it is not possible for us to quantify the extent of our potential
liability, if any. An unfavorable outcome in any of these matters could have a
material adverse effect on our business, financial condition, results of
operations and cash flow. In addition, defending any litigation may be costly
and divert managements attention from the day-to-day operations of our
business. Other Litigation On January 10, 2003, Raytheon Company sued VERITAS along with Brocade
Communications Systems, Oracle Corporation, Overland Storage Inc., Qualstar
Corp., QLogic Corporation, Ricoh Corporation and Spectra Logic Corporation in
the United States District Court for the Eastern District of Texas. Raytheon
alleged infringement of a patent entitled Mass Data Storage Library and sought
damages and an injunction against all defendants. On February 26, 2004, a
confidential settlement was agreed to by Raytheon and VERITAS, and on March 17,
2004, the case was dismissed with prejudice pursuant to the settlement
agreement. The settlement agreement did not have a material impact on our
financial position or overall results of operations. On October 23, 2001, Storage Computer Corporation sued VERITAS in the
United States District Court for the Northern District of Texas alleging
infringement of one of Storage Computer Corporations patents. Currently,
Storage Computer Corporation is 42




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alleging we infringed two of their U.S. patents. We have denied all material
allegations in the complaints, filed counterclaims for declaratory judgment of
invalidity and non-infringement of the patents-in-suit and alleged their
infringement of one of our patents. Storage Computer Corporation is seeking
damages of approximately $50.0 million, treble damages, costs of suit and
attorneys fees and a permanent injunction from further alleged infringement.
On March 12, 2004, the Court granted our motions for summary judgment of
non-infringement of the two patents at issue, and denied Storage Computers
motion for partial summary judgment. The Court did not address additional
matters raised in our motion. Storage Computer Corporation recently filed a
notice of appeal. In addition to the legal proceedings listed above, we are also party to
various other legal proceedings that have arisen in the ordinary course of our
business. While we currently believe that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material
adverse effect on our financial position or overall trends in results of
operations, litigation is subject to inherent uncertainties. Were an
unfavorable ruling to occur, there exists the possibility of a material adverse
impact on our results of operations and cash flows for the period in which the
ruling occurs. The estimate of the potential impact on our financial position
or overall results of operations for the above discussed legal proceedings
could change in the future. 
 Item 5. Other Information 2004 Annual Meeting of Stockholders.Our 2004 annual meeting of
stockholders will be held at our principal executive offices located at 350
Ellis Street, Mountain View, California 94043 on Wednesday, August 25, 2004, beginning at
8:30 a.m. Pacific Time. Stockholder Proposals for 2004 Annual Meeting.If you want us to consider
including a proposal in our proxy statement for our 2004 annual meeting of
stockholders, you must deliver a copy of your proposal to our Secretary at our
principal executive offices at 350 Ellis Street, Mountain View, California
94043 no later than June 26, 2004. If you intend to present a proposal or
nominate directors at our 2004 annual meeting of stockholders, but you do not
intend to have it included in our proxy statement, you must deliver a written
copy of your proposal or notice of director nomination to our Secretary at our
principal executive offices by June 26, 2004. If we do not receive your
proposal within the specified time frame, you will not be permitted to raise
your proposal at the annual meeting. 
 Item 6.Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    Date
    
    Number
    
    Herewith3.01
    
    Amended and Restated Certificate of
Incorporation of VERITAS Holding
Corporation
    
    8-A
    
    06/02/99
    
    
    3.013.02
    
    Certificate of Amendment of Amended
and Restated Certificate of
Incorporation of VERITAS Holding
Corporation (changing name of
corporation to VERITAS Software
Corporation)
    
    8-A
    
    06/02/99
    
    
    3.023.03
    
    Certificate of Amendment of Amended
and Restated Certificate of
Incorporation of VERITAS
    
    S-8
    
    06/02/00
    
    
    4.033.04
    
    Amended and Restated Bylaws of VERITAS
    
    S-4/A
    
    09/28/00
    
    
    3.0431.01
    
    Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X31.02
    
    Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.01
    
    Certifications of Chief Executive
Officer and Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X
  (b)
    
    Reports on Form 8-K Date of Report
    
    Item(s)
    
    Description1/28/04
    
    
    12
    
    
    VERITAS announces financial results for the
year and quarter ended
 43




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##### Table of Contents



Date of Report
    
    Item(s)
    
    DescriptionDecember 31, 2003.3/15/04
    
    
    12
    
    
    VERITAS announces delay in filing its annual
report on Form 10-K for the year ended December
31, 2003, restatement of financial statements
for 2001 and 2002 and revisions to reported
results for 2003.
 44




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on June 11, 2004. VERITAS SOFTWARE CORPORATION By: /s/ Edwin J. GillisEdwin J. GillisExecutive Vice President, Financeand Chief Financial Officer(Principal Financial and Accounting Officer)
 45




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Exhibit Index  (a)
    
    Exhibits Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNumber
    
    Exhibit Description
    
    Form
    
    Date
    
    Number
    
    Herewith3.01
    
    Amended and Restated Certificate of
Incorporation of VERITAS Holding
Corporation
    
    8-A
    
    06/02/99
    
    
    3.013.02
    
    Certificate of Amendment of Amended
and Restated Certificate of
Incorporation of VERITAS Holding
Corporation (changing name of
corporation to VERITAS Software
Corporation)
    
    8-A
    
    06/02/99
    
    
    3.023.03
    
    Certificate of Amendment of Amended
and Restated Certificate of
Incorporation of VERITAS
    
    S-8
    
    06/02/00
    
    
    4.033.04
    
    Amended and Restated Bylaws of VERITAS
    
    S-4/A
    
    09/28/00
    
    
    3.0431.01
    
    Certification of Chief Executive
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X31.02
    
    Certification of Chief Financial
Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.01
    
    Certifications of Chief Executive
Officer and Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X