<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Period Ended
September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition Period
From _________________ to ______________
Commission file number 0-20981
DOCUMENT SCIENCES CORPORATION
Delaware 33-0485994
- - ------------------------------ ---------------------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or of organization) Identification No.)
6333 Greenwich Drive, Suite 100
San Diego, CA 92122
- - ------------------------------ ---------------------------------
(Address of principal executive (Zip Code)
offices)
(619) 625-2000
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 periods
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
The number of shares of the issuer's Common Stock outstanding as of September
30, 1996 was 10,375,260
<PAGE> 2
Index
DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets---September 30, 1996 and December 31, 1995.............. 3
Condensed consolidated statements of income---Three months ended September 30, 1996 and
1995 and Nine months ended September 30, 1996 and 1995................................. 4
Condensed consolidated statements of cash flows---Nine months ended September 30, 1996
and 1995................................................................................ 5
Notes to condensed consolidated financial statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................. 13
Item 6. Exhibits and Reports on Form 8-K..................................................... 13
Signatures.................................................................................... 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1-Financial Statements (Unaudited)
DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,589,164 $ 1,271,120
Accounts receivable, net 3,193,031 2,152,732
Due from affiliates 2,192,491 1,612,600
Other current assets 335,324 243,433
------------ -----------
Total current assets 27,310,010 5,279,885
Property and equipment, net 984,050 632,225
Other assets 402,648 377,172
============ ===========
Total assets $ 28,696,708 $ 6,289,282
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $ 921,072 $ 328,609
Accrued liabilities 1,187,948 574,896
Deferred revenues 2,499,233 1,596,965
Current portion of obligations under capital leases 76,826 44,100
Current income tax expense payable to affiliate 1,382,100 1,382,100
------------ -----------
Total current liabilities 6,067,179 3,926,670
Long-term liabilities
Obligations under capital leases 130,298 98,500
Deferred income taxes 157,000 157,000
------------ -----------
Total long-term liabilities 287,298 255,500
============ ===========
Total liabilities $ 6,354,477 $ 4,182,170
============ ===========
Commitments and contingencies
Series A Redeemable Preferred Stock, $.001 par value;
no shares authorized, issued and outstanding in 1996,
2,000,000 shares authorized, issued and outstanding
in 1995 1,250,750
STOCKHOLDERS' EQUITY
Common stock, par value $.001 per share authorized
30,000,000 shares in 1996 and 3,000,000 in 1995,
issued and outstanding 10,375,260 shares in 1996
and 1,311,423 in 1995
10,375 1,311
Additional paid-in-capital 21,636,780 110,550
Deferred compensation (378,974)
Retained earnings 1,074,050 744,501
------------ -----------
Total stockholders' equity 22,342,231 856,362
------------ -----------
Total liabilities & stockholders equity $ 28,696,708 $ 6,289,282
============ ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
3
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DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Initial license fees $ 2,526,772 $ 1,237,850 $ 6,030,064 $ 3,730,257
Annual renewal license and support fees 631,140 514,043 1,731,495 1,408,064
Services and other 951,691 538,715 2,698,098 1,316,766
----------- ----------- ----------- -----------
Total revenues 4,109,603 2,290,608 10,459,657 6,455,087
Cost of revenues:
Initial license fees 212,780 34,345 526,444 132,677
Annual renewal license and support fees 122,646 86,447 367,234 266,122
Services and other 288,020 114,909 609,592 293,763
----------- ----------- ----------- -----------
Total cost of revenues 623,446 235,701 1,503,270 692,562
----------- ----------- ----------- -----------
Gross profit 3,486,157 2,054,907 8,956,387 5,762,525
Operating expenses:
Research and development 652,865 512,168 1,738,335 1,331,539
Selling, marketing and customer support 1,893,053 1,058,380 5,142,062 2,924,451
General and administrative 411,079 386,988 1,146,696 1,119,262
----------- ----------- ----------- -----------
Total operating expenses 2,956,997 1,957,536 8,027,093 5,375,252
----------- ----------- ----------- -----------
Income from operations 529,160 97,371 929,294 387,273
Interest income, net 25,644 444 41,483 9,671
----------- ----------- ----------- -----------
Income before income taxes 554,804 97,815 970,777 396,944
Provision for income taxes 221,922 36,940 391,478 147,899
=========== =========== =========== ===========
Net income $ 332,882 $ 60,875 $ 579,299 $ 249,045
=========== =========== =========== ===========
Net income per share $ 0.04 $ 0.01 $ 0.06 $ 0.03
=========== =========== =========== ===========
Shares used in per share calculations 9,144,517 8,256,165 8,977,371 8,256,165
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1996 1995
----------- ---------
<S> <C> <C>
Operating activities
Net income $ 579,299 $ 249,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 183,128 97,714
Amortization of computer software costs 78,760 22,901
Amortization of deferred compensation 61,026 --
Provision for doubtful accounts 25,386 30,337
Deferred revenue 902,268 24,263
Changes in operating assets and liabilities:
Accounts receivable (1,645,576) 829,740
Other current assets (91,891) (19,965)
Accounts payable 592,463 (61,342)
Accrued liabilities 613,052 (491,042)
----------- ---------
Net cash provided by operating activities 1,297,915 681,651
Investing activities
Purchases of property and equipment (437,093) (245,875)
Additions to computer software costs (104,236) (185,306)
----------- ---------
Net cash used for investing activities (541,329) (431,181)
Financing activities
Principal payments under capital lease obligations (33,336) (26,492)
Issuance of common stock 19,594,794 100
----------- ---------
Net cash provided by (used for) financing activities 19,561,458 (26,392)
----------- ---------
Increase in cash and cash equivalents 20,318,044 224,078
Cash and cash equivalents at beginning of period 1,271,120 583,835
=========== =========
Cash and cash equivalents at end of period $21,589,164 $ 807,913
=========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 16,008 $ 4,688
=========== =========
Capital lease obligations entered into for property and
equipment $ 97,860 $ 130,941
=========== =========
</TABLE>
See notes to condensed consolidated financial statements
5
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DOCUMENT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Note A---Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended December 31, 1995, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Registration Statement on Form S-1 (File No. 333-06349). Operating
results for the three- and nine-month periods ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
Note B---Transactions with Affiliates
The Company has a strategic marketing alliance with Xerox Corporation (Xerox)
under which the parties have agreed to pay each other fees on referrals that
lead to the successful sale or licensing of each other's products. Included in
services and other revenue in the accompanying condensed consolidated statements
of income are commissions earned from Xerox totaling $167,300 and $259,200 for
the three months ended September 30, 1995 and 1996, respectively and $325,000
and $845,800 for the nine months ended September 30, 1995 and 1996,
respectively. Commissions related to referrals from Xerox are included in
selling and marketing expense in the accompanying condensed consolidated
statements of income and totaled $20,400 and $98,300 for the three months ended
September 30, 1995 and 1996, respectively, and $92,600 and $165,600 for the nine
months ended September 30, 1995 and 1996, respectively.
The Company has distribution agreements with affiliates which provide the
affiliates with the non-exclusive right to sub-license the Company's software in
Australia, New Zealand and Canada. The terms of the distributor agreements
provide that the affiliates receive a discount from the list price of the
Company's products licensed, including maintenance and support. Revenues from
the affiliates under these agreements, net of discounts, were $114,800 and
$296,400 for the three months ended September 30, 1995 and 1996, respectively
and $629,400 and $432,700 for the nine months ended September 30, 1995 and 1996,
respectively. Included in accounts receivable in the accompanying condensed
consolidated balance sheets are $193,500 and $318,600 from these revenues at
December 31, 1995 and September 30, 1996, respectively.
The Company has distribution agreements with affiliates which provide the
affiliates the non-exclusive right to sub-license the Company's software in
Europe. Revenues under these agreements totaled $604,500 and $533,400 for the
three months ended September 30, 1995 and 1996, respectively, and $1,229,600 and
$1,073,000 for the nine months ended September 30, 1995 and 1996, respectively.
Related accounts receivable in the accompanying condensed consolidated balance
sheets are $482,900 and $943,600 at December 31, 1995 and September 30, 1996,
respectively
6
<PAGE> 7
Under terms of a separate agreement with Xerox, the Company provided software
support services for Xerox Publishing Systems' products. Included in annual
renewal license and support fees are revenues from Xerox under this agreement of
$29,700 for the three months ended September 30, 1995 and $89,100 for the nine
months ended September 30, 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion contains certain trend analysis and other
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors, including those set
forth in this discussion under "Certain Factors That May Affect Future Results"
and other risks detailed from time to time in the Company's SEC reports. In
addition, the discussion of the Company's results of operations should be read
in conjunction with matters described in detail in the Company's Prospectus
dated September 20, 1996, including the risk factors set forth therein.
OVERVIEW
Document Sciences develops, markets and supports a family of document automation
software and services used in high volume electronic publishing applications.
The Company was incorporated in Delaware in October 1991 as a wholly-owned
subsidiary of Xerox Corporation ("Xerox"). As a result of the Company's initial
public offering of stock in September 1996, Xerox ownership has been reduced to
approximately 63% at September 30, 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statements of income for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1995 1996 1995 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees 54% 62% 58% 58%
Annual renewal license and support fees 22 15 22 16
Services and other 24 23 20 26
--------- --------- --------- --------
Total revenues 100% 100% 100% 100%
--------- --------- --------- --------
Cost of revenues:
Initial license fees 2 5 2 5
Annual renewal license and support fees 4 3 4 4
Services and other 5 7 5 6
--------- --------- --------- --------
Total cost of revenues 11% 15% 11% 15%
--------- --------- --------- --------
Gross profit 89% 85% 89% 85%
--------- --------- --------- --------
</TABLE>
7
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1995 1996 1995 1996
------ ------ ------- ------
<S> <C> <C> <C> <C>
Operating expenses
Research and development 22% 16% 21% 16%
Selling, marketing and customer support 46 46 45 49
General and administration 17 10 17 11
------ ------ ------- ------
Total operating expenses 85% 72% 83% 76%
------ ------ ------- ------
Income from operations 4 13 6 9
Interest income, net -- 1 -- 1
Income before provision for taxes 4 14 6 10
Provision for income taxes 1 6 2 4
====== ====== ======= ======
Net income 3% 8% 4% 6%
====== ====== ======= ======
</TABLE>
REVENUES
The Company's revenues are divided into three categories: initial license fees,
annual renewal license and support fees, and services and other revenues.
Initial license fees are comprised principally of license fees for the first
year of use of the Company's products by end user customers. Annual renewal
license and support fees are comprised principally of mandatory fees paid by
customers annually for continued use and support of the licensed products.
Services and other revenues are comprised principally of fees for consulting,
application development and training services performed by the Company as well
as fees received from Xerox in connection with the sale of certain Xerox printer
products. The Company recognizes revenue in accordance with AICPA Statement of
Position on Software Revenue Recognition No. 91-1. Initial license revenue is
recognized upon shipment of the product to customers if no significant Company
obligations remain and collection of the receivable is deemed probable. The
portion of the initial license revenue which represents the software support for
the first year is deferred and recognized ratably over the contract period.
Revenues from commissions paid by Xerox in connection with the sale of Xerox
printer products are recognized upon installation of the printer products.
Revenues generated from consulting and training services are recognized as the
related services are performed.
Total revenues increased by 79% from $2.3 million for the three months ended
September 30, 1995 to $4.1 million for the three months ended September 30,
1996, and increased by 62% from $6.5 million for the nine months ended September
30, 1995 to $10.5 million for the nine months ended September 30, 1996. This
growth was due primarily to the increases in revenues from initial licenses of
software and growth in services and other revenue.
The Company sells its products principally through a direct sales force
domestically, and internationally principally through distributors and value
added resellers ("VARS") and, to a lesser extent, through its direct sales
force. Revenues from export sales and sales through the Company's foreign
subsidiary increased 36% from $1.0 million for the three months ended September
30, 1995 to $1.4 million for the three months ended September 30, 1996, and
increased 24% from $2.6 million for the nine months ended September 30, 1995 to
$3.3 million for the nine months ended September 30, 1996. This growth was
principally due to expansion of the VAR channel in Europe. Revenues from export
sales were 45% and 34% of total revenues for the three months ended September
30, 1995 and 1996, respectively, and 41% and 31% of total revenues for the nine
months ended September 30, 1995 and 1996, respectively.
8
<PAGE> 9
The Company and Xerox maintain a strategic marketing alliance agreement under
which the parties have agreed to pay each other fees on referrals that lead to
the successful licensing or sales of each other's products. The Company's
revenues from the strategic marketing alliance, principally commissions from
sales of Xerox printers, were $167,300 and $259,200 for the three months ended
September 30, 1995 and 1996, respectively, and $325,000 and $845,800 for the
nine months ended September 30, 1995 and 1996, respectively. The fees received
by the Company from sales of Xerox printers under the strategic marketing
alliance have little associated costs, have had a high degree of inconsistency
from quarter to quarter and are difficult to project. Failure to continue to
receive such fees could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company has entered into distributorship agreements with various Xerox
foreign affiliates to remarket the Company's products internationally. The
Company's revenues from such distributorship agreements related to the
licensing, maintenance and support of the Company's products increased 15% from
$719,300 for the three months ended September 30, 1995 to $829,900 for the three
months ended September 30, 1996. Revenues for the nine months ended September
30, 1995 and September 30, 1996 were $1.9 million and $1.5 million,
respectively. This decrease is due principally to substantially reduced sales
through Xerox Canada Ltd. in Canada and to a lesser extent, to reduced European
revenues from Xerox affiliates.
Initial license fees. Initial license fee revenues increased 104% from $1.2
million for the three months ended September 30, 1995 to $2.5 million for the
three months ended September 30, 1996 and increased 62% from $3.7 million for
the nine months ended September 30, 1995 to $6.0 million for the nine months
ended September 30, 1996. The increase was due principally to sales to new
customers, expansion of the direct sales force and expansion of the Company's
indirect distribution channel, especially the value added reseller channel in
Europe. During the three months ended September 30, 1995 and September 30, 1996
the Company derived revenue from two single customers for initial license fees
in the amounts of $342,000 and $528,600 respectively. These transactions
represented 15% and 13% of total revenues for the respective three month
periods.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 23% from $514,000 for the three months ended
September 30, 1995 to $631,000 for the three months ended September 30, 1996,
and increased 22% from $1.4 million for the nine months ended September 30, 1995
to $1.7 million for the nine months ended September 30, 1996. The increase was
principally due to the larger installed base of users of the Company's software
products. As a percentage of total revenues, annual renewal license and support
fees have decreased from approximately 22% to 15% for the three months ended
September 30, 1995 and 1996 and from approximately 22% to 16% for the nine
months ended September 30, 1995 and 1996. This decrease is principally due to
the strong increase in initial license revenues.
Services and other. Revenues from services and other increased 77% from
$538,700 for the three months ended September 30, 1995 to $951,700 for the
three months ended September 30, 1996, and increased 105% from $1.3 million for
the nine months ended September 30, 1995 to $2.7 million for the nine months
ended September 30, 1996. The increase was principally due to the increased
number of new customer licenses of the Company's software generating increased
demand for services, and the increase in commissions from $167,300 to $259,200
for the three months ended September 30, 1995 and 1996, respectively, and from
$325,000 to $845,800 for the nine months ended September 30, 1995 and 1996,
respectively, under the strategic marketing alliance for the sale of Xerox
printer products.
9
<PAGE> 10
Cost of Revenues
Total cost of revenues was 11% and 15% of total revenues for the three months
ended September 30, 1995 and 1996, respectively, and 11% and 15% of total
revenues for the nine months ended September 30, 1995 and 1996, respectively.
The increase in cost of revenues as a percentage of total revenues resulted
primarily from increased personnel costs associated with providing professional
consulting services to customers.
Cost of initial license fees. Cost of initial licenses of software includes
documentation, reproduction costs, product packaging, packaging design, product
media, employment costs for training, installation and distribution personnel
and the cost of third party software. The cost of initial licenses increased
520% from $34,300 for the three months ended September 30, 1995 to $212,800 for
the three months ended September 30, 1996, and increased 297% from $132,700 for
the nine months ended September 30, 1995 to $526,400 for the nine months ended
September 30, 1996. The increases were primarily the result of increased
payments for third party software integrated into the Company's Document Library
software products. As a percent of initial license fee revenues, the cost of
initial license fees was 3% and 8% for the three months ended September 30, 1995
and 1996, respectively, and 4% and 9% for the nine months ended September 30,
1995 and 1996, respectively. The cost of initial license fees also included the
amortization of capitalized software development costs of $7,200 and $25,900 for
the three months ended September 30, 1995 and 1996, respectively and $22,900 and
$78,800 for the nine months ended September 30, 1995 and 1996, respectively.
Cost of annual renewal license and support fees. Cost of annual renewal license
and support fees consists principally of the employment-related costs for the
Company's technical support staff, which performs technical software support
services. These costs increased 42% from $86,400 for the three months ended
September 30, 1995 to $122,600 for the three months ended September 30, 1996,
and increased 38% from $266,100 for the nine months ended September 30, 1995 to
$367,200 for the nine months ended September 30, 1996. As a percentage of annual
renewal license and support fee revenues, these costs were 17% and 19% for the
three months ended September 30, 1995 and 1996, respectively, and 19% and 21%
for the nine months ended September 30, 1995 and 1996, respectively. This
increase was the result of additional personnel to support the expansion of the
installed base of users of the Company's software products.
Cost of services and other. Cost of services and other consists principally of
the employment-related costs for the Company's staff of product consultants and
trainers. There are little or no costs related to commissions from the sale of
Xerox printers under the strategic marketing alliance. Cost of services and
other revenue increased 151% from $114,900 for the three months ended September
30, 1995 to $288,000 for the three months ended September 30, 1996, and
increased 108% from $293,800 for the nine months ended September 30, 1995 to
$609,600 for the nine months ended September 30, 1996. The costs of services and
other represented 21% and 30% of the related revenues for the three months ended
September 30, 1995 and 1996, respectively, and 22% and 23% of related revenues
for the nine months ended September 30, 1995 and 1996 respectively. The increase
in cost of services and other revenues resulted principally from the additional
staffing to provide professional consulting services.
Research and development. Research and development expenses consist primarily of
the employment-related costs of personnel associated with developing new
products, enhancing existing products, testing software products and developing
product documentation. The Company expenses all costs for research and
development of new products until technological feasibility has been assured.
Thereafter, costs of production are capitalized until general release of the
product. The capitalized costs of software production are amortized using the
greater of the amount computed using the ratio of current product revenues to
estimated total product revenues or the straight-line method over the remaining
estimated economic lives of the products. The Company capitalized $43,500 and $0
for the three months ended September 30, 1995 and 1996, respectively and
$104,200 and $172,500 for the nine months ended September 30, 1995 and 1996,
respectively. Research and development
10
<PAGE> 11
expenses increased 28% from $512,200 for the three months ended September 30,
1995 to $652,900 for the three months ended September 30, 1996 and 31% from $1.3
million for the nine months ended September 30, 1995 to $1.7 million for the
nine months ended September 30, 1996. The increase in these expenses for each
period resulted principally from the expansion of the engineering staff and
related costs.
Selling, marketing and customer support. Selling, marketing and customer support
expenses consist primarily of salaries, commissions, marketing programs and
related costs for pre- and post sales activity. These expenses increased 79%
from $1.1 million for the three months ended September 30, 1995 to $1.9 million
for the three months ended September 30, 1996 and 76% from $2.9 million for the
nine months ended September 30, 1995 to $5.1 million for the nine months ended
September 30, 1996. The growth of these expenses were due principally to
increased sales, sales support and marketing personnel and related costs,
commissions associated with increased revenues and increased marketing programs.
General and administrative. General and administrative expenses consist
primarily of employment-related costs for finance, administration and human
resources, and general corporate management and services. These expenses
increased 6% from $387,000 for the three months ended September 30, 1995 to
$411,000 for the three months ended September 30, 1996 and 3% from $1.12
million for the nine months ended September 30, 1995 to $1.15 million for the
nine months ended September 30, 1996. These expenses represented 17% and 10% of
the total revenues for the three months ended September 30, 1995 and 1996,
respectively, and 17% and 11% of total revenues for the nine months ended
September 30, 1995 and 1996, respectively. The increase in general and
administrative expenses in absolute dollars was the result of growth in the
finance and administrative operations of the Company. The decrease of these
expenses as a percentage of total revenues reflects the benefits of economies
of scale. The Company expects general and administrative expenses to increase
for the remainder of the year in order to support the growth of the Company.
Interest and other income (expense), net. Interest and other income is primarily
composed of interest income from cash and cash equivalents and short term
investments offset by financing charges related to equipment leases and other
debt. Interest and other income (expense), net increased from $400 for the three
months ended September 30, 1995 to $25,600 for the three months ended September
30, 1996, and increased from $9,700 for the nine months ended September 30, 1995
to $41,500 for the nine months ended September 30, 1996. The increase in dollar
amount is primarily due to higher cash balances resulting from the infusion of
cash from the Company's initial public offering of common stock completed in
September 1996.
Provision for income taxes. From its inception to September 20, 1996, the
Company's taxes were included in the consolidated tax returns of Xerox
Corporation. For reporting purposes, the Company recognized income tax expense
on pretax income at the tax rates in effect as if the Company were filing tax
returns on a stand-alone basis.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's total revenues and operating results can vary, sometimes
substantially, from quarter to quarter and are expected to vary significantly in
the future. The Company's revenues and operating results are difficult to
forecast. Future results will depend upon many factors, including the demand for
the Company's products, the level of product and price competition, the length
of the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the budget
cycles of the Company's customers, the Company's success in expanding its direct
sales force and indirect distribution channels, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of products and services sold, levels of international sales, activities of
and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, the ability of the Company to develop and market new
products and control costs, and general domestic and international economic
conditions. In addition, the Company's sales generally reflect a relatively high
amount of revenues per order, and
11
<PAGE> 12
the loss or delay of individual orders, therefore, could have a significant
impact on revenues and quarterly operating results of the Company. In addition,
a significant amount of the Company's revenues occur predominantly in the third
month of each fiscal quarter and tend to be concentrated in the latter half of
that third month.
The Company's software products generally are shipped as orders are received. As
a result, initial license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. The timing of receipt of initial
license revenue is difficult to predict because of the length of the Company's
sales cycle, which is typically three to twelve months from the initial contact.
Because the Company's operating expenses are based on anticipated revenue trends
and because a high percentage of the Company's expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of initial license
transactions could cause significant variations in operating results from
quarter to quarter and could result in losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially adversely affected.
Due to the foregoing factors, revenues and operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
In September, 1996, the Company completed an initial public offering of its
common stock, and received net proceeds of approximately $20.5 million.
The Company's cash and cash equivalents totaled $21.6 million at September 30,
1996, representing 76% of total assets. Net cash provided by operating
activities for the nine months ended September 30, 1996 was $1.3 million and was
primarily the result of increases in deferred revenue, accrued liabilities and
accounts payable and income from operations offset by increases in accounts
receivable of $1.5 million. The Company intends to invest in short-term,
interest-bearing, investment grade securities.
For the nine months ended September 30, 1996, the Company's investing activities
used cash of $437,100 primarily for computer equipment and fixed assets required
to support the growth of the Company and $104,200 for capitalization of software
development expenses.
The Company's current line of credit allows for borrowings up to $2.5 million at
the bank's prime rate and expires in July 1997. As of September 30, 1996 the
Company had no outstanding borrowings under its line of credit.
With the exception of plans to undertake capital spending to expand the
corporate facilities in the first quarter of 1997, the Company has no
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under facilities and capital leases.
The Company believes that its existing cash balances, anticipated cash flows
from operations and its bank line of credit will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. A portion of the Company's cash could be used to acquire
or invest in complementary businesses or products or obtain the right to use
complementary technologies. The Company is currently evaluating, in its
ordinary course of business, potential investments such as businesses, products
or technologies. The Company has no current understandings, commitments or
agreements with respect to any acquisition of other businesses, products or
technologies.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective August 7, 1996, the following proposals were approved by the written
consent of the Company's stockholders:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes
------------------ ------
<S> <C> <C>
1. Proposal to amend and restate the Company's 1,799,961 shares of
Certificate of Incorporation to increase the Common Stock 0
authorized Common Stock to 30,000,000
shares, to authorize 2,000,000 shares of 2,000,000 shares of
undesignated Preferred Stock and to effect Series A Preferred
certain other amendments.
2. Proposal to approve indemnification agree- 1,867,545 shares of 0
ments between the Company and its officers Common Stock
and directors.
2,000,000 shares of
Series A Preferred
3. Proposal to amend the Company's 1995 1,822,545 shares of 0
Stock Incentive Plan. Common Stock
2,000,000 shares of
Series A Preferred
4. Proposal to ratify the appointment of Ernst 1,867,545 shares of 0
& Young LLP as independent auditors for the Common Stock
fiscal year ending December 31, 1996.
2,000,000 shares of
Series A Preferred
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1996.
13
<PAGE> 14
SIGNATURES
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.
Document Sciences Corporation
-----------------------------
(Registrant)
Date: November 14, 1996 /S/ Barbara Amantea
- - ------------------------ ----------------------------------------
Barbara Amantea, Vice President,
Chief Financial Officer (Duly Authorized
and Principal Financial Officer)
14
<PAGE> 15
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 21,589,164
<SECURITIES> 0
<RECEIVABLES> 5,432,558
<ALLOWANCES> (47,036)
<INVENTORY> 0
<CURRENT-ASSETS> 27,310,010
<PP&E> 1,422,873
<DEPRECIATION> (438,823)
<TOTAL-ASSETS> 28,696,708
<CURRENT-LIABILITIES> 6,067,179
<BONDS> 0
0
0
<COMMON> 10,375
<OTHER-SE> 22,331,856
<TOTAL-LIABILITY-AND-EQUITY> 28,696,708
<SALES> 7,761,559
<TOTAL-REVENUES> 10,459,657
<CGS> 893,678
<TOTAL-COSTS> 1,503,270
<OTHER-EXPENSES> 7,962,596
<LOSS-PROVISION> 48,489
<INTEREST-EXPENSE> 16,008
<INCOME-PRETAX> 970,777
<INCOME-TAX> (391,478)
<INCOME-CONTINUING> 579,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579,299
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
