<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 June 30, 1997
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 of (I.R.S. Employer
incorporation or of organization) Identification No.)
6333 Greenwich Drive, Suite 200
San Diego, CA 92122
- ------------- -----
(Address of principal executive offices) (Zip Code)
(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 July 31,
1997 was 10,783,723
<PAGE> 2
Index
DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 1997 and December 31, 1996.......................... 3
Condensed consolidated statements of income--Three and Six months ended June 30, 1997 and
1996................................................................................................ 4
Condensed consolidated statements of cash flows--Six months ended June 30, 1997 and 1996............ 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>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 2,550,968 2,465,694
Short-term investments 19,871,538 23,142,885
Accounts receivable, net 3,185,536 2,257,025
Due from affiliates 2,231,670 2,377,364
Other current assets 652,930 403,004
----------- -----------
Total current assets 28,492,642 30,645,972
Property and equipment, net 1,929,578 998,203
Goodwill, net of accumulated amortization of $11,687 1,040,173 --
Other assets 539,321 377,342
----------- -----------
Total assets 32,001,714 32,021,517
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable 647,088 698,711
Accrued liabilities 704,795 1,289,033
Deferred revenues 2,753,922 2,477,723
Current portion of obligations under capital leases 62,922 62,439
Current income tax expense payable to affiliate 311,000 311,000
----------- -----------
Total current liabilities 4,479,727 4,838,906
Obligations under capital leases 84,155 115,740
Deferred income taxes 156,500 156,500
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized---30,000,000 shares
Issued and outstanding shares --10,778,583 at June 30,
1997 and 10,722,168 at December 31, 1996 10,751 10,722
Additional paid-in-capital 25,394,529 25,382,203
Deferred compensation (296,471) (351,473)
Unrealized gain on short term investments 54,990 13,222
Retained earnings 2,117,533 1,855,697
----------- -----------
Total stockholders' equity 27,281,332 26,910,371
----------- -----------
Total liabilities and stockholders' equity 32,001,714 32,021,517
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 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 Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $ 1,906,301 $1,939,524 $ 3,689,380 $3,503,292
Annual renewal license and support fees 1,166,979 555,201 1,966,920 1,100,355
Services and other 1,609,813 1,167,475 3,008,728 1,746,407
------------ ---------- ------------ ----------
Total revenues 4,683,093 3,662,200 8,665,028 6,350,054
------------ ---------- ------------ ----------
Cost of revenues:
Initial license fees 242,476 227,599 438,415 313,664
Annual renewal license and support fees 170,886 110,363 281,250 244,588
Services and other 594,871 182,753 1,002,598 321,572
------------ ---------- ------------ ----------
Total cost of revenues 1,008,233 520,715 1,722,263 879,824
------------ ---------- ------------ ----------
Gross profit 3,674,860 3,141,485 6,942,765 5,470,230
Operating expenses:
Research and development 801,260 579,407 1,493,946 1,085,470
Selling, marketing and customer support 2,368,056 1,786,502 4,509,759 3,249,009
General and administrative 678,999 394,967 1,327,775 735,617
------------ ---------- ------------ ----------
Total operating expenses 3,848,315 2,760,876 7,331,480 5,070,096
------------ ---------- ------------ ----------
Income from operations (173,455) 380,609 (388,715) 400,134
Interest income, net 284,775 10,502 571,651 15,839
------------ ---------- ------------ ----------
Income before income taxes 111,320 391,111 182,936 415,973
Provision for (benefit of) income taxes (52,500) 160,356 (78,900) 169,556
------------ ---------- ------------ ----------
Net income $ 163,820 $ 230,755 $ 261,836 $ 246,417
============ ========== ============ ==========
Net income per share $ 0.01 $ 0.03 $ 0.02 $ 0.03
============ ========== ============ ==========
Shares used in per share calculations 11,059,229 8,749,061 11,052,748 8,891,176
============ ========== ============ ==========
</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>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 261,836 $ 246,417
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 189,368 113,560
Amortization of goodwill 11,687 --
Amortization of computer software costs 48,454 52,849
Amortization of deferred compensation 55,002 33,525
Provision for doubtful accounts 39,292 5,982
Changes in operating assets and liabilities, net of acquired business:
Accounts receivable (822,109) 41,934
Other current assets (249,926) (20,134)
Accounts payable (51,623) (176,400)
Accrued liabilities (584,238) 318,980
Deferred revenue (500,661) (2,608
----------- -----------
Net cash provided by (used for) operating activities (1,602,918) 614,105
INVESTING ACTIVITIES
Maturity of short-term investments 2,599,431 --
Proceeds from sales of short-term investments 671,916 --
Purchases of property and equipment (888,743) (287,562)
Cash paid for acquired business (507,000) --
Unrealized gains on securities 41,768 --
Additions to computer software costs (210,433) (104,236)
----------- -----------
Net cash provided by (used for) investing activities 1,706,939 (391,798)
----------- -----------
FINANCING ACTIVITIES
Principal payments under capital lease obligations (31,102) (34,244)
Issuance of common stock 12,355 6,601
----------- -----------
Net cash used for financing activities (18,747) (27,643)
----------- -----------
Increase in cash and cash equivalents 85,274 194,664
Cash and cash equivalents at beginning of period 2,465,694 1,271,120
=========== ===========
Cash and cash equivalents at end of period $ 2,550,968 $ 1,465,784
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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DOCUMENT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
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,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. Operating results for the three and
six-month periods ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
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 $403,000 and $234,400 for
the three months ended June 30, 1996 and 1997, respectively, and $586,600 and
$413,400 for the six months ended June 30, 1996 and 1997, respectively.
Commissions related to referrals from Xerox are included in selling and
marketing expense in the accompanying condensed consolidated statements of
income and totaled $37,200 and $19,900 for the three months ended June 30, 1996
and 1997, respectively, and $67,300 and $52,900 for the six months ended June
30, 1996 and 1997, respectively.
The Company has distribution agreements with certain affiliates which provide
such 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 $66,400 and
$135,500 for the three months ended June 30, 1996 and 1997, respectively, and
$136,300 and $368,400 for the six months ended June 30, 1996 and 1997,
respectively. Related accounts receivable are $91,600 and $268,600 from these
revenues at June 30, 1996 and 1997, respectively.
The Company has distribution agreements with certain affiliates which provide
such affiliates the non-exclusive right to sub-license the Company's software in
Europe. Revenues under these agreements totaled $328,300 and $494,800 for the
three months ended June 30, 1996 and 1997, respectively, and $539,600 and
$974,200 for the six months ended June 30, 1996 and 1997, respectively. Related
accounts receivable are $418,100 and $614,900 at June 30, 1996 and 1997,
respectively.
6
<PAGE> 7
Note C--Earnings per Share under FASB No. 128
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted by December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The calculation of diluted earnings per share
will not change significantly. The impact of the adoption of Statement 128 is
not expected to be material.
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 various factors, including those set
forth in this discussion under "Factors That May Affect Future Operating
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 the sections entitled "Certain Additional
Business Risks" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
OVERVIEW
Document Sciences Corporation (the "Company") 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"), and
following the Company's initial public offering of stock in September 1996,
Xerox ownership was reduced to approximately 63%.
On May 9, 1997 the Company purchased substantially all of the assets of Data
Retrieval Corporation of America from the West Group. Included in the purchase
were exclusive ownership of the TextComply, Text DBMS, TextGen, TextMigrate and
TextBook software products and the installed base of commercial accounts. The
Company has retained employees responsible for the development, product support
and customer service of the software products. In addition, the Company will
continue to provide training and consulting support for existing and future
customers.
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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial license fees 41% 53% 42% 55%
Annual renewal license and support fees 25 15 23 17
Services and other 34 32 35 28
--- --- --- ---
Total revenues 100% 100% 100% 100%
--- --- --- ---
</TABLE>
7
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<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of revenues:
Initial license fees 5% 6% 5% 5%
Annual renewal license and support fees 4 3 3 4
Services and other 13 5 12 5
---- ---- ---- ----
Total cost of revenues 22% 14% 20% 14%
---- ---- ---- ----
Gross profit 78% 86% 80% 86%
---- ---- ---- ----
Operating expenses
Research and development 17% 16% 17% 17%
Selling, marketing and customer support 51 48 52 51
General and administrative 14 11 16 12
---- ---- ---- ----
Total operating expenses 82% 75% 85% 80%
---- ---- ---- ----
Income from operations (4) 11 (5) 6
Interest income, net 6 -- 7 ----
---- ---- ---- ----
Income before provision for taxes 2 11 2 6
---- ---- ---- ----
Provision for (benefit of) income taxes (1) 5 (1) 2
==== ==== ==== ====
Net income 3% 6% 3% 4%
==== ==== ==== ====
</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 27.9% from $3.7 million for the three months ended
June 30, 1996 to $4.7 million for the three months ended June 30, 1997, and
increased by 36.5% from $6.4 million for the six months ended June 30, 1996 to
$8.7 million for the six months ended June 30, 1997. This growth was due
primarily to the increases in revenues from consulting services, which are
included in services and other, and increases in annual renewal and support
fees, which have increased in part as a result of the large installed customer
base acquired in the Data Retrieval transaction.
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 by less than 1% from $1.1 million for the three months
ended June 30, 1996 to $1.2 million for
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the three months ended June 30, 1997, and increased by 35.7% from $1.9 million
for the six months ended June 30, 1996 to $2.5 million for the six months ended
June 30, 1997. This growth was principally due to a more established and
experienced VAR channel in Europe. Revenues from export sales were 31% and 25%
of total revenues for the three months ended June 30, 1996 and 1997,
respectively and 30% and 29% of total revenues for the six months ended June 30,
1996 and 1997, respectively.
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 $403,000 and $234,400 for the three months ended
June 30, 1996 and 1997, respectively, and $586,600 June 30, 1996 and $413,400
for the six months ended June 30, 1997, 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 59.7%
from $394,700 for the three months ended June 30, 1996 to $630,300 for the three
months ended June 30, 1997 and increased by 98.6% from $675,900 for the six
months ended June 30, 1996 to $1.3 million for the six months ended June 30,
1997. This increase is due principally to substantially increased European
revenues from Xerox affiliates, and, to a lesser extent, to increased sales
through Xerox Canada Ltd. and Fuji Xerox Australia.
Initial license fees. Initial license fee revenues decreased 1.7% from $1.94
million for the three months ended June 30, 1996 to $1.91 million for the three
months ended June 30, 1997 and increased by 5.3% from $3.5 million for the six
months ended June 30, 1996 to $3.7 million for the six months ended June 30,
1997. 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 VAR channel in Europe. Initial license fees have
declined as a percentage of total revenue due to customers increasing demand for
consulting services and a significant increase in annual renewal license and
support fees.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 110% from $555,200 for the three months ended June
30, 1996 to $1.2 million for the three months ended June 30, 1997 and increased
by 78.8% from $1.1 million for the six months ended June 30, 1996 to $2.0
million for the six months ended June 30, 1997. The increase was principally due
to the larger installed base of users of the Company's software products and
additional support fees acquired in the Data Retrieval acquisition in May 1997.
As a percentage of total revenues, annual renewal license and support fees have
increased from 15.2% to 24.9% for the three months ended June 30, 1996 and 1997,
and from 17.3% to 22.7% for the six months ended June 30, 1996 and 1997.
Services and other. Revenues from services and other increased 37.9% from $1.2
million for the three months ended June 30, 1996 to $1.6 million for the three
months ended June 30, 1997, and increased 72.3% from $1.7 million for the six
months ended June 30, 1996 to $3.0 million for the six months ended June 30,
1997. Revenues from consulting services, which is included in services and
other, represented a larger component of new customer orders compared to the
first six months of 1996, while overall new customers orders remained relatively
consistent during the first six months of 1997.
9
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Cost of Revenues
Total cost of revenues was 14.2% and 21.5% of total revenues for the three
months ended June 30, 1996 and 1997, respectively, and 13.9% and 19.9% of total
revenues for the six months ended June 30, 1996 and 1997, respectively. The
increase in cost of revenues as a percentage of total revenues resulted
primarily from increased personnel costs associated with providing additional
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
6.5% from $227,600 for the three months ended June 30, 1996 to $242,500 for the
three months ended June 30, 1997 and increased by 39.8% from $313,700 for the
six months ended June 30, 1996 to $438,400 for the six months ended June 30,
1997. These 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 11.7% and 12.7% for the three months ended June 30, 1996 and 1997,
respectively, and 9.0% and 11.8% for the six months ended June 30, 1996 and
1997. The cost of initial license fees also included the amortization of
capitalized software development costs of $25,300 and $23,200 for the three
months ended June 30, 1996 and 1997, respectively, and $52,800 and $48,500 for
the six months ended June 30, 1996 and 1997, respectively.
Cost of annual renewal license and support fees. Cost of annual renewal license
and support fees consists primarily of employment-related costs for the
Company's technical support staff, which performs technical software support
services. These costs increased 54.8% from $110,400 for the three months ended
June 30, 1996 to $170,900 for the three months ended June 30, 1997 and increased
15.0% from $244,600 for the six months ended June 30, 1996 to $281,300 for the
six months ended June 30, 1997. As a percentage of annual renewal license and
support fee revenues, these costs were 19.9% and 14.6% for the three months
ended June 30, 1996 and 1997, respectively, and 22.2% and 14.3% for the six
months ended June 30, 1996 and 1997, respectively. This increase in absolute
dollars is attributed to the additional technical support personnel necessary to
support the customer base acquired from Data Retrieval as well as an increase in
the installed base of users of the Company's software products. The decrease in
costs as a percentage of revenue is the result of a more experienced and
efficient support staff.
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 225.5% from $182,800 for the three months ended June 30,
1996 to $594,900 for the three months ended June 30, 1997 and increased 211.8%
from $321,600 for the six months ended June 30, 1996 to $1,002,600 for the six
months ended June 30, 1997. The costs of services and other represented 15.7%
and 37.0% of the related revenues for the three months ended June 30, 1996 and
1997, respectively and 18.4% and 33.3% of the related revenues for the six
months ended June 30, 1996 and 1997 respectively. The increase in cost of
services and other revenues resulted principally from the additional costs
related to the Company providing increased 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
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<PAGE> 11
estimated total product revenues or the straight-line method over the remaining
estimated economic lives of the products. The Company capitalized $28,400 and
$210,400 of software costs for the three month periods ended June 30, 1996 and
1997, respectively, and $104,200 and $210,400 for the six months ended June 30,
1996 and 1997, respectively. Research and development expenses increased 38.3%
from $579,400 for the three months ended June 30, 1996 to $801,300 for the three
months ended June 30, 1997 and increased 37.6% from $1,085,500 for the six
months ended June 30, 1996 to $1,493,900 for the six months ended June 30, 1997.
The increase in these expenses 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 32.6%
from $1.8 million for the three months ended June 30, 1996 to $2.4 million for
the three months ended June 30, 1997 and increased 38.8% from $3.2 million for
the six months ended June 30, 1996 to $4.5 million for the six months ended June
30, 1997. The growth of these expenses was due principally to increased sales,
sales support and marketing personnel and related costs and 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 71.9% from $395,000 for the three months ended June 30, 1996 to
$679,000 for the three months ended June 30, 1997 and increased 80.5% from
$735,600 for the six months ended June 30, 1996 to $1.3 million for the six
months ended June 30, 1997. These expenses represented 10.8% and 14.5% of the
total revenues for the three months ended June 30, 1996 and 1997, respectively,
and 11.6% and 15.3% of the total revenues for the six months ended June 30, 1996
and 1997, 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 and increased expenses associated with being a
publicly traded company. 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 increased from $10,500 for the three months
ended June 30, 1996 to $284,800 for the three months ended June 30, 1997 and
from $15,800 for the six months ended June 30, 1996 to $571,700 for the six
months ended June 30, 1997. 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 (benefit of) 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. For the three months and six months ended June
30, 1997, the Company has recognized a tax benefit as a result of non taxable
municipal bond interest received during the period.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company's total revenues and operating results have varied, 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
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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 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 customer
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. In October 1996, the Underwriters of the offering exercised their
over allotment option. The net proceeds received by the Company from the
offering were approximately $23.3 million.
The Company's cash and cash equivalents and short-term investments totaled $22.4
million at June 30, 1997, representing 70.1% of total assets. Net cash used by
operating activities for the six months ended June 30, 1997 was $1.6 million and
was primarily the result of reductions in accrued liabilities, accounts
receivable and deferred revenue. The Company intends to continue to invest in
short-term, interest-bearing, investment grade securities.
For the six months ended June 30, 1997, the Company's investing activities
included net inflows from the maturity and sale of short term investments of
$3.3 million dollars offset by $1.6 million dollars used primarily for purchases
of fixed assets required to support the growth of the Company and the
acquisition of substantially all of the assets of Data Retrieval Corporation.
The Company's line of credit allowed borrowings up to $2.5 million at the bank's
prime rate and expired in July 1997. The Company believes that its existing cash
balances and anticipated cash flows from operations will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next twelve months, and accordingly, has elected not to renew the line
of credit. As of June 30, 1997, the Company had no outstanding borrowings under
its line of credit.
The Company has no significant capital spending or purchase commitments other
than normal purchase commitments and commitments under facilities and capital
leases for the remainder of the year.
12
<PAGE> 13
In the future, a portion of the Company's cash could be used to acquire or
invest in additional 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 in and/or strategic
acquisitions of certain businesses, products or technologies.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 25, 1997, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
Tony N. Domit 9,316,178 109,753
Charles P. Holt 9,410,668 15,263
Thomas Ringer 9,411,368 14,563
Colin J. O'Brien 9,316,023 109,908
James J. Costello 9,411,368 14,563
Barton L. Faber 9,359,958 65,983
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstain
----------- -------- -------
<S> <C> <C> <C>
1. Proposal to approve the adoption of the
Company's 1997 Employee Stock Purchase
Plan and the reservation of 350,000 shares of
the Company's common stock thereunder. 9,390,648 25,783 9,500
2. Proposal to ratify the appointment of Ernst &
Young LLP as the independent auditors of the
Company for the fiscal year ended December
31, 1997. 9,368,741 8,933 48,257
</TABLE>
Item 6. Exhibits and Reports on 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
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: August 11, 1997 /s/ Barbara Amantea
- ---------------------- ----------------------------------------
Barbara Amantea, Vice President,
Chief Financial Officer (Duly Authorized
and Principal Financial Officer)
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- --- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,550,968
<SECURITIES> 19,871,538
<RECEIVABLES> 5,543,229
<ALLOWANCES> (126,023)
<INVENTORY> 0
<CURRENT-ASSETS> 28,492,642
<PP&E> 2,616,354
<DEPRECIATION> 686,776
<TOTAL-ASSETS> 32,001,714
<CURRENT-LIABILITIES> 4,479,727
<BONDS> 0
0
0
<COMMON> 10,751
<OTHER-SE> 27,270,581
<TOTAL-LIABILITY-AND-EQUITY> 27,281,332
<SALES> 5,656,300
<TOTAL-REVENUES> 8,665,028
<CGS> 719,665
<TOTAL-COSTS> 1,722,263
<OTHER-EXPENSES> 7,071,849
<LOSS-PROVISION> 259,631
<INTEREST-EXPENSE> 9,960
<INCOME-PRETAX> 182,936
<INCOME-TAX> 78,900
<INCOME-CONTINUING> 261,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,836
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
