<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, 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 October 31,
1997 was 10,802,150.
<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---September 30, 1997 and
December 31, 1996............................................................... 3
Condensed consolidated statements of income---Three and Nine months ended
September 30, 1997 and 1996..................................................... 4
Condensed consolidated statements of cash flows---Nine months ended September
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 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,
1997 1996
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 817,999 $ 2,465,694
Short-term investments 20,862,090 23,142,885
Accounts receivable, net 4,308,683 2,257,025
Due from affiliates 860,487 2,377,364
Other current assets 720,143 403,004
------------ ------------
Total current assets 27,569,402 30,645,972
Property and equipment, net 2,083,827 998,203
Goodwill, net of accumulated amortization of $29,218 1,022,643 --
Other assets 749,169 377,342
============ ============
Total assets $ 31,425,041 $ 32,021,517
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 661,841 $ 698,711
Accrued liabilities 600,794 1,289,033
Deferred revenues 2,734,111 2,477,723
Current portion of obligations under capital leases 63,217 62,439
Current income tax expense payable to affiliate 311,000 311,000
------------ ------------
Total current liabilities 4,370,963 4,838,906
Obligations under capital leases 69,973 115,740
Deferred income taxes 156,500 156,500
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized---30,000,000 shares;
Issued and outstanding shares --10,792,050 at
September 30, 1997 and 10,722,168 at
December 31, 1996 10,792 10,722
Additional paid-in capital 25,396,931 25,382,203
Deferred compensation (268,970) (351,473)
Treasury stock (285,000) --
Unrealized gain on short-term investments 109,417 13,222
Retained earnings 1,864,435 1,855,697
------------ ------------
Total stockholders' equity 26,827,605 26,910,371
============ ============
Total liabilities and stockholders' equity $ 31,425,041 $ 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
<PAGE> 4
DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1997 1996 1997 1996
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $ 1,599,055 $2,526,772 $ 5,288,435 $ 6,030,064
Annual renewal license and support
fees 1,307,589 631,140 3,274,509 1,731,495
Services and other 1,496,409 951,691 4,505,137 2,698,098
------------ ---------- ------------ -----------
Total revenues 4,403,053 4,109,603 13,068,081 10,459,657
------------ ---------- ------------ -----------
Cost of revenues:
Initial license fees 139,231 212,780 577,646 526,444
Annual renewal license and support
fees 247,437 122,646 528,687 367,234
Services and other 741,604 288,020 1,744,202 609,592
------------ ---------- ------------ -----------
Total cost of revenues 1,128,272 623,446 2,850,535 1,503,270
------------ ---------- ------------ -----------
Gross profit 3,274,781 3,486,157 10,217,546 8,956,387
Operating expenses:
Research and development 934,497 652,865 2,428,443 1,738,335
Selling, marketing and customer
support 2,310,860 1,893,053 6,820,619 5,142,062
General and administrative 700,953 411,079 2,028,728 1,146,696
------------ ---------- ------------ -----------
Total operating expenses 3,946,310 2,956,997 11,277,790 8,027,093
------------ ---------- ------------ -----------
Income (loss) from operations (671,529) 529,160 (1,060,244) 929,294
Interest income, net 266,326 25,644 837,977 41,483
------------ ---------- ------------ -----------
Income (loss) before income taxes (405,203) 554,804 (222,267) 970,777
Provision for (benefit of) income
taxes (152,100) 221,922 (231,000) 391,478
------------ ---------- ------------ -----------
Net income (loss) $ (253,103) $ 332,882 $ 8,733 $ 579,299
============ ========== ============ ===========
Net income (loss) per share $ (0.02) $ 0.04 $ 0.00 $ 0.06
============ ========== ============ ===========
Shares used in per share calculations 10,984,948 9,144,517 11,020,061 8,977,371
============ ========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,733 $ 579,299
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 320,382 183,128
Amortization of goodwill 29,218 --
Amortization of computer software costs 70,454 78,760
Amortization of deferred compensation 82,503 61,026
Provision for doubtful accounts 35,141 25,386
Changes in operating assets and liabilities,
net of acquired business:
Accounts receivable (569,922) (1,645,576)
Other current assets (317,139) (91,891)
Accounts payable (36,871) 592,463
Accrued liabilities (688,239) 613,052
Deferred revenue (520,472) 902,268
------------ ------------
Net cash provided by (used for) operating activities (1,586,212) 1,297,915
INVESTING ACTIVITIES
Proceeds from sales and maturity of short-term investments 11,139,055 --
Purchases of short-term investments (8,858,259) --
Purchases of property and equipment (1,174,006) (437,093)
Cash paid for acquired business (507,000) --
Unrealized gains on securities 96,199 --
Additions to computer software costs (442,281) (104,236)
------------ ------------
Net cash provided by (used for) investing activities 253,708 (541,329)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (44,989) (33,336)
Purchase of treasury stock (285,000) --
Issuance of common stock 14,798 19,594,794
------------ ------------
Net cash provided by (used for) financing activities (315,191) 19,561,458
------------ ------------
Increase (decrease) in cash and cash equivalents (1,647,695) 20,318,044
Cash and cash equivalents at beginning of period 2,465,694 1,271,120
============ ============
Cash and cash equivalents at end of period $ 817,999 $ 21,589,164
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
DOCUMENT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 nine
month periods ended September 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 $130,800 and $259,200 for
the three months ended September 30, 1997 and 1996, respectively, and $544,200
and $845,800 for the nine months ended September 30, 1997 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 $0 and $98,300 for the three months ended
September 30, 1997 and 1996, respectively, and $52,900 and $165,600 for the nine
months ended September 30, 1997 and 1996, 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 $258,700 and
$296,400 for the three months ended September 30, 1997 and 1996, respectively,
and $627,100 and $432,700 for the nine months ended September 30, 1997 and 1996,
respectively. Included in accounts receivable in the accompanying condensed
consolidated balance sheets are $304,600 and $318,600 from these revenues at
September 30, 1997 and 1996, 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 $447,700 and $533,400 for the
three months ended September 30, 1997 and 1996, respectively, and $1.4 million
and $1.1 million for the nine months ended September 30, 1997 and 1996,
respectively. Related accounts receivable are $461,100 and $943,600 at September
30, 1997 and 1996, respectively.
6
<PAGE> 7
Note C--Earnings per Share under FASB No. 128
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which the
Company will adopt for all periods ending after December 15, 1997. Pursuant to
SFAS No. 128, the Company will replace the reporting of primary earnings per
share ("EPS") with basic EPS, which excludes the dilutive effect of stock
options and warrants. Fully diluted EPS will be replaced by diluted EPS, which
includes the dilutive effect of stock options, similar to the calculation of
fully diluted EPS under Accounting Principles Board No. 15. The Company will be
required to change the method currently used and to restate all prior periods.
The effect of the adoption of SFAS No. 128 is not expected to be material for
the three months ended September 30, 1997 and 1996.
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.
The Company is currently assessing the potential impact of year 2000 software
and operational compliance issues on its business and the related expenses of
remedying such impact. The Company is utilizing both internal and external
resources to identify, modify or reprogram, and perform extensive testing on its
systems in connection with the year 2000 issue. Management has not yet assessed
the year 2000 compliance expenses and related potential effect on the Company's
earnings.
7
<PAGE> 8
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,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial license fees 36% 62% 41% 58%
Annual renewal license and support fees 30 15 25 16
Services and other 34 23 34 26
---- --- ---- ---
Total revenues 100% 100% 100% 100%
---- --- ---- ---
Cost of revenues:
Initial license fees 3% 5% 5% 5%
Annual renewal license and support fees 6 3 4 4
Services and other 17 7 13 6
---- --- ---- ---
Total cost of revenues 26% 15% 22% 15%
---- --- ---- ---
Gross profit 74% 85% 78% 85%
---- --- ---- ---
Operating expenses
Research and development 21% 16% 19% 16%
Selling, marketing and customer support 52 46 52 49
General and administrative 16 10 15 11
---- --- ---- ---
Total operating expenses 89% 72% 86% 76%
---- --- ---- ---
Income (loss) from operations (15) 13 (8) 9
Interest income, net 6 1 6 1
---- --- ---- ---
Income (loss) before provision for taxes (9) 14 (2) 10
Provision for (benefit of) income taxes (3) 6 (2) 4
==== === ==== ===
Net income (loss) (6)% 8% 0% 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.
8
<PAGE> 9
Total revenues increased 7.1% to $4.4 million for the three months ended
September 30, 1997 from $4.1 million for the three months ended September 30,
1996, and increased 24.7% to $13.1 million for the nine months ended September
30, 1997 from $10.5 million for the nine months ended September 30, 1996. 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 principally as a result of the 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 decreased 21.4% to $1.1 million for the three months ended September
30, 1997 from $1.4 million for the three months ended September 30, 1996, and
increased 12.1% to $3.7 million for the nine months ended September 30, 1997
from $3.3 million for the nine months ended September 30, 1996. The decrease for
the three month period ended September 30, 1997 is the result of fewer large
transactions as compared to the same period in 1996. The growth in revenue for
the nine month period was due principally to a more established and experienced
VAR channel in Europe. Revenues from export sales were 26% and 34% of total
revenues for the three months ended September 30, 1997 and 1996, respectively,
and 28% and 31% of total revenues for the nine months ended September 30, 1997
and 1996, 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 $130,800 and $259,200 for the three months ended
September 30, 1997 and 1996, respectively, and were $544,200 and $845,800 for
the nine months ended September 30, 1997 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 decreased 14.9% to
$706,400 for the three months ended September 30, 1997 from $829,900 for the
three months ended September 30, 1996, and increased 33.3% to $2.0 million for
the nine months ended September 30, 1997 from $1.5 million for the nine months
ended September 30, 1996. The decrease for the three month period ended
September 30, 1997 is the result of fewer large transactions as compared to the
same period in 1996, particularly in the European market. The increase for the
nine month period 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 36.0% to $1.6
million for the three months ended September 30, 1997 from $2.5 million for the
three months ended September 30, 1996, and decreased 11.7% to $5.3 million for
the nine months ended September 30, 1997 from $6.0 million for the nine months
ended September 30, 1996. These decreases in initial license fees in dollars
were due principally to a reduction in the total number of transactions. 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 as a result of the Data Retrieval acquisition.
9
<PAGE> 10
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 106.0% to $1.3 million for the three months ended
September 30, 1997 from $631,100 for the three months ended September 30, 1996,
and increased 94.1% to $3.3 million for the nine months ended September 30, 1997
from $1.7 million for the nine months ended September 30, 1996. The increases
were 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 to 29.7% from 15.4% for the three months
ended September 30, 1997 and 1996, and have increased to 25.0% from 16.6% for
the nine months ended September 30, 1997 and 1996.
Services and other. Revenues from services and other increased 50.0% to $1.5
million for the three months ended September 30, 1997 from $1.0 million for the
three months ended September 30, 1996, and increased 66.7% to $4.5 million for
the nine months ended September 30, 1997 from $2.7 million for the nine months
ended September 30, 1996. The growth in revenues from consulting services, which
is included in services and other, both in revenue dollars and in service
revenues as a percent of total revenues was attributable to increasing demand
for consulting services which has become a larger component of new customer
orders.
Cost of Revenues
Total cost of revenues was 25.6% and 15.2% of total revenues for the three
months ended September 30, 1997 and 1996, respectively, and 21.8% and 14.4% of
total revenues for the nine months ended September 30, 1997 and 1996,
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 decreased
34.6% to $139,200 for the three months ended September 30, 1997 from $212,800
for the three months ended September 30, 1996, and increased 9.7% to $577,600
for the nine months ended September 30, 1997 from $526,400 for the nine months
ended September 30, 1996. The decrease for the three months ended September 30,
1997 was the result of a decline in initial license fees for the period, while
the increase for the nine months was the result of increased payments for third
party software integrated into the Company's software products. As a percent of
initial license fee revenues, the cost of initial license fees was 8.7% and 8.4%
for the three months ended September 30, 1997 and 1996, respectively, and 10.9%
and 8.7% for the nine months ended September 30, 1997 and 1996. The cost of
initial license fees also included the amortization of capitalized software
development costs of $22,000 and $25,900 for the three months ended September
30, 1997 and 1996, respectively, and $70,500 and $78,800 for the nine months
ended September 30, 1997 and 1996, 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 101.8% to $247,400 for the three months ended
September 30, 1997 from $122,600 for the three months ended September 30, 1996,
and increased 44.0% to $528,700 for the nine months ended September 30, 1997
from $367,200 for the nine months ended September 30, 1996. As a percentage of
annual renewal license and support fee revenues, these costs were 18.9% and
19.4% for the three months ended September 30, 1997 and 1996, respectively, and
16.1% and 21.2% for the nine months ended September 30, 1997 and 1996,
respectively. This increase in absolute dollars is attributed to the additional
technical support personnel necessary to support the customer base
10
<PAGE> 11
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 157.5% to $741,600 for the three months ended September
30, 1997 from $288,000 for the three months ended September 30, 1996, and
increased 178.9% to $1.7 million for the nine months ended September 30, 1997
from $609,600 for the nine months ended September 30, 1996. The costs of
services and other represented 49.6% and 30.3% of the related revenues for the
three months ended September 30, 1997 and 1996, respectively and 38.7% and 22.6%
of the related revenues for the nine months ended September 30, 1997 and 1996,
respectively. The increase in cost of services and other revenues resulted
principally from the additional personnel 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
estimated total product revenues or the straight-line method over the remaining
estimated economic lives of the products. The Company capitalized $231,800 for
the three months ended September 30, 1997 while no costs were capitalized for
the three months ended September 30, 1996, and $442,300 and $172,500 were
capitalized for the nine months ended September 30, 1997 and 1996, respectively.
Research and development expenses increased 43.1% to $934,500 for the three
months ended September 30, 1997 from $652,900 for the three months ended
September 30, 1996, and increased 41.2% to $2.4 million for the nine months
ended September 30, 1997 from $1.7 million for the nine months ended September
30, 1996. 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 22.1% to
$2.3 million for the three months ended September 30, 1997 from $1.9 million for
the three months ended September 30, 1996, and increased 33.3% to $6.8 million
for the nine months ended September 30, 1997 from $5.1 million for the nine
months ended September 30, 1996. The growth of these expenses was due
principally to increased sales, sales support and marketing personnel and the
related costs and commissions associated with increased revenues.
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 70.5% to $701,000 for the three months ended September 30, 1997 from
$411,100 for the three months ended September 30, 1996 and increased 81.8% to
$2.0 million for the nine months ended September 30, 1997 from $1.1 million for
the nine months ended September 30, 1996. These expenses represented 15.9% and
10.0% of the total revenues for the three months ended September 30, 1997 and
1996, respectively, and 15.5% and 11.0% of the total revenues for the nine
months ended September 30, 1997 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 and increased expenses
associated with being a publicly traded company. The Company expects general and
11
<PAGE> 12
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 finance charges related to equipment leases and other
debt. Interest and other income increased to $266,300 for the three months ended
September 30, 1997 from $25,600 for the three months ended September 30, 1996,
and increased to $838,000 for the nine months ended September 30, 1997 from
$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 (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 nine months ended
September 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 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.
12
<PAGE> 13
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 $21.7
million at September 30, 1997, representing 69.1% of total assets. Net cash used
by operating activities for the nine months ended September 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 nine months ended September 30, 1997, the Company's investing activities
included net inflows from the maturity, sale and purchase of short-term
investments of $2.3 million dollars offset by $1.7 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.
Prior to July 1997, the Company's line of credit allowed borrowings up to $2.5
million at the bank's prime rate. The Company had no outstanding borrowings
under this line of credit which expired in July 1997. The Company has elected
not to renew this line of credit and 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.
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.
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 6. Exhibits and Reports on 8-K
No reports on Form 8-K were filed during the quarter ended September 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: November 14, 1997 /s/ Robert D. Gerhart
- ------------------------ ----------------------------------------
Robert D. Gerhart, Controller (Duly
Authorized and Chief Accounting 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 817,999
<SECURITIES> 20,862,090
<RECEIVABLES> 5,291,042
<ALLOWANCES> 121,872
<INVENTORY> 0
<CURRENT-ASSETS> 27,569,402
<PP&E> 2,901,226
<DEPRECIATION> 817,399
<TOTAL-ASSETS> 31,425,041
<CURRENT-LIABILITIES> 4,370,963
<BONDS> 0
0
0
<COMMON> 10,792
<OTHER-SE> 26,816,813
<TOTAL-LIABILITY-AND-EQUITY> 31,425,041
<SALES> 8,562,244
<TOTAL-REVENUES> 13,068,081
<CGS> 1,106,333
<TOTAL-COSTS> 2,850,535
<OTHER-EXPENSES> 10,933,685
<LOSS-PROVISION> 344,105
<INTEREST-EXPENSE> 13,965
<INCOME-PRETAX> (222,267)
<INCOME-TAX> (231,000)
<INCOME-CONTINUING> 8,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,733
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
