<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, 1998.
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 August 6,
1998, was 10,837,796.
<PAGE> 2
Index
DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets-June 30, 1998 and December 31, 1997........................................3
Consolidated statements of income-three and six months ended June 30, 1998 and 1997....................4
Consolidated statements of cash flows-six months ended June 30, 1998 and 1997..........................5
Notes to interim 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...........................................11
Item 6. Exhibits and Reports on Form 8-K..............................................................12
Signatures............................................................................................12
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (Unaudited)
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 2,293,279 $ 3,526,301
Short-term investments 16,532,745 18,228,527
Accounts receivable, net 5,887,381 6,468,751
Due from affiliates 1,833,419 851,717
Work in process on development contracts 309,025 288,932
Deferred income taxes 326,500 326,500
Other current assets 1,000,566 279,888
------------ ------------
Total current assets 28,182,915 29,970,616
Property and equipment, net 2,195,401 2,135,930
Goodwill, net 970,049 1,005,111
Computer software costs, net 1,606,308 1,117,319
============ ============
Total assets $ 32,954,673 $ 34,228,976
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 507,475 $ 673,657
Accrued compensation 854,601 787,511
Other accrued liabilities 322,848 348,559
Deferred revenue 4,372,181 3,812,365
Current income tax payable to affiliate 0 387,443
Current portion of obligations under capital leases 59,598 65,108
------------ ------------
Total current liabilities 6,116,703 6,074,643
Obligations under capital leases 24,558 52,236
Deferred income taxes 411,500 411,500
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized shares - 30,000,000
Issued and outstanding shares - 10,828,671 at June 30,
1998, and 10,803,369 at December 31, 1997 10,829 10,803
Deferred compensation (186,467) (241,469)
Treasury stock (337,486) (240,515)
Unrealized gain on short-term investments 72,515 69,506
Additional paid-in capital 25,404,302 25,398,897
Retained earnings 1,438,219 2,693,375
------------ ------------
Total stockholders' equity 26,401,912 27,690,597
------------ ------------
Total liabilities and stockholders' equity $ 32,954,673 $ 34,228,976
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 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 consolidated financial statements.
3
<PAGE> 4
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees $ 2,820,616 $ 1,906,301 $ 4,217,378 $ 3,689,380
Annual renewal license and support fees 1,401,472 1,166,979 2,872,541 1,966,920
Services and other 1,611,152 1,609,813 3,325,168 3,008,728
------------ ------------ ------------ ------------
Total revenues 5,833,240 4,683,093 10,415,087 8,665,028
Cost of revenues:
Initial license fees 271,868 242,476 479,606 438,415
Annual renewal license and support fees 209,405 170,886 394,101 281,250
Services and other 1,147,557 816,940 2,182,783 1,328,203
------------ ------------ ------------ ------------
Total cost of revenues 1,628,830 1,230,302 3,056,490 2,047,868
------------ ------------ ------------ ------------
Gross profit 4,204,410 3,452,791 7,358,597 6,617,160
Operating expenses:
Research and development 1,004,192 801,260 1,929,863 1,493,946
Selling, marketing and customer support 2,944,744 2,145,987 5,379,922 4,184,154
General and administrative 620,861 678,999 2,141,392 1,327,775
------------ ------------ ------------ ------------
Total operating expenses 4,569,797 3,626,246 9,451,177 7,005,875
------------ ------------ ------------ ------------
Income (loss) from operations (365,387) (173,455) (2,092,580) (388,715)
Interest income, net 220,475 284,775 467,424 571,651
------------ ------------ ------------ ------------
Income (loss) before income taxes (144,912) 111,320 (1,625,156) 182,936
Provision for (benefit of) income taxes (30,000) (52,500) (370,000) (78,900)
------------ ------------ ------------ ------------
Net income (loss) $ (114,912) $ 163,820 $ (1,255,156) $ 261,836
============ ============ ============ ============
Net income (loss) per share-basic ($ 0.01) $ 0.02 ($ 0.12) $ 0.02
============ ============ ============ ============
Weighted average shares used in basic calculation
10,755,727 10,771,458 10,754,784 10,751,425
============ ============ ============ ============
Net income (loss) per share-diluted ($ 0.01) $ 0.01 ($ 0.12) $ 0.02
============ ============ ============ ============
Weighted average shares used in diluted
calculation 10,755,727 11,057,555 10,754,784 11,054,244
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,255,156) $ 261,836
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 202,526 189,368
Amortization of goodwill 35,062 11,687
Amortization of computer software costs 56,728 48,454
Amortization of deferred compensation 55,002 55,002
Income taxes payable to affiliates (387,443) -0-
Provision for doubtful accounts 213,133 39,292
Changes in operating assets and liabilities:
Accounts receivable (613,465) (822,109)
Work in process on development contracts (20,093) -0-
Other current assets (720,678) (249,926)
Accounts payable (166,182) (51,623)
Other accrued liabilities 41,379 (584,238)
Deferred revenue 559,816 (500,661)
------------ ------------
Net cash used in operating activities (1,999,371) (1,602,918)
INVESTING ACTIVITIES
Purchases of short-term investments (net) (10,832,652) -0-
Sales of short-term investments 9,928,434 671,916
Maturities of short-term investments 2,600,000 2,599,431
Purchases of property and equipment, net (261,997) (888,743)
Cash paid for acquired business -0- (507,000)
Unrealized gains on securities 3,009 41,768
Additions to computer software costs (545,717) (210,433)
------------ ------------
Net cash provided by investing activities 891,077 1,706,939
FINANCING ACTIVITIES
Principal payments under capital lease obligations (33,188) (31,102)
Purchase of treasury stock (96,971) -0-
Issuance of common stock 5,431 12,355
------------ ------------
Net cash used in financing activities (124,728) (18,747)
------------ ------------
Increase (decrease) in cash and cash equivalents (1,233,022) 85,274
Cash and cash equivalents at beginning of period 3,526,301 2,465,694
------------ ------------
Cash and cash equivalents at end of period $ 2,293,279 $ 2,550,968
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 6,656 $ 9,960
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
DOCUMENT SCIENCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
Note A-Basis of Presentation
The accompanying unaudited 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 adjustments) considered necessary for a fair presentation
have been included. Certain amounts for 1997 have been reclassified to conform
with the 1998 presentation. The information included in this 10-Q should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis included in the Company's
1997 Annual Report on Form 10-K. Operating results for the three and six-month
periods ended June 30, 1998, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
Note B-Transactions with Affiliates
Document Sciences Corporation (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
products. Included in services and other revenue in the accompanying condensed
consolidated statements of income are commissions earned from Xerox totaling
$70,000 and $234,400 for the three months ended June 30, 1998 and 1997,
respectively, and $154,800 and $413,400 for the six months ended June 30, 1998
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 $0 and $19,900 for the three months ended June
30, 1998 and 1997, respectively, and $0 and $52,900 for the six months ended
June 30, 1998 and 1997, respectively.
The Company has distribution agreements with certain affiliates which provide
the affiliates with the non-exclusive right to sub-license the Company's
software in Canada, Australia, New Zealand and Brazil. 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 $514,100 and $135,500 for the three months ended June 30, 1998 and 1997,
respectively, and $967,500 and $368,400 for the six months ended June 30, 1998
and 1997, respectively. Related accounts receivable are $474,400 and $268,600
from these revenues at June 30, 1998 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 $631,200 and $494,800 for the
three months ended June 30, 1998 and 1997, respectively, and $1.1 million and
$974,200 for the six months ended June 30, 1998 and 1997, respectively. Related
accounts receivable are $391,800 and $614,900 at June 30, 1998 and 1997,
respectively.
Note C-Net Income Per Share
The Company presents it's earnings per share information in accordance with FAS
No. 128, "Earnings per Share". Statement 128 replaced the previously reported
primary and fully diluted earnings per share
6
<PAGE> 7
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share, which includes the dilutive
effects of options, warrants and convertible securities, is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table reconciles the shares used in computing basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding used in basic earnings per
share calculation 10,755,727 10,771,458 10,754,784 10,751,425
Effect of dilutive stock options -0- 286,097 -0- 302,819
---------- ---------- ---------- ----------
Shares used in diluted earnings per
share 10,755,727 11,057,555 10,754,784 11,054,244
========== ========== ========== ==========
</TABLE>
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, 1997.
RESULTS OF OPERATIONS
The Company develops, markets and supports a family of document automation
software products 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 Xerox currently owns
approximately 62% of the Company's outstanding shares of Common Stock.
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,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Initial license fees 48% 41% 40% 42%
Annual renewal license and support fees 24 25 28 23
Services and other 28 34 32 35
-------- -------- -------- --------
Total revenues 100% 100% 100% 100%
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C> <C> <C>
Cost of revenues:
Initial license fees 5% 5% 4% 5%
Annual renewal license and support fees 3 4 4 3
Services and other 20 17 21 15
-------- -------- -------- --------
Total cost of revenues 28% 26% 29% 23%
-------- -------- -------- --------
Gross profit 72% 74% 71% 76%
Operating expenses:
Research and development 17% 17% 18% 17%
Selling, marketing and customer support 46 46 52 48
General and administrative 15 15 21 16
-------- -------- -------- --------
Total operating expenses 78% 78% 91% 81%
-------- -------- -------- --------
Loss from operations (6) (4) (20) (5)
Interest income, net 4 6 4 7
-------- -------- -------- --------
Income (loss) before provision for taxes (2)% 2% (16)% 2%
-------- -------- -------- --------
Provision for (benefit of) income taxes 0 (1) (4) (1)
======== ======== ======== ========
Net income (loss) (2)% 3% (12)% 3%
======== ======== ======== ========
</TABLE>
REVENUES
Total revenues increased 24.6% to $5.8 million for the three months ended June
30, 1998, from $4.7 million for the three months ended June 30, 1997 and
increased 20.2% to $10.4 million for the six months ended June 30, 1998, from
$8.7 million for the six months ended June 30, 1997. This growth was due
primarily to the increases in revenues from initial license fees, and increases
in annual renewal and support fees, which are due in part to the installed
customer base acquired from Data Retrieval in May 1997.
Sales Channels. 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 54.5% to $1.8 million for the three months ended June 30,
1998, from $1.2 million for the three months ended June 30, 1997 and increased
20.7% to $3.1 million for the six months ended June 30, 1998, from $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 30% and 25% of total revenues for the three months ended June 30,
1998 and 1997, respectively, and 29% and 29% of total revenues for the six
months ended June 30, 1998 and 1997, respectively.
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 80.7% to
$1.1 million for the three months ended June 30, 1998, from $630,300 for the
three months ended June 30, 1997 and increased 52.9% to $2.1 million for the six
months ended June 30, 1998, from $1.3 million for the six months ended June 30,
1997. These increases are due principally to substantially increased sales
through Xerox Canada Ltd. and European revenues from Xerox affiliates.
Initial license fees. Initial license fee revenues increased 48.0% to $2.8
million for the three months ended June 30, 1998, from $1.9 million for the
three months ended June 30, 1997 and increased 14.3% to $4.2 million for the six
months ended June 30, 1998, from $3.7 million for the six months ended June 30,
1997. The increase for the three month period ended June 30, 1998 when compared
to same period in
8
<PAGE> 9
1997 was due principally to sales to new customers reflecting in part the
expansion of the direct sales force and expansion of the Company's indirect
distribution channel. For the comparative six month period, initial license fees
have declined slightly as a percentage of total revenue due to increased
customer 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 20.1% to $1.4 million for the three months ended June
30, 1998, from $1.2 million for the three months ended June 30, 1997 and
increased 46.0% to $2.9 million for the six months ended June 30, 1998, from
$2.0 million for the six months ended June 30, 1997. The increase was
principally due to the acquisition of Data Retrieval's installed base of users.
Services and other. Revenues from services and other remained at $1.6 million
for the three months ended June 30, 1998, and increased 10.5% to $3.3 million
for the six months ended June 30, 1998, from $3.0 million for the six months
ended June 30, 1997. The increase for the six month period ended June 30, 1998
when compared to the same period in 1997 was due to consulting services
representing a larger component of new customer orders.
Cost of Revenues
Total cost of revenues increased 32.4% to $1.6 million for the three months
ended June 30, 1998, from $1.2 million for the three months ended June 30, 1997,
and increased 49.3% to $3.1 million for the six months ended June 30, 1998, from
$2.0 million for the six months ended June 30, 1997. The increase in cost of
revenues resulted primarily from increased personnel costs associated with
providing additional professional consulting services to customers.
Operating Expenses
Research and development. The Company capitalized $256,000 and $210,400 of
software costs for the three month periods ended June 30, 1998 and 1997,
respectively, and $545,700 and $210,400 for the six months ended June 30, 1998
and 1997, respectively. The Company did not capitalize any software costs for
the three months ended March 31, 1997. Research and development expenses
increased 25.3% to $1.0 million for the three months ended June 30, 1998, from
$801,300 for the three months ended June 30, 1997 and increased 29.2% to $1.9
million for the six months ended June 30, 1998, from $1.5 million 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 increased 37.2% to $2.9 million for the three months ended June 30,
1998, from $2.1 million for the three months ended June 30, 1997 and increased
28.6% to $5.4 million for the six months ended June 30, 1998, from $4.2 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.
General and administrative. General and administrative expenses decreased 8.6%
to $620,900 for the three months ended June 30, 1998, from $679,000 for the
three months ended June 30, 1997 and increased 61.3% to $2.1 million for the six
months ended June 30, 1998, from $1.3 million for the six months ended June 30,
1997. The increase in general and administrative expenses for the six
month period was primarily the result of one-time charges of $459,000 for
severance and recruiting costs taken in the first quarter and increased
personnel related and general corporate expenditures.
9
<PAGE> 10
Provision for (benefit of) income taxes. For the six months ended June 30, 1998,
the Company has recognized a tax benefit as a result of the net operating loss
and non-taxable municipal bond interest.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments totaled $18.8
million at June 30, 1998, representing 56.8% of total assets. The Company
intends to continue to invest in short-term, interest-bearing, investment grade
securities.
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.
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 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 thus far used the
proceeds from the offering as follows:
(i) Approximately $1,380,000 was used to pay income taxes to Xerox
Corporation.
(ii) Approximately $507,000 was used to purchase certain assets of
Data Retrieval Corporation of America.
(iii) Approximately $2,000,000 has been used for general working
capital purposes.
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 the recording 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.
10
<PAGE> 11
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.
Marketing alliances with Xerox have contributed a substantial portion of the
Company's income from operations and net income for certain prior operating
periods, have had a high degree of inconsistency from quarter to quarter and are
difficult to estimate. Failure to continue to receive such commissions would
have a material adverse effect on the Company's business, operating results and
financial condition. Although neither Xerox nor its affiliated entities has
expressed to the Company any intention to terminate their respective agreements
with the Company, these agreements generally may be terminated on no more than
90 days notice. Accordingly, there can be no assurance that Xerox or its
affiliates will continue these relationships or, if they do, that they will be
on terms favorable to the Company. Furthermore, there can be no assurance that
existing and potential customers will not be deterred by the existence of these
relationships or by the historical ties between the Company and Xerox and its
affiliates. Though the Company intends to continue its existing relationships
with Xerox, the Company's strategy is to lessen its dependence on Xerox.
However, there can be no assurance that the Company will be able to do so and,
because of the Company's current level of dependence on Xerox, there can be no
assurance that the Company's transition to a more independent company will not
maintain these relationships, particularly with Xerox and its affiliates, or to
establish new relationships in the future, could have a material adverse effect
on the Company's business, operating results and financial condition.
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.
The Company is continuing to assess 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 internal resources to identify,
modify or reprogram, and perform extensive testing on its systems, in connection
with the Year 2000 issue. The Company expects to have all necessary changes
implemented by 2000. The cost of the Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
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 May 21, 1998, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
<S> <C> <C>
Thomas L. Ringer 9,398,218 782,549
Charles P. Holt 9,398,218 782,549
Colin J. O'Brien 9,398,218 782,549
James J. Costello 9,398,218 782,549
Barton L. Faber 9,398,218 782,549
</TABLE>
11
<PAGE> 12
The following proposals were voted on at the Company's Annual Meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE BROKER
VOTES VOTES ABSTAIN NON-VOTES
----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
1. Stockholder Proposal regarding the election of the Company's 1,334,687 7,361,730 28,690 1,455,960
directors through cumulative voting.
2. Proposal to amend the Company's 1995 Stock Incentive Plan to 8,446,134 261,723 16,950 1,455,960
increase the shares of Common Stock reserved for issuance
thereunder by 750,000.
3. Proposal to ratify the appointment of Ernst & Young LLP as 10,121,462 7985 51,320 0
independent auditors for the fiscal year ending December 31, 1998.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
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 6, 1998 /S/ John H. Wilson
- --------------------- -----------------------------------------
John H. Wilson
Interim Chief Financial Officer
(Duly Authorized and Principal Financial
Officer)
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,293,279
<SECURITIES> 16,532,745
<RECEIVABLES> 5,887,381
<ALLOWANCES> 431,411
<INVENTORY> 0
<CURRENT-ASSETS> 28,182,915
<PP&E> 2,195,401
<DEPRECIATION> 1,296,746
<TOTAL-ASSETS> 32,954,673
<CURRENT-LIABILITIES> 6,116,703
<BONDS> 0
0
0
<COMMON> 10,829
<OTHER-SE> 26,391,083
<TOTAL-LIABILITY-AND-EQUITY> 32,954,673
<SALES> 7,089,919
<TOTAL-REVENUES> 10,415,087
<CGS> 873,707
<TOTAL-COSTS> 3,056,490
<OTHER-EXPENSES> 9,451,177
<LOSS-PROVISION> 212,964
<INTEREST-EXPENSE> 6,656
<INCOME-PRETAX> (1,625,156)
<INCOME-TAX> (370,000)
<INCOME-CONTINUING> (1,255,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,255,156)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
