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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 March 31, 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
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(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 April 30,
1998 was 10,818,087.
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INDEX
DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets---March 31, 1998 and December 31, 1997.... 3
Condensed consolidated statements of income---Three months ended March 31, 1998
and 1997........................................................................ 4
Condensed consolidated statements of cash flows---Three months ended March 31,
1998 and 1997................................................................... 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...................................................................... 13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Unaudited)
DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,357,324 $ 3,526,301
Short-term investments 16,895,235 18,228,527
Accounts receivable, net 6,786,448 6,468,751
Due from affiliates 408,244 851,717
Work in process on development contracts 375,098 288,932
Deferred income taxes 326,500 326,500
Other current assets 925,838 279,888
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Total current assets 28,074,687 29,970,616
Property and equipment, net 2,193,966 2,135,930
Goodwill, net 987,580 1,005,111
Capitalized computer software development costs, net 1,369,090 1,117,319
============ ============
Total assets $ 32,625,323 $ 34,228,976
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 937,927 $ 673,657
Accrued compensation 626,827 787,511
Other accrued liabilities 387,584 348,559
Deferred revenues 3,578,061 3,812,365
Current income tax payable to affiliate -- 387,443
Current portion of obligations under capital leases 65,108 65,108
------------ ------------
Total current liabilities 5,595,507 6,074,643
Obligations under capital leases 36,626 52,236
Deferred income taxes 411,500 411,500
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized---30,000,000 shares
Issued and outstanding shares --10,814,962 at March 31,
1998 and 10,803,369 at December 31, 1997 10,815 10,803
Deferred compensation (213,968) (241,469)
Treasury stock (240,515) (240,515)
Unrealized gains on short-term investments 70,491 69,506
Additional paid-in-capital 25,401,736 25,398,897
Retained earnings 1,553,131 2,693,375
------------ ------------
Total stockholders' equity 26,581,690 27,690,597
============ ============
Total liabilities and stockholders' equity $ 32,625,323 $ 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 condensed consolidated financial statements.
3
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DOCUMENT SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
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<S> <C> <C>
Revenues:
Initial license fees $ 1,396,762 $ 1,783,079
Annual renewal license and support fees 1,471,069 799,941
Services and other 1,714,016 1,398,915
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Total revenues 4,581,847 3,981,935
Cost of revenues:
Initial license fees 207,738 195,939
Annual renewal license and support fees 184,696 110,364
Services and other 1,035,226 511,263
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Total cost of revenues 1,427,660 817,566
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Gross margin 3,154,187 3,164,369
Operating expenses:
Research and development 925,671 692,686
Selling, marketing and customer support 2,435,177 2,038,167
General and administrative 1,520,532 648,776
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Total operating expenses 4,881,380 3,379,629
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Income (loss) from operations (1,727,193) (215,260)
Interest income, net 246,949 286,876
------------ ------------
Income (loss) before income taxes (1,480,244) 71,616
Provision for (benefit from) income taxes (340,000) (26,400)
============ ============
Net income (loss) $ (1,140,244) $ 98,016
============ ============
Net income (loss) per share--basic $ (0.11) $ 0.01
============ ============
Weighted average shares used in basic calculation 10,753,840 10,731,393
============ ============
Net income (loss) per share--diluted $ (0.11) $ 0.01
============ ============
Weighted average shares used in diluted calculation 10,753,840 11,047,534
============ ============
</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>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
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<S> <C> <C>
Net income (loss) $(1,140,244) $ 98,016
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 134,268 80,159
Amortization of goodwill 17,531 --
Amortization of computer software costs 37,923 25,264
Amortization of deferred compensation 27,501 27,501
Current income tax paid to affiliate (387,443) --
Provision for doubtful accounts 92,686 (108,816)
Changes in operating assets and liabilities:
Accounts receivable 33,090 475,810
Work in process on development contracts (86,166) --
Other current assets (645,950) (128,602)
Accounts payable 264,270 60,484
Accrued liabilities (121,659) (474,416)
Deferred revenue (234,304) (184,691)
----------- -----------
Net cash provided by (used in) operating activities (2,008,497) (129,291)
INVESTING ACTIVITIES
Purchases of short-term investments (6,663,311) (1,355,766)
Sales of short-term investments 6,896,603 --
Maturities of short-term investments 1,100,000 --
Purchases of property and equipment (192,304) (337,779)
Unrealized gains on securities 985 --
Additions to computer software development costs (289,694) --
----------- -----------
Net cash provided by (used in) investing activities 852,279 (1,693,545)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (15,610) (16,083)
Issuance of common stock 2,851 2,893
----------- -----------
Net cash used in financing activities (12,759) (13,190)
----------- -----------
Decrease in cash and cash equivalents (1,168,977) (1,836,026)
Cash and cash equivalents at beginning of period 3,526,301 2,465,694
=========== ===========
Cash and cash equivalents at end of period $ 2,357,324 $ 629,668
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 3,307 $ 5,093
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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DOCUMENT SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
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, 1997. Operating results for the three month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes rules for reporting and
displaying comprehensive income. The adoption of SFAS No. 130 does not
materially impact the Company's results of operations, cash flows or financial
position.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position, (SOP 97-2), Software Revenue Recognition, which provides
guidance for recognizing revenue related to sales by software vendors. SOP 97-2
was effective for the Company in the first quarter of 1998. The adoption of SOP
97-2 does not have a significant impact on the Company's revenue recognition
policy.
Note B---Transactions with Affiliates
The Company has strategic marketing alliances with Xerox Corporation (Xerox)
under which the parties have agreed to pay certain 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 $84,750 and $179,000 for the three months
ended March 31, 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 $39,500 for the
three months ended March 31, 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 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 $453,300 and
$232,900 for the three months ended March 31, 1998 and 1997, respectively.
Included in accounts receivable are $397,800 and $227,800 from these revenues at
March 31, 1998 and 1997, respectively.
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The Company has distribution agreements with certain affiliates which provide
the affiliates the non-exclusive right to sub-license the Company's software in
Europe. Revenues under these agreements totaled $465,000 and $479,400 for the
three months ended March 31, 1998 and 1997, respectively. Related accounts
receivable are $567,700 and $413,900 at March 31, 1998 and 1997, respectively.
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 factors, including those set forth in
this discussion under "Factors That May Affect Future Results" and other risks
detailed from time to time in the Company's SEC reports. In addition, the
discussion of the Company's results of operations should be read in conjunction
with 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.
OVERVIEW
Document Sciences Corporation (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.
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 retained employees responsible for the development, product support and
customer service of the software products. In addition, the Company has
continued 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 2000 issue. Management has not yet finalized its
assessment of the year 2000 compliance expenses and related potential effect on
the Company's earnings.
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:
7
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
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<S> <C> <C>
Revenues:
Initial license fees 31% 45%
Annual renewal license and support fees 32 20
Services and other 37 35
------------ ------------
Total revenues 100% 100%
------------ ------------
Cost of revenues:
Initial license fees 4% 5%
Annual renewal license and support fees 4 3
Services and other 23 12
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Total cost of revenues 31% 20%
------------ ------------
Gross profit 69% 80%
Operating expenses:
Research and development 20% 17%
Selling, marketing and customer support 53 52
General and administrative 33 16
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Total operating expenses 106% 85%
------------ ------------
Income (loss) from operations (37) (5)
Interest income, net 5 7
------------ ------------
Income (loss) before income taxes (32)% 2%
------------ ------------
Provision for (benefit from) income taxes (7) --
============ ============
Net income (25)% 2%
============ ============
</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. 97-2. Initial license revenue is
recognized upon delivery 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 15.1% to $4.6 million for the three months ended March
31, 1998 from $4.0 million for the three months ended March 31, 1997. This
growth was due primarily to the increases in revenues from increased consulting
services, which are included in services and other, and increases in
8
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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 7.2% to $1.3 million for the three months ended March 31,
1998 from $1.4 million for the three months ended March 31, 1997. This decrease
is the result of fewer large transactions. Revenues from export sales were 28%
and 35% of total revenues for the three months ended March 31, 1998 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 $84,750 and $179,000 for the three months ended
March 31, 1998 and 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 28.9% to
$918,300 for the three months ended March 31, 1998 from $712,300 for the three
months ended March 31, 1997. This increase is due principally to increased
revenues through Xerox Canada Ltd. and Fuji Xerox Australia.
Initial license fees. Initial license fee revenues decreased 21.7% to $1.4
million for the three months ended March 31, 1998 from $1.8 million for the
three months ended March 31, 1997. This decrease in initial license fees was due
to one-time charges of $340,000 for sales concessions to certain customers.
Initial license fees have declined as a percentage of total revenue due to
increased customer demand for consulting services and a significant increase in
annual license and support fees as a result of the Data Retrieval acquisition.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 83.9% to $1.5 million for the three months ended
March 31, 1998 from $799,900 for the three months ended March 31, 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 were 32.1% and 20.1% for the three months ended
March 31, 1998 and 1997, respectively.
Services and other. Revenues from services and other increased 22.5% to $1.7
million for the three months ended March 31, 1998 from $1.4 million for the
three months ended March 31, 1997. The growth in revenues from consulting
services, which is included in services and other, both in revenue dollars and
as a percentage of total revenues, was attributable to increased demand for
consulting services which has become a larger component of new customer orders.
9
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Cost of Revenues
Total cost of revenues was 31.2% and 20.5% of total revenues for the three
months ended March 31, 1998 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 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
6.0% to $207,700 for the three months ended March 31, 1998 from $195,900 for the
three months ended March 31, 1997. This increase was primarily the result of
increased amortization of capitalized software development costs. As a percent
of initial license fee revenues, the cost of initial license fees was 14.9% and
11.0% for the three months ended March 31, 1998 and 1997, respectively. The cost
of initial license fees also included the amortization of capitalized software
development costs of $37,900 and $25,300 for the three months ended March 31,
1998 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 67.4% to $184,700 for the three months ended
March 31, 1998 from $110,400 for the three months ended March 31, 1997. As a
percentage of annual renewal license and support fee revenues, these costs were
12.6% and 13.8% for the three months ended March 31, 1998 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 annual
renewal license and support fees revenue is a result of economies of scale
associated with a larger installed base of customers.
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 102.5% to $1.0 million for the three months ended March
31, 1998 from $511,300 for the three months ended March 31, 1997. The costs of
services and other represented 60.4% and 36.5% of the related revenues for the
three months ended March 31, 1998 and 1997, respectively. The increase in cost
of services and other revenues resulted principally from the additional
personnel costs related to the Company providing increased 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 $289,700 of
software costs for the three months ended March 31, 1998. The Company did not
capitalize any software costs for the three months ended March 31, 1997.
Research and development expenses increased 33.6% to $925,700 for the three
months ended March 31, 1998 from $692,700 for the three months ended March 31,
1997. The increase in these expenses resulted principally from the expansion of
the engineering staff and related costs.
10
<PAGE> 11
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 19.5% to
$2.4 million for the three months ended March 31, 1998 from $2.0 million for the
three months ended March 31, 1997. 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 134.4% to $1.5 million for the three months ended March 31, 1998 from
$648,800 for the three months ended March 31, 1997. These expenses represented
33.2% and 16.3% of the total revenues for the three months ended March 31, 1998
and 1997, respectively. The increase in general and administrative expenses was
the result of growth in the finance and administrative operations of the Company
and of one-time charges of $459,000 for severance and recruiting costs.
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 decreased to $247,000 for the three months ended
March 31, 1998 from $286,900 for the three months ended March 31, 1997. The
decrease in dollar amount is due to a decrease in the balance of short-term
investments which are being used to fund the growth of the Company.
Provision for (benefit from) income taxes. From its inception to September 20,
1996, the Company's taxes were included in the consolidated tax returns of Xerox
Corporation. Subsequent to the Company's initial public offering, the Company
was no longer included in the consolidated tax returns for Xerox Corporation.
For the three months ended March 31, 1998, the Company has recognized a tax
benefit as a result of the net operating loss and the 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.
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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.
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
adversely affect its business, financial condition or results of operations. The
failure by the Company to 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments totaled $19.3
million at March 31, 1998, representing 59% of total assets. Net cash used by
operating activities for the three months ended March 31, 1998 was $2.0 million
and was primarily the result of an increase in other assets, the payment of
income taxes to Xerox and the net loss from operations. The Company intends to
continue to invest in short-term, interest-bearing, investment grade securities.
For the three months ended March 31, 1998, the Company's investing activities
provided cash of $852,300 primarily from sales and maturities of short-term
investments.
The Company has no significant capital spending or purchase commitments other
than normal purchase commitments and commitments under facilities and capital
leases.
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The Company believes that its existing cash balances, anticipated cash flows
from operations and its bank line of credit will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months.
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 $21,400,000 is available for general working
capital purposes.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 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: May 15, 1998 /S/ Robert D. Gerhart
- ------------------- ---------------------
Robert D. Gerhart
Acting Chief Financial Officer
(Duly Authorized and Principal Financial
Officer)
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,357,324
<SECURITIES> 16,895,235
<RECEIVABLES> 7,505,656
<ALLOWANCES> 310,964
<INVENTORY> 0
<CURRENT-ASSETS> 28,074,687
<PP&E> 3,288,186
<DEPRECIATION> 1,094,220
<TOTAL-ASSETS> 32,625,323
<CURRENT-LIABILITIES> 5,595,507
<BONDS> 0
0
0
<COMMON> 10,815
<OTHER-SE> 26,570,875
<TOTAL-LIABILITY-AND-EQUITY> 32,625,323
<SALES> 2,867,831
<TOTAL-REVENUES> 4,581,847
<CGS> 392,434
<TOTAL-COSTS> 3,154,187
<OTHER-EXPENSES> 4,881,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,307
<INCOME-PRETAX> (1,480,244)
<INCOME-TAX> (340,000)
<INCOME-CONTINUING> (1,140,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,140,244)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
