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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, 1999
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 April 30,
1999 was 10,910,188.
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DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets---March 31, 1999 and December 31, 1998................................................3
Consolidated statements of income---three months ended March 31, 1999 and 1998....................................4
Consolidated statements of cash flows---three months ended March 31, 1999 and 1998................................5
Notes to 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......................................................17
Signature........................................................................................................17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (Unaudited)
DOCUMENT SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 1,741,443 $ 6,694,420
Short-term investments 16,585,950 13,220,581
Accounts receivable, net 3,940,269 4,251,460
Due from affiliates 1,471,150 1,592,349
Unbilled revenue 912,258 391,601
Income tax receivable 331,337 331,337
Other current assets 605,024 519,479
------------ ------------
Total current assets 25,587,431 27,001,227
Property and equipment, net 1,609,726 1,668,855
Capitalized computer software development costs, net 1,251,088 1,383,590
Goodwill, net 917,456 934,987
------------ ------------
Total assets $ 29,365,701 $ 30,988,659
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 305,444 $ 1,065,986
Accrued compensation 1,026,887 1,874,044
Other accrued liabilities 1,199,057 1,773,716
Deferred revenue 7,769,994 7,362,838
Current portion of obligations under capital leases 26,178 41,568
------------ ------------
Total current liabilities 10,327,560 12,118,152
Obligations under capital leases 10,512 12,618
Deferred revenue 380,884 448,099
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;
Authorized---30,000,000 shares
Issued and outstanding shares --10,908,778 at March 31,
1999 and 10,857,958 at December 31, 1998 10,909 10,858
Deferred compensation (53,193) (67,326)
Treasury stock (686,989) (686,989)
Additional paid-in-capital 25,422,891 25,409,399
Accumulated comprehensive income 187,545 204,071
Retained earnings (deficit) (6,234,418) (6,460,223)
------------ ------------
Total stockholders' equity 18,646,745 18,409,790
------------ ------------
Total liabilities and stockholders' equity $ 29,365,701 $ 30,988,659
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 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.
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DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1999 1998
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<S> <C> <C>
Revenues:
Initial license fees $ 1,738,941 $ 973,762
Annual renewal license and support fees 1,852,357 1,471,069
Services and other 1,918,445 1,681,016
------------ ------------
Total revenues 5,509,743 4,125,847
Cost of revenues:
Initial license fees 286,302 207,738
Annual renewal license and support fees 241,898 184,696
Services and other 783,480 1,002,226
------------ ------------
Total cost of revenues 1,311,680 1,394,660
------------ ------------
Gross margin 4,198,063 2,731,187
Operating expenses:
Research and development 1,374,584 925,671
Selling and marketing 1,843,270 2,435,177
General and administrative 969,108 1,520,532
------------ ------------
Total operating expenses 4,186,962 4,881,380
------------ ------------
Income (loss) from operations 11,101 (2,150,193)
Interest income, net 214,704 246,949
------------ ------------
Income (loss) before income taxes 225,805 (1,903,244)
Benefit from income taxes -- (435,000)
------------ ------------
Net income (loss) $ 225,805 $ (1,468,244)
============ ============
Net income (loss) per share--basic $ 0.02 $ (0.14)
============ ============
Weighted average shares used in basic calculation 10,656,861 10,753,840
============ ============
Net income (loss) per share--diluted $ 0.02 $ (0.14)
============ ============
Weighted average shares used in diluted calculation 10,801,804 10,753,840
============ ============
</TABLE>
See notes to consolidated financial statements.
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DOCUMENT SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 225,805 $(1,468,244)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 98,845 133,613
Amortization of goodwill 17,531 17,531
Amortization of computer software costs 132,502 37,923
Amortization of deferred compensation 14,133 27,501
Current income tax payable to affiliate -- (387,443)
Provision for doubtful accounts 22,899 92,686
Changes in operating assets and liabilities:
Accounts receivable 270,404 (403,215)
Due from affiliates 159,902 465,429
Unbilled revenue (520,657) (86,166)
Other current assets (86,047) (741,023)
Accounts payable (759,571) 264,587
Accrued compensation (843,059) (162,141)
Other accrued liabilities (568,087) (5,391)
Deferred revenue 346,935 187,766
----------- -----------
Net cash used in operating activities (1,488,465) (2,026,587)
INVESTING ACTIVITIES
Purchases of short-term investments (8,942,185) (6,663,311)
Sales of short-term investments 4,826,816 6,896,603
Maturities of short-term investments 750,000 1,100,000
Purchases of property and equipment, net (31,774) (181,290)
Unrealized gains (losses) on securities (87,412) 985
Additions to computer software development costs -- (289,694)
----------- -----------
Net cash provided by (used in) investing activities (3,484,555) 863,293
FINANCING ACTIVITIES
Principal payments under capital lease obligations (17,496) (15,610)
Issuance of common stock 13,543 2,851
----------- -----------
Net cash used in financing activities (3,953) (12,759)
----------- -----------
Decrease in cash and cash equivalents (4,976,973) (1,176,053)
Foreign currency translation adjustment 23,996 7,076
Cash and cash equivalents at beginning of period 6,694,420 3,526,301
----------- -----------
Cash and cash equivalents at end of period $ 1,741,443 $ 2,357,324
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 1,203 $ 3,307
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
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 1998 have been reclassified to conform
with the 1999 presentation. The information included in this Form 10-Q 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, included in our 1998 Annual Report on Form
10-K. Operating results for the three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
The Company recognizes revenue in accordance with AICPA Statement of Position
(SOP) 97-2, Software Revenue Recognition. Initial license revenue is recognized
when a contract exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable. The portion of the
initial license revenue representing the software support for the first year is
deferred and recognized ratably over the contract period. Annual renewal license
and support fees are 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 services are recognized as the related services are performed.
However, when such consulting services are deemed to be essential to the
functionality of the delivered software product, revenue from the entire
arrangement is recognized either on a percentage of completion or completed
contract basis in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, and Accounting Research
Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts.
Note B-Transactions with Affiliates
We maintain a strategic marketing alliance with Xerox Corporation (Xerox) under
which both parties agree 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 revenues in the accompanying consolidated statements of income are
commissions earned from Xerox totaling $96,900 and $84,800 for the three months
ended March 31, 1999 and 1998, respectively. We paid no referral commissions to
Xerox for the three months ended March 31, 1999 and 1998.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Australia, New Zealand, Canada and Brazil.
The terms of the distributor agreements provide that the affiliates receive a
discount from the list price of our licensed products and annual license fees.
Revenues from the affiliates under these agreements, net of discounts, were
$328,100 and $453,300 for the three months ended March 31, 1999 and 1998,
respectively. Included in accounts receivable are $252,600 and $397,800 from
these revenues at March 31, 1999 and 1998, respectively.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Europe. Revenues under these agreements
totaled $658,100 and $465,000 for the three
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months ended March 31, 1999 and 1998, respectively. Related accounts receivable
are $666,000 and $1,367,500 at March 31, 1999 and 1998, respectively.
Note C-Net Income Per Share
We present our 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 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
----------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Weighted average common shares outstanding used in
basic earnings per share calculation 10,656,861 10,753,840
Effect of dilutive stock options 144,943 -0-
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Shares used in diluted earnings per share 10,801,804 10,753,840
========== ==========
</TABLE>
Note D-Restructuring Charges
In December 1998, our board of directors approved a plan of restructuring and we
recorded a charge of approximately $2.0 million. The restructuring included the
shutdown of certain facilities and the termination of 46 employees involved in
development, sales, marketing, professional services and administrative
activities. The charge consisted primarily of $1.2 million in termination
benefits, a $470,000 write off of impaired assets and $333,000 in facilities
shutdown and other costs. At March 31, 1999, our restructuring reserve totaled
$772,800 and consisted of $608,600 in termination benefits and $164,200 in
facilities shutdown costs, none of which has been paid at March 31, 1999.
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. Our actual
results could differ materially from those discussed herein, including those set
forth in this discussion, under "Risk Factors" and other risks detailed from
time to time in our SEC reports. In addition, the discussion of our results of
operations should be read in conjunction with the sections entitled "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our 1998 Annual Report on Form 10-K.
OVERVIEW
Document Sciences Corporation develops, markets and supports a family of
document automation software products and services used in high volume
electronic publishing applications. We were
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incorporated in Delaware in October 1991 as a wholly-owned subsidiary of Xerox,
and following our initial public offering of stock in September 1996, Xerox
ownership was reduced to approximately 62%.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues for certain
items in our consolidated statements of income for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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<S> <C> <C>
Revenues:
Initial license fees 31% 23%
Annual renewal license and support fees 34 36
Services and other 35 41
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Total revenues 100% 100%
Cost of revenues:
Initial license fees 5% 5%
Annual renewal license and support fees 5 5
Services and other 14 24
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Total cost of revenues 24% 34%
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Gross profit 76% 66%
Operating expenses:
Research and development 25% 22%
Selling and marketing 33 59
General and administrative 18 37
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Total operating expenses 76% 118%
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Income (loss) from operations 0% (52)%
Interest income, net 4 6
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Income (loss) before income taxes 4% (46)%
Provision for (benefit from) income taxes 0 (10)
---------- ----------
Net income (loss) 4% (36)%
========== ==========
</TABLE>
Revenues
Total revenues increased 33.5% to $5.5 million for the three months ended March
31, 1999 from $4.1 million for the three months ended March 31, 1998. This
growth was due to increases in all revenues, primarily from initial license
fees.
Sales Channels. We sell our products principally through a direct sales force
domestically, and internationally principally through distributors and value
added resellers ("VARS") and, to a lesser extent, through a direct sales force.
Revenues from export sales and sales through our foreign subsidiary increased
8.0% to $1.4 million for the three months ended March 31, 1999 from $1.3 million
for the three months ended March 31, 1998. This increase is primarily the result
of increased activity. Revenues from export sales were 25% and 31% of total
revenues for the three months ended March 31, 1999 and 1998, respectively.
We maintain distributorship agreements with various Xerox foreign affiliates to
remarket our products internationally. Our revenues from such distributorship
agreements related to the licensing, maintenance
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and support of our products increased 7.4% to $986,200 for the three months
ended March 31, 1999 from $918,300 for the three months ended March 31, 1998.
This increase is due principally to increased revenues through European Xerox
affiliates and Xerox Brazil.
Initial license fees. Initial license fee revenues increased 78.6% to $1.7
million for the three months ended March 31, 1999 from $973,800 for the three
months ended March 31, 1998. This increase is due to increased sales activity in
both the United States and Europe.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 25.9% to $1.9 million for the three months ended
March 31, 1999 from $1.5 million for the three months ended March 31, 1998. The
increase is due to the increasing installed base of customers.
Services and other. Revenues from services and other increased 14.1% to $1.9
million for the three months ended March 31, 1999 from $1.7 million for the
three months ended March 31, 1998. This growth in revenues is attributable to
increasing demand for consulting services which reflects our increased sales of
solutions.
Cost of Revenues
Total cost of revenues was 23.8% and 33.8% of total revenues for the three
months ended March 31, 1999 and 1998, respectively. The decrease in cost of
revenues as a percentage of total revenues resulted primarily from increased
utilization of consulting personnel.
Operating Expenses
Research and development. Research and development expenses increased 48.5% to
$1.4 million for the three months ended March 31, 1999 from $925,700 for the
three months ended March 31, 1998. We did not capitalize any software costs for
the three months ended March 31, 1999, while we capitalized $289,700 for the
three months ended March 31, 1998. Notwithstanding capitalized software costs in
1998, research and development expenditures increased $159,200 or by 13.1%. This
increase is due primarily to the increased use of outside consultants.
Selling and marketing. Selling and marketing expenses decreased 24.3% to $1.8
million for the three months ended March 31, 1999 from $2.4 million for the
three months ended March 31, 1998. This decrease is due principally to the
savings realized from our restructuring and the realignment of our commission
structure with our selling model.
General and administrative. General and administrative expenses decreased 36.3%
to $969,100 for the three months ended March 31, 1999 from $1.5 million for the
three months ended March 31, 1998. This decrease is due principally to the
savings realized from our restructuring and the absence of severance costs paid
to the former CEO in 1998.
Provision for income taxes. For the three months ended March 31, 1999, we have
recognized no income tax expense as a result of the utilization of the net
operating loss carryforward generated in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and short-term investments totaled $18.3 million
at March 31, 1999, representing 62.4% of total assets. We intend to continue to
invest in short-term, interest-bearing, investment grade securities.
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We believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months.
We have no significant capital spending or purchase commitments other than
normal purchase commitments and commitments under facilities and capital leases.
RISK FACTORS
The following is a discussion of certain factors which currently impact or may
impact our business, operating results and/or financial condition. Anyone making
an investment decision with respect to our common stock or other securities is
cautioned to carefully consider these factors.
If any of the following risks actually occur, our business, results of future
operations or financial condition could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may lose
all or part of your investment.
WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated in October 1991 as a wholly owned subsidiary of Xerox, and
Xerox currently owns approximately 62% of our outstanding shares of common
stock. Our limited operating history means that predicting future operating
results is difficult, and our operating history during prior periods cannot
necessarily be regarded as indicative of our prospects as an independent
company. Accordingly, although we have experienced recent revenue growth, we
cannot assure you that we will sustain such growth in revenues or that we will
sustain this quarter's profitability on a quarterly or annual basis.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY, AND WE MAY NOT BE ABLE TO
MAINTAIN OUR EXISTING GROWTH RATES.
Our total revenues and operating results can vary, sometimes substantially, from
quarter to quarter and we expect them to vary significantly in the future. Our
revenues and operating results are difficult to forecast; and our future results
will depend upon many factors, including the following:
o the demand for our products;
o the level of product competition and price competition that we face;
o the length of our sales cycle;
o the size and timing of individual license transactions;
o the delay or deferral of customer implementations;
o the budget cycles of our customers;
o the level of commissions that we receive from the sale of Xerox
printers under the strategic marketing alliance that we have with
Xerox;
o our success in expanding our direct sales force and indirect
distribution channels;
o the timing of our new product introductions and product
enhancements, as well as those of our competitors;
o our mix of products and services;
o our level of international sales;
o the activities of our competitors;
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o our timing of new hires;
o changes in foreign currency exchange rates;
o our ability to develop and market new products and to control costs;
and
o general domestic and international economic conditions.
Our initial license fee revenue mainly depends on when orders are received and
shipped. However, because of our sales model, our customers' implementation
schedule and the complexity of the implementation process, revenue from some
software shipments may not be recognized in the same quarter as the shipment
occurs. Our operating expenses are primarily based on anticipated revenue
levels. Since a high percentage of those expenses are relatively fixed, a delay
in the recognition of revenue from license transactions could cause significant
variations in operating results from quarter to quarter and we may sustain
losses as a result. If such expenses precede increased revenues, our operating
results would be materially adversely affected.
As a result of these factors, results from operations for any quarter are
subject to significant variation, and we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and you
should not rely upon them as an indication of our future performance.
Furthermore, our operating results in some future quarter may fall below the
expectations of public market analysts and investors. If this occurs, the price
of our common stock would likely be materially adversely affected.
WE ARE SUBSTANTIALLY CONTROLLED BY XEROX.
Xerox owns approximately 62% of the outstanding shares of our common stock.
Consequently, Xerox controls Document Sciences, is able to elect our entire
board of directors and could have significant input into our operations. In
addition, Xerox is able to determine the outcome of all corporate actions
requiring stockholder approval, including potential mergers, acquisitions,
consolidations and sales of all or substantially all of our assets. Xerox's
voting power could delay or prevent a change in control of Document Sciences and
may prevent or discourage tender offers for our common stock at a premium price
by another person or entity. Xerox affiliates currently hold two of the six
seats on our board of directors.
OUR BUSINESS IS DEPENDENT ON MAINTAINING OUR RELATIONSHIPS WITH XEROX.
We currently have a variety of contractual and informal relationships with Xerox
and affiliates of Xerox, including a Cooperative Marketing Agreement, a Transfer
and License Agreement and various distribution agreements. We rely on these
relationships and agreements for a significant portion of our total revenues.
o For the three months ended March 31, 1999, revenues derived from
relationships with Xerox and affiliates of Xerox accounted for
approximately $1.1 million, representing 20.5% of our total revenues
and
o For the three months ended March 31, 1998, revenues derived from
relationships with Xerox and affiliates of Xerox accounted for
approximately $1.1 million, representing 25.9% of our total
revenues.
Included above were commissions that we received from sales of Xerox printers
under our strategic marketing alliance with Xerox. These commissions were:
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o 1999: $96,900;
o 1998: $84,800.
These commissions have little or no associated costs and have contributed a
substantial portion of our income from operations for certain prior operating
periods. In addition, these commissions have been inconsistent from quarter to
quarter and are difficult to estimate. Although neither Xerox nor its affiliated
entities have expressed any intention to terminate their agreements with us,
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 us.
Furthermore, there can be no assurance that existing and potential customers
will continue to do business with us because of these relationships or our
historical ties with Xerox and its affiliates. Though we intend to continue our
existing relationships with Xerox, our strategy is to lessen our dependence on
Xerox. However, there can be no assurance that we will be able to do so and,
because of our current level of dependence on Xerox, there can be no assurance
that our move to become more independent will not adversely affect our business,
results of operations or financial condition. Our failure 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 our
business, operating results and financial condition.
Xerox has strategic alliances and other business relationships with other
companies who supply software and services used in high volume electronic
publishing applications and who now or in the future may be our competitors.
There can be no assurance that Xerox or one of its affiliated companies will not
engage in business that directly competes with us. In addition, Xerox has
ongoing internal development activities that could in the future lead to
products that compete with us. Xerox could in the future expand these
relationships or enter into additional ones, and as a result our business could
be materially adversely affected.
OUR GROWTH IS DEPENDENT UPON SUCCESSFULLY FOCUSING OUR DISTRIBUTION CHANNELS.
We intend to streamline our worldwide sales and distribution channels by
focusing on key target industry market segments where our current and planned
products enjoy a significant competitive advantage and a current, high market
demand. We also plan on leveraging our existing relationships with Xerox
Corporation, IBM Corporation and their channels and affiliates by launching
targeted joint marketing and value added reseller programs and by introducing
new product offerings that are optimized for selected target markets and
marketing channels. In addition, we intend to form additional partnerships with
system integrators and consultants in order to broaden our capacity to deliver
complete document automation solutions that incorporate significant services
content, while also maintaining our core domain expertise. We cannot assure you
that we will be able to successfully streamline and focus our worldwide
channels, leverage our existing relationships or form new alliances. If we fail
to do so, it will have a material adverse effect on our business, operating
results and financial condition.
CONTINUED EXPANSION OF OUR PROFESSIONAL SERVICES IS NECESSARY FOR OUR FUTURE
GROWTH.
We are increasing our focus on the consulting services component of our
professional services to assist customers in the planning and implementation of
enterprise-wide, mission-critical document automation applications. Our
increased focus is dependent on retaining and hiring professionals to perform
these consulting services. Should we be unable to maintain the necessary
services workforce, our business and financial condition could be materially
adversely affected.
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OUR GROWTH DEPENDS ON OUR INTRODUCTION OF NEW PRODUCTS AND ENHANCEMENTS TO
EXISTING PRODUCTS.
Our future business, operating results and financial condition will depend upon
our ability to develop new products that address the future needs of our target
markets and to respond to emerging industry standards and practices. Our
Document Sciences Autograph family of products has been applied mainly to
document automation applications producing paper-based documents. We believe
that our core technology can be extended to the Internet, intranets and
commercial on-line services, and we have begun initial development activity in
this area. We cannot assure you that we will be successful in developing,
introducing and marketing new products or product enhancements, including new
products or the extension of existing products for the Internet, intranets and
commercial on-line services, on a timely and cost effective basis, if at all. In
addition, we cannot assure you that our new products and product enhancements
will adequately meet the requirements of the marketplace or achieve market
acceptance. Delays in our commercial shipments of new products or enhancements
may result in client dissatisfaction and a delay or loss of product revenues.
If we are unable, for technological or other reasons, to develop and introduce
new products or enhancements of existing products in a timely manner in response
to changing market conditions or client requirements, then our business,
operating results and financial condition will be materially adversely affected.
In addition, we cannot assure you that our new products or new versions of our
existing products will achieve market acceptance. In order to provide our
customers with integrated product solutions, our future success will also depend
in part upon our ability to maintain and enhance relationships with our
technology partners, such as JetForm Corporation and New Dimension Software.
A LONGER THAN EXPECTED SALES CYCLE MAY AFFECT OUR REVENUES AND OPERATING
RESULTS.
The licensing of our software products is often an enterprise-wide decision by
prospective customers and generally involves a sales cycle of three to twelve
months in order to educate our prospective customers regarding the use and
benefits of our products. In addition, the implementation of our products by
customers involves a significant commitment of their resources over an extended
period of time, and is commonly associated with substantial customer business
process reengineering efforts. For these and other reasons, our sales and
customer implementation cycles are subject to a number of significant delays
over which we have little or no control. Any delay in the sale or customer
implementation of a limited number of license transactions could have a material
adverse effect on our business and results of operations and cause our operating
results to vary significantly from quarter to quarter.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON SALES OF A SMALL NUMBER OF
PRODUCTS IN HIGHLY CONCENTRATED INDUSTRIES.
We derived 62% of our initial license revenues from licenses of CompuSet and
related CompuSet option products for the three months ended March 31, 1999. Our
initial license fees from DLS and DVS comprised 26% and 12%, respectively, for
the three months ended March 31, 1998. As a result, factors that may adversely
impact the pricing of or demand for CompuSet and related products, such as
competition from other products, negative publicity or obsolescence of the
hardware or software environments in which our products run, could have a
material adverse effect on our business, operating results and financial
condition. Our financial performance will continue to depend significantly on
the successful development, introduction and customer acceptance of new and
enhanced versions of our CompuSet software and related products.
Licenses to end users in the insurance industry accounted for 58% of domestic
initial license revenues. Our future success will depend on our ability to
continue to successfully market our products in this and
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<PAGE> 14
other industries. We cannot assure you that we will continue to be successful in
developing and marketing CompuSet products and related services. Our failure to
do so would have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our revenues from export sales, including sales through our foreign subsidiary,
accounted for the following:
o 25% of our total revenues for the three months ended March 31, 1999
and
o 31% of our total revenues for the three months ended March 31, 1998.
Our wholly owned subsidiary, Document Sciences Europe, markets and supports our
products in Europe. We license our products in Europe through value added
resellers and to a lesser extent, direct sales. Our value added resellers are
principally Xerox affiliates who re-market our products. Revenues generated by
this subsidiary were $1.1 million and $840,100 for the three months ended 1999
and 1998, respectively. Net income from this subsidiary was $626,400 and
$190,500 for the three months ended 1999 and 1998, respectively. In Australia,
Canada and Brazil we distribute our products through Fuji Xerox Co., Ltd., Xerox
Canada, Ltd. and Xerox Brazil, Ltd., respectively. Revenues generated by these
Xerox affiliates were $328,100 and $453,300 for the three months ended 1999 and
1998, respectively. In order to successfully expand export sales, we must
establish additional foreign operations, hire additional personnel and develop
relationships with additional international resellers. If we are unable to do so
in a timely manner, our growth in international export sales could be limited,
and our business, operating results and financial condition could be materially
adversely affected. In addition, we cannot assure you that we will be able to
maintain or increase international market demand for our products.
Additional risks inherent in our international business activities include:
o currency fluctuations;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o our limited experience in localizing products for foreign countries;
o lack of acceptance of our localized products in foreign countries;
o longer accounts receivable payment cycles;
o difficulties in managing our international operations;
o potentially adverse tax consequences including restrictions on the
repatriation of earnings; and
o the burdens of complying with a wide variety of foreign laws.
A portion of our business is conducted in currencies other than the U.S. dollar,
primarily the French franc. Although exchange rate fluctuations have not had a
significant impact on us, fluctuations in the value of the currencies in which
we conduct our business relative to the U.S. dollar could cause currency
transaction gains and losses in future periods. We do not currently engage in
currency hedging transactions, and we cannot assure you that fluctuations in
currency exchange rates in the future will not have a material adverse impact on
our international revenues and our business, operating results or financial
condition.
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<PAGE> 15
OUR BUSINESS IS DEPENDENT ON THE EMERGING MARKET FOR DOCUMENT AUTOMATION
SOFTWARE.
The market for document automation software is relatively new, intensely
competitive, highly fragmented, underdeveloped and subject to rapid change.
Marketing and sales techniques in the document automation software marketplace,
as well as the bases for competition, are not well established. We cannot assure
you that the market for document automation software will develop or that, if it
does develop, organizations will adopt our products. We have spent, and intend
to continue to spend, significant resources educating potential customers about
the benefits of our products. However, we cannot assure you that such
expenditures will enable our products to achieve further market acceptance, and
if the document automation software market fails to develop or develops more
slowly than we currently anticipate, our business, operating results and
financial condition would be materially adversely affected.
In addition, the commercial market for document automation of electronic
documents designed for use with the Internet, intranets and commercial on-line
services has only recently begun to develop, and the success of our products
designed for this market will depend in part on their compatibility with such
services. It is difficult to predict whether the Internet, intranets and
commercial on-line services will be a viable commercial marketplace or whether
the demand for related products and services will increase or decrease in the
future. Since the increased commercial use of the Internet, intranets and
commercial on-line services could require substantial modification and
customization of certain of our products and services as well as the
introduction of new products and services, we cannot assure you that we will be
able to effectively or successfully compete in this emerging market.
OUR ABILITY TO MANAGE OUR GROWTH WILL AFFECT OUR BUSINESS.
We have recently experienced a period of growth in total revenues. Our ability
to compete effectively and to manage future change will require us to continue
to improve our financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage our work force. We
cannot assure you that we will be able to do so successfully. Our failure to do
so could have a material adverse effect on our business, operating results and
financial condition.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE
FUTURE.
Our future performance depends in significant part upon the continued service of
our key technical, sales and senior management personnel. The loss of the
services of one or more of our executive officers could have a material adverse
effect on our business, operating results and financial condition. Our future
success also depends on our continuing ability to attract and retain highly
qualified product development, sales and management personnel. Competition for
such personnel is intense, and there can be no assurance that we will be able to
retain our key employees or that we will be able to attract, assimilate or
retain other highly qualified product development, sales and managerial
personnel in the future.
OUR FAILURE TO ADEQUATELY LIMIT OUR EXPOSURE TO PRODUCT LIABILITY CLAIMS MAY
ADVERSELY AFFECT US.
Our license agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. However, it is
possible that the limitation of liability provisions contained in our license
agreements may not be effective under the laws of certain jurisdictions.
Although we have not experienced any product liability claims to date, sale and
support of our products may entail the risk of such claims in the future. A
successful product liability claim brought against us or
15
<PAGE> 16
a claim arising as a result of our professional services could have a material
adverse effect upon our business, operating results and financial condition.
OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS.
Software products as complex as those we offer, particularly our new Visual
CompuSet and Data Prep Tool products, may contain undetected defects or errors
when first introduced or as new versions are released. As a result, we could in
the future lose or delay recognition of revenues as a result of software errors
or defects. In addition, our products are typically intended for use in
applications that may be critical to a customer's business. As a result, we
expect that our customers and potential customers have a greater sensitivity to
product defects than the market for software products generally. Although our
business has not been adversely affected by any such errors to date, we cannot
assure you that, despite our testing and testing by current and potential
customers, errors will not be found in our new products or releases. If these
errors are discovered after the commencement of commercial shipments, it could
result in any of the following:
o loss of revenue or delay in market acceptance;
o diversion of our development resources;
o damage to our reputation; or
o increased service and warranty costs.
If any of these factors occur, it would have a material adverse effect upon our
business, operating results and financial condition.
WE MAY FACE RISKS OF YEAR 2000 NONCOMPLIANCE.
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar activities.
Based on recent assessments, we have determined that our information technology,
or IT, and non-IT systems, software, hardware and equipment, are currently
purported by the software and hardware vendors to be able to utilize dates
beyond December 31, 1999. However, if such testing disconfirms readiness, the
Year 2000 Issue could have a material impact on our operations.
We have queried our significant suppliers and subcontractors that do not share
information systems with us. To date, we are not aware of any external agent
with a Year 2000 issue that would materially impact our results of operations,
liquidity or capital resources. However, we have no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
impact us. The effect of non-compliance by external agents is not determinable.
We have not yet completed the final phase of the Year 2000 program. In the event
that we do not complete the testing phase to confirm readiness and the systems
believed to be ready are not, we might be unable to sell merchandise and might
be unable to use our financial systems to operate the finance and accounting
functions. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect us. We could be subject to
litigation for computer systems product failure, for example, equipment shutdown
or failure to properly date business records. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
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<PAGE> 17
WE MAY FACE RISKS FROM THE EURO
A new currency called the "euro" was introduced in January 1999 in certain
Economic and Monetary Union, or EMU, countries. During 2002, all EMU countries
are expected to be operating with the euro as their single currency. Uncertainty
exists as to the effects the euro currency will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. We
are still assessing the impact the EMU formation will have on our internal
systems and the sale of our products. We expect to take appropriate actions
based on the results of such assessment. We have not yet determined any
potential costs.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the first
quarter of fiscal year 1999.
SIGNATURE
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 14, 1999 /S/ John H. Wilson
- ------------------- -----------------------------------------
John H. Wilson
Interim Chief Financial Officer
(Duly Authorized and Principal Financial
Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,741,443
<SECURITIES> 16,585,950
<RECEIVABLES> 6,159,879
<ALLOWANCES> 748,460
<INVENTORY> 0
<CURRENT-ASSETS> 25,587,431
<PP&E> 2,730,468
<DEPRECIATION> 1,120,742
<TOTAL-ASSETS> 29,365,701
<CURRENT-LIABILITIES> 10,327,560
<BONDS> 0
0
0
<COMMON> 10,909
<OTHER-SE> 18,639,836
<TOTAL-LIABILITY-AND-EQUITY> 29,369,701
<SALES> 3,591,298
<TOTAL-REVENUES> 5,509,743
<CGS> 528,200
<TOTAL-COSTS> 1,311,680
<OTHER-EXPENSES> 4,186,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,203
<INCOME-PRETAX> 225,805
<INCOME-TAX> 0
<INCOME-CONTINUING> 225,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,805
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
