DOCUMENT SCIENCES CORP, DEF 14A, 1999-04-30

DOCUMENT SCIENCES CORP
DEF 14A, 1999-04-30
PREPACKAGED SOFTWARE

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<PAGE> 1

SCHEDULE 14A INFORMATION
(Rule 14a-101)

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12

DOCUMENT SCIENCES CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

[DOCUMENT SCIENCES CORPORATION LOGO]

May 5, 1999

Dear Stockholder:

You are cordially invited to attend Document Sciences Corporation's 1999
Annual Meeting of Stockholders to be held on Monday, May 24, 1999 at 10:00 a.m.
local time. The meeting will be held at the La Jolla Marriott, 4240 La Jolla
Village Drive, La Jolla, California 92037.

At this year's meeting we are proposing adoption of an amendment to our
1995 Stock Incentive Plan. The amendment to the 1995 Stock Incentive Plan
increases the shares available for issuance under the Plan by 350,000.
Additionally, our stockholders are requested to ratify and approve an amendment
to the 1995 Stock Incentive Plan regarding the number of shares that may be
granted to an employee in any one fiscal year. We believe that the adoption of
the proposed amendment to the Plan enhances our ability to provide equity
compensation to our employees and/or directors.

We hope you will be able to attend this year's Annual Meeting. Whether or
not you plan to attend the meeting, please sign and return the enclosed proxy
card to ensure your representation at the meeting.

Very truly yours,

/s/ CHARLES R. HARRIS
-------------------------------------
CHARLES R. HARRIS
President and Chief Executive Officer
<PAGE> 3

DOCUMENT SCIENCES CORPORATION
------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 24, 1999

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Document
Sciences Corporation, a Delaware corporation, will be held on May 24, 1999 at
10:00 a.m., local time, at the La Jolla Marriott, 4240 La Jolla Village Drive,
La Jolla, California 92037, for the following purposes:

1. To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified.

2. To (i) approve an amendment to our 1995 Stock Incentive Plan effecting
an increase of 350,000 shares in the number of shares of our common
stock reserved for issuance thereunder and (ii) ratify and approve an
amendment to our 1995 Stock Incentive Plan regarding the number of
shares that may be granted to an employee in any one fiscal year.

3. To ratify the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ending December 31, 1999.

4. To transact such other business as may properly come before the meeting
or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

Only stockholders of record at the close of business on April 23, 1999, are
entitled to notice of and to vote at the Annual Meeting.

All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the Annual Meeting, you are
urged to sign and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder attending
the Annual Meeting may vote in person even if he or she has returned a proxy.

FOR THE BOARD OF DIRECTORS

/s/ CHARLES R. HARRIS
--------------------------
CHARLES R. HARRIS
President and Chief Executive Officer

San Diego, California
May 5, 1999

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO COMPLETE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
<PAGE> 4

DOCUMENT SCIENCES CORPORATION
------------------------

PROXY STATEMENT
FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
------------------------

This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Document Sciences Corporation of Proxies for use at
the Annual Meeting of Stockholders to be held on Monday, May 24, 1999 at 10:00
a.m. local time, and at any adjournment thereof. The Proxies are being solicited
for the purposes set forth herein and in the accompanying Notice of Annual
Meeting of Stockholders.

The Annual Meeting will be held at the La Jolla Marriott, 4240 La Jolla
Village Drive, La Jolla, California 92037. Our principal executive offices are
located at 6339 Paseo Del Lago, Carlsbad, California 92009. The telephone number
at that location is (760) 602-1400.

These proxy solicitation materials were mailed on or about May 5, 1999,
together with our 1998 Annual Report to Stockholders, to all stockholders
entitled to vote at the meeting.

INFORMATION CONCERNING VOTING AND PROXY SOLICITATION

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of Document
Sciences:

- a written notice of revocation;

- a duly executed proxy bearing a later date; or

- by attending the meeting and voting in person.

VOTING AND SOLICITATION

Each stockholder is entitled to one vote for each share of common stock
with respect to all matters presented at the Annual Meeting. Stockholders do not
have the right to cumulate their votes in the election of directors.

We will pay the costs associated with soliciting the proxies. In addition,
we may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may also be solicited on our behalf by directors,
officers, and regular employees, without additional compensation, personally or
by telephone, telegram, letter or facsimile.

STOCKHOLDERS ENTITLED TO VOTE

Only stockholders of record at the close of business on April 23, 1999 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. As
of the Record Date, 10,910,188 shares of our common stock, $0.001 par value,
were issued and outstanding. For information regarding security ownership by
management and by the beneficial owners of more than 5% of our common stock, see
"Beneficial Security Ownership of Management and Certain Beneficial Owners." The
closing sales price of our common stock on the Nasdaq Stock Market National
Market on April 23, 1999 was $1.75 per share.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The presence, in person or by proxy, of the holders of a majority of the
shares entitled to be voted generally at the Annual Meeting is necessary to
constitute a quorum at the Annual Meeting. A plurality of the votes duly cast is
required for the election of directors. The affirmative vote of a majority of
the votes duly cast
<PAGE> 5

is required to approve the amendment to our 1995 Stock Incentive Plan. The
affirmative vote of a majority of the votes duly cast is required to ratify the
appointment of auditors.

Under the General Corporation Law of the State of Delaware, an abstaining
vote and a broker "non-vote" are counted as present and entitled to vote and
are, therefore, included for purposes of determining whether a quorum of shares
is present at a meeting. However, broker non-votes are not deemed to be "votes
cast." As a result, broker non-votes are not included in the tabulation of the
voting results on the election of directors or issues requiring approval of a
majority of the votes cast and, therefore, do not have the effect of votes in
opposition in such tabulations. However, with respect to the proposed amendment
to our 1995 Stock Incentive Plan, abstentions and broker non-votes will have the
same effect as negative votes. A broker "non-vote" occurs when a nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS

Our bylaws establish advance notice procedures that a stockholder must
follow in order to nominate persons for election as directors or to introduce an
item of business at an annual or special meeting of stockholders. These
procedures provide that notice of nominations for director nominees and/or an
item of business proposed to be introduced at an annual or special meeting of
stockholders must be received by our Secretary no later than 90 days in advance
of such meeting if prior notice or public disclosure of the meeting has been
given or made at least 100 days prior to such meeting. If prior notice or public
disclosure of the meeting has not been given at least 100 days prior to such
meeting, then the nomination or item of business must be received by the tenth
day following the date of public disclosure of the date of the meeting. The form
of such notice must set forth:

- the name and address of the stockholder who intends to make the
nominations, propose the business, and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the
business to be proposed;

- a representation that the stockholder is a holder of record of stock of
Document Sciences entitled to vote at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice or introduce the business
specified in the notice;

- if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;

- such other information regarding each nominee or each matter of business
to be proposed by such stockholder as would be required to be included in
a proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or intended to be
nominated, or the matter been proposed, or intended to be proposed, by
the Board of Directors; and

- if applicable, the consent of each nominee to serve as director of
Document Sciences if so elected.

The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the
procedures described above.

Under the rules of the Securities and Exchange Commission, stockholder
proposals that are intended to be presented at our 2000 Annual Meeting of
Stockholders must be received by us no later than January 6, 2000, and must
otherwise comply with requirements of Rule 14a-8 of the Securities Exchange Act
of 1934, as amended, in order to be considered for inclusion in the proxy
statement and form of proxy relating to that meeting.

2
<PAGE> 6

PROPOSAL ONE

ELECTION OF DIRECTORS

NOMINEES

A board of six directors is to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for our six nominees named below, all of whom are presently directors. In the
event that any nominee is unable to or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for any nominee who shall
be designated by the present Board of Directors to fill the vacancy. It is not
expected that any nominee will be unable to or will decline to serve as a
director. The term of office of each person elected as a director will continue
until the next Annual Meeting of Stockholders or until a successor has been
elected and qualified.

The name of and certain information regarding each nominee is set forth
below. There are no family relationships among directors or executive officers
of Document Sciences.

<TABLE>
<CAPTION>
NAME AGE(1) PRINCIPAL OCCUPATION
---- ------ --------------------
<S> <C> <C>
Charles R. Harris...................... 49 President and Chief Executive Officer
of Document Sciences Corporation
Thomas L. Ringer....................... 67 Chairman of the Board of Directors of
Document Sciences Corporation,
Chairman of the Board of Directors of
E*Capital Corporation and Wedbush
Capital Corporation
Charles P. Holt........................ 62 Director of Document Sciences
Corporation and Documentum, Inc.
Colin J. O'Brien....................... 60 Vice President of Xerox and Chairman
of XESystems, Inc., a subsidiary of
Xerox
Barton L. Faber........................ 51 Director of Document Sciences
Corporation, Dataware Technologies,
Inc., GeoSystems Global Corporation
and Xeikon N.V.
Brian E. Stern......................... 51 Senior Vice President of Xerox and
President of Xerox Technology
Enterprises
</TABLE>

- ---------------
(1) As of April 23, 1999.

Charles R. Harris has served as President and Chief Executive Officer and
as a director of Document Sciences since August 1998. Prior to joining Document
Sciences, Mr. Harris was President and Chief Executive Officer and a director of
Simulation Sciences, Inc. from July 1995 to July 1998. From September 1994 to
June 1995, Mr. Harris was an independent consultant. From April 1993 to August
1994, Mr. Harris was employed by Computervision Corp., a computer modeling
equipment provider, as Vice President of the Industry Business Group and as a
Member of the Management Committee. From 1980 to 1993, Mr. Harris was employed
by Hewlett-Packard Company, a computer and instrument manufacturer, as Global
Account Manager for General Motors/Electronic Data Systems. Mr. Harris holds a
B.A degree and an M.S. degree from Emory University in Georgia.

Thomas L. Ringer has served as Chairman of the Board of Directors of
Document Sciences since March 1998 and has been a director of Document Sciences
since 1991. Mr. Ringer is currently Chairman of the Boards of Directors of
E*Capital Corporation, Wedbush Capital Corporation, M.S. Aerospace, Inc. and the
Center for Innovation and Entrepreneurship. In addition, he serves on the Boards
of Directors of Wedbush Morgan Securities, Inc., California Amplifier Inc. and
Public Safety Equipment Inc.

Charles P. Holt has served as a director of Document Sciences since April
1997. Mr. Holt served as Corporate Vice President of the Joseph C. Wilson Center
for Research & Technology for Xerox Corporation

3
<PAGE> 7

from 1993-1998. Mr. Holt joined Xerox Corporation in 1970 as a computer
development project engineer and since that time has held a number of management
positions, including Vice President and Chief Engineer of future product
programs.

Colin J. O'Brien has served as a director of Document Sciences since
December 1995. Since February 1992, Mr. O'Brien has been employed in various
positions at Xerox and currently serves as a Vice President of Xerox and
Chairman of XESystems, Inc., a subsidiary of Xerox. Prior to February 1992, Mr.
O'Brien was the founder and Chief Executive Officer of Triax Corporation, an
investment company specializing in defense electronics companies. Prior to
joining Triax Corporation, he was the Chief Executive Officer of Times Fiber
Communications Inc., a manufacturer of fiber optic and coaxial
telecommunications systems. Mr. O'Brien is also a director of Documentum, Inc.

Barton L. Faber has served as a director of Document Sciences since July
1996. From 1996 to 1998, Mr. Faber served as Chairman of the Board of Directors
and Chief Executive Officer of Metromail. From April 1985 to June 1996, Mr.
Faber held various positions with R.R. Donnelley. Prior to joining R.R.
Donnelley, Mr. Faber held various positions with Mobil Oil Corporation and
Ramada Europe. Mr. Faber currently serves as a member of the Board of Directors
of Dataware Technologies, Inc., GeoSystems Global Corporation and Xeikon N.V.

Brian E. Stern has served as a director of Document Sciences since February
1999. Mr. Stern is currently a Senior Vice President of Xerox and since February
1999 he has been President of Xerox Technology Enterprises. Mr. Stern has held
various positions with Xerox since 1976 including Vice President of Finance of
Development and Marketing and President of Xerox's Personal Document Products
Division.

REQUIRED VOTE

The six nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted shall be elected as
directors. Votes withheld from any director are counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
but they have no legal effect under Delaware law.

BOARD MEETINGS AND COMMITTEES

Our Board of Directors held a total of twelve meetings during the fiscal
year ended December 31, 1998. No director, during the time he was a member of
the Board of Directors, attended fewer than 75% of the aggregate of all meetings
of the Board of Directors, or its committees on which he served, which occurred
during fiscal 1998. The Board has an Audit Committee and a Compensation
Committee. It does not have a nominating committee or a committee performing the
functions of a nominating committee.

The Audit Committee, which currently consists of Mr. Faber and Mr. Ringer,
is responsible for:

- recommending engagement of our independent auditors;

- approving the services performed by such auditors;

- consulting with such auditors and reviewing with them the results of
their examination;

- reviewing and approving any material accounting policy changes affecting
our operating results;

- reviewing our control procedures and personnel; and

- reviewing and evaluating our accounting principles and our system of
internal accounting controls.

The Audit Committee held three meetings during fiscal 1998.

The Compensation Committee, which currently consists of Mr. Ringer and Mr.
O'Brien, is responsible for:

- reviewing and approving the compensation and benefits for our officers
and other employees;

- administering our stock purchase and stock option plans; and
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<PAGE> 8

- determining which eligible individuals (excluding non-employee directors)
receive grants thereunder and the size of such grants.

The Compensation Committee held two meetings during fiscal 1998.

COMPENSATION OF DIRECTORS

In March 1998, we approved a director compensation arrangement pursuant to
which non-employee directors who are not affiliated with Xerox Corporation will
be compensated as follows: Mr. Ringer and Mr. Faber will receive annual
retainers of $50,000 and $10,000, respectively. In addition, each non-employee
director who is not affiliated with Xerox Corporation will receive $1,200 for
each meeting of the Board attended. In addition, in February 1998, Mr. Ringer
and Mr. Faber were each granted an option to purchase 15,000 shares of common
stock at an exercise price of $3.25 per share.

BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS

The following table sets forth the beneficial ownership of Document
Sciences common stock as of March 31, 1999, for the following: (i) each person
or entity who is known by us to own beneficially more than 5% of the outstanding
shares of our common stock; (ii) each of our directors and nominees; (iii) each
of the officers named in the Summary Compensation Table; and (iv) all of our
directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED
---- ------------ ------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS(2)
Xerox Corporation(3).................................. 6,754,500 61.9%
800 Long Ridge Road
Stamford, CT 06904
DIRECTORS AND NOMINEES
Charles R. Harris................................... 0 --
Thomas L. Ringer(4)................................. 51,820 *
Charles P. Holt..................................... 0 --
Colin J. O'Brien(3)................................. 6,754,500 61.9%
Barton L. Faber(5).................................. 12,083 *
Brian E. Stern(3)................................... 6,754,500 61.9%
NAMED OFFICERS
Thomas J. Anthony................................... 64,843 *
Peter L. Bradshaw(6)................................ 83,457 *
Daniel J. Fregeau(7)................................ 109,146 1.0%
Robert J. Pryor..................................... 0 --
John H. Wilson...................................... 10,000 *
All directors and executive officers as a group (11
persons)(8)......................................... 7,085,849 64.5%
=========
</TABLE>

- ---------------
* Less than 1%.

(1) The number and percentage of shares beneficially owned is determined under
rules of the Securities and Exchange Commission, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also any
shares which the individual has the right to acquire within sixty days of
March 31, 1999, through the exercise of any stock option or other right.
Unless otherwise indicated in the footnotes, each person has sole voting and
investment power (or shares such powers with his or her spouse) with respect
to the shares shown as beneficially owned.

5
<PAGE> 9

(2) This information was obtained from filings made with the SEC pursuant to
Sections 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended.
Unless otherwise indicated, the address of each of the individuals or
entities named above is: c/o Document Sciences Corporation, 6339 Paso Del
Lago, Carlsbad, California 92009.

(3) Mr. O'Brien is a director of Document Sciences, a Vice President of Xerox
and Chairman of XESystems, Inc., a subsidiary of Xerox. Mr. Stern is a
director of Document Sciences, and a Senior Vice President of Xerox and
President of Xerox Technology Enterprises. Messrs. O'Brien and Stern
disclaim beneficial ownership of the shares held by Xerox.

(4) Pursuant to a trust, Mr. Ringer and his spouse share voting and investment
powers as co-trustees with respect to 46,820 shares of common stock.
Includes 5,000 shares of common stock subject to stock options exercisable
within sixty days of March 31, 1999.

(5) Includes 12,083 shares of common stock subject to options exercisable within
sixty days of March 31, 1999.

(6) Includes 29,752 shares of common stock subject to options exercisable within
sixty days of March 31, 1999.

(7) Includes 52,896 shares of common stock subject to options exercisable within
sixty days of March 31, 1999.

(8) Includes 99,731 shares of common stock subject to options exercisable within
sixty days of March 31, 1999, held by executive officers and directors of
Document Sciences.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act of 1934 ("Section 16(a)") requires our
directors and executive officers, and persons who own more than ten percent of a
registered class of our equity securities, to file with Securities and Exchange
Commission and The Nasdaq National Market reports of ownership and changes in
ownership of our common stock and other equity securities. Officers, directors
and greater than ten percent stockholders are required by the SEC to furnish
Document Sciences with copies of all Section 16(a) forms they file.

Based solely on review of the copies of such reports furnished to Document
Sciences or written representations that no other reports were required, we
believe that during the 1998 fiscal year all filing requirements applicable to
our officers, directors and greater than ten percent stockholders were complied
with except that two reports covering an aggregate of two transactions were
filed late by two people.

CERTAIN TRANSACTIONS

Transfer and License Agreement

In connection with the transfer of our technology from Xerox, we entered
into a Transfer and License Agreement with Xerox in July 1992 to expire upon the
expiration of all of the rights in the items covered thereby. This Agreement was
subsequently amended in September 1994. Pursuant to the terms of the Agreement,
as amended:

- Xerox transferred all worldwide copyrights in and to the predecessor
product of CompuSet, or the transferred software and granted us a
non-exclusive license to use the Xerox trade secrets in existence as of
July 1992 pertaining to the transferred software;

- We granted Xerox a non-exclusive royalty-free license to use and copy the
transferred software for internal purposes only, and to use portions of
the code of the transferred software in products of Xerox;

- Xerox granted us a non-exclusive, royalty-free license to use, modify and
reproduce the source code of XPS and EVMS, two software products
comprising a small portion of our current CompuSet products, and to
distribute derivatives of XPS and EVMS in object code format;

6
<PAGE> 10

- We granted to Xerox ownership of all technical information not primarily
related to computer software that is generated by us. While Xerox
continues to own a majority of our outstanding capital stock, we retain a
non-exclusive license to use such technical information outside of
certain eastern Asian and Pacific Rim countries;

- We granted "most favored nation" status with respect to the purchase
price of software products sold by us to Xerox, Rank Xerox Ltd., Fuji
Xerox Co. Ltd., companies jointly owned by Xerox and the Rank
Organization Ltd. and 40% affiliates of the foregoing; and

- We granted Fuji Xerox Co., Ltd. a right of first negotiation with respect
to exclusive distribution of our products in certain eastern Asian and
Pacific Rim countries.

Cooperative Marketing Agreement USO

In February 1998, Document Sciences and Xerox entered into a Cooperative
Marketing Agreement USO, pursuant to which Document Sciences and Xerox agreed to
pay each other commissions on certain sales of products resulting from
successful referrals from each other. The Agreement may be terminated by either
Xerox or us upon sixty days written notice in certain circumstances, or upon
ninety days written notice at any time. Our revenues from the strategic
marketing alliance, principally commissions from sales of Xerox printers, were
$1.4 million, $859,000 and $344,000 in 1996, 1997 and 1998, respectively, and
payments to Xerox under the Agreement were $181,000, $121,000 and $0 in 1996,
1997 and 1998, respectively.

Relationship with Fuji Xerox Australia

We have an arrangement with Fuji Xerox Co., Ltd. pursuant to which Fuji
Xerox distributes our products in Australia and New Zealand. For each copy of
our products sublicensed by Fuji Xerox, Fuji Xerox pays us initial and annual
fees equal to our list price minus a percentage discount based on annual volume
of sublicenses of our products. Fuji Xerox provides technical support to its end
users, with periodic software upgrades provided to Fuji Xerox by us. The term of
the agreement is for a period of two years subject to automatic successive
one-year renewal terms, unless either party gives written notice within 90 days
prior to expiration of the then current term of its intention not to further
extend the agreement.

Xerox Canada Agreement

Our Cooperative Marketing and Customer Support Agreement with Xerox Canada
Limited is a non-exclusive cooperative marketing agreement in which Xerox Canada
provides support and referrals of our products in Canada. Under the terms of
this agreement, Xerox Canada refers our products for sale by our direct sales
organization, provides technical support and assists end users with application
development. Xerox Canada receives referral and support fees for sales and
installations of our products in Canada. The term of the agreement is for a
period of six months subject to automatic successive six-month renewal terms
unless either party gives notice at least 90 days prior to the expiration of the
then current term that it will not renew the agreement.

EUROPEAN/SUB-SAHARAN AFRICA VAR AGREEMENTS

We have numerous Value Added Reseller and Value Added Remarketer agreements
in Europe and South Africa, Namibia and Swaziland, many of which are with Rank
Xerox, Ltd. and other Xerox affiliates. The rights granted to our resellers
under these agreements are typically non-exclusive, although the agreements
covering the territories of England, Scotland, Northern Ireland and Wales and
South Africa, Namibia and Swaziland grant the reseller exclusive rights in its
territory. In the usual circumstance, the reseller purchases our products
pursuant to purchase orders and redistributes the products in its territory,
with the reseller having no right to copy our products. The reseller performs
front-line technical support for its end users, and software upgrades are
periodically provided to the reseller by Document Sciences. Each reseller
agreement runs for either a two- or three-year term, with automatic one-year
renewals unless either party gives notice of non-renewal within a specified
period prior to renewal.

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<PAGE> 11

TAX SHARING AGREEMENT

We have a Tax Sharing Agreement with Xerox that provides for the allocation
between Xerox and Document Sciences of all responsibilities, liabilities and
benefits relating to taxes paid or payable by either Xerox or us for all taxable
periods, whether beginning before, on or after our initial public offering in
September 1996. Prior to the consummation of our initial public offering, we had
been included in the consolidated tax returns of Xerox. Our share of Xerox's
consolidated income tax liability for the pre-offering period had been
determined on a separate company basis computed under Internal Revenue Code and
applicable state guidelines and were $136,000, $653,700 and $591,400 for the
years ended December 31, 1993, 1994 and 1995, respectively. We have paid such
liability from the proceeds of our initial public offering. For the period from
January 1, 1996, through September 19, 1996, our separate tax liability of
$403,400 has also been settled with Xerox. For the post-offering period, we
filed combined state income tax returns as required by law in certain states and
we filed separate state tax returns in the remaining states. Pursuant to the Tax
Sharing Agreement, adjustments (for example, pursuant to an Internal Revenue
Service audit) made during the post-offering period, but relating to the
pre-offering period, will be settled between us and Xerox.

IBM AGREEMENT

We have entered into an agreement with IBM Corporation, its subsidiaries
and authorized agents. Under the terms of this agreement, IBM is an Authorized
Agent for the Document Sciences' Autograph family of products. Initially, the
execution of a Joint Marketing Strategy that supports this agreement will be
spearheaded by the IBM Printing Systems Company (PSC), located in Boulder,
Colorado. IBM PCS will provide complimentary printing hardware, servers,
software and services that will be used in conjunction with our products at
major clients worldwide.

SEVERANCE ARRANGEMENTS

Tony N. Domit's severance agreement

We entered into an agreement with Mr. Tony N. Domit, a former Director and
former President and Chief Executive Officer of Document Sciences. Effective as
of March 13, 1998, the agreement provided that in connection with Mr. Domit's
retirement from his position as our President and Chief Executive Officer, Mr.
Domit shall receive an amount equal to eighteen months of his current annual
base salary of $192,000.

Tom J. Anthony's separation agreement

We entered into a Separation Agreement and Release of Claims with Thomas J.
Anthony, Vice President -- Sales effective September 30, 1998, as a result of
Mr. Anthony's resignation. Mr. Anthony was paid a one-month severance allowance
and a continuation of health, dental and vision coverage for a period of
eighteen months from September 30, 1998. All other terms and conditions of the
agreement were in the normal course of business and provided neither Mr. Anthony
nor Document Sciences with any unusual obligations or restrictions.

Robert J. Pryor's severance agreement

We entered into a severance agreement with Robert J. Pryor, dated December
11, 1998, in connection with our restructuring. This agreement called for Mr.
Pryor to receive salary continuation for a six month period of time at his
current annual base salary of $135,000, with an option to receive another six
months, on a month-to-month basis if he is unable to find full-time employment
by the end of the initial six month period. Additionally, Mr. Pryor was to be
provided normal employee benefits during his salary continuation period, access
to outplacement services at our cost and a letter of reference signed by our
President and CEO. All other terms and conditions of this agreement were in the
normal course of business and provided neither Mr. Pryor nor Document Sciences
with any unusual obligations or restrictions. For these benefits, Mr. Pryor was
obligated to sign an agreement to accept these terms, signed and effective as of
December 18, 1998.

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<PAGE> 12

CONSULTING AGREEMENT

We have an agreement with Mr. John H. Wilson to serve as our Interim Chief
Financial Officer. The original agreement, dated May 18, 1998, calls for Mr.
Wilson to serve at our discretion in performing all activities normally executed
by a Chief Financial Officer of a public company. The current extension of Mr.
Wilson's agreement expires on July 31, 1999.

We have entered into indemnification agreements with each of our officers
and directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our Compensation Committee was formed in June 1996 and is currently
composed of Mr. Ringer and Mr. O'Brien. No interlocking relationship exists
between any member of our Board of Directors or Compensation Committee and any
member of the board of directors or compensation committee of any other company,
nor has any such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of ours or
our subsidiaries.

EXECUTIVE OFFICER COMPENSATION

SUMMARY COMPENSATION TABLE

The following table shows, as to the Chief Executive Officer and each of
the four other most highly compensated executive officers whose salary plus
bonus exceeded $100,000 during the last fiscal year, information concerning
compensation paid for services to Document Sciences in all capacities during the
last three fiscal years.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- SECURITIES
BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) OPTIONS(#) COMPENSATION(2)
--------------------------- ---- --------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Charles R. Harris..................... 1998 $ 97,917 $58,750 323,888 $ 3,902
President and Chief Executive
Officer 1997 $ -- $ -- -- $ --
1996 $ -- $ -- -- $ --
Alan H. Lynchosky(3).................. 1998 $ 96,250 $96,439 21,000 $ 6,941
Acting President and 1997 $ 77,994 $ -- -- $ 6,033
Chief Executive Officer 1996 $ -- $ -- -- $ --
Tony N. Domit(4)...................... 1998 $ 40,000 $ -- -- $328,223
President and Chief Executive
Officer 1997 $192,000 $ -- -- $ 4,200
1996 $192,000 $ -- 17,448 $ 4,800
John H. Wilson........................ 1998 $112,500 $ -- -- $ --
Interim Chief Financial Officer 1997 $ -- $ -- -- $ --
1996 $ -- $ -- -- $ --
Peter L. Bradshaw..................... 1998 $130,000 $25,000 15,000 $ 5,859
Vice President -- Development 1997 $115,000 $ -- -- $ 75,085
1996 $100,000 $ -- 12,045 $ 3,306
Daniel J. Fregeau..................... 1998 $131,622 $25,000 15,000 $ 8,825
Vice President -- Worldwide Sales 1997 $128,201 $21,563 -- $ 3,994
1996 $ 90,000 $74,568 4,090 $ 4,467
Robert J. Pryor(5).................... 1998 $130,000 $40,000 19,000 $ 8,542
Vice President -- Marketing 1997 $ 71,506 $ -- -- $ 5,586
1996 $ -- $ -- -- $ --
Thomas J. Anthony(6).................. 1998 $138,750 $ -- -- $ 76,234
Vice President -- Sales 1997 $141,773 $45,000 -- $ 63,359
1996 $ 90,000 $72,366 11,590 $ 6,690
</TABLE>

- ---------------
(1) Includes bonuses earned or accrued with respect to services rendered in the
fiscal year indicated, whether or not such bonus was actually paid during
such fiscal year.

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<PAGE> 13

(2) For all fiscal years, includes $3,000 of our contributions under the 401(k)
Plan and the balance represents insurance premiums paid by us. In addition
for fiscal 1998, includes compensation as the result of vacation accrual
payout of $3,206 and $345 in repayment of health benefit allowance for Mr.
Lynchosky; the result of severance of $288,000 and $36,923 of vacation
accrual payout for Mr. Domit; the result of payment of access health benefit
allowance for $1,051 for Mr. Fregeau and the result of exercising options of
$37,621, $14,231 of vacation and $15,417 of severance for Mr. Anthony. In
addition for fiscal 1997, includes compensation as the result of exercising
options for Mr. Anthony and Mr. Bradshaw of $59,373 and $71,059,
respectively.

(3) Alan H. Lynchosky resigned from his position as Acting President and Chief
Executive Officer effective September 30, 1998.

(4) Tony N. Domit resigned from his position as President and Chief Executive
Officer effective March 13, 1998.

(5) Robert J. Pryor resigned from his position as Vice President -- Marketing
effective December 11, 1998.

(6) Thomas J. Anthony resigned from his position as Vice President -- Sales
effective September 30, 1998.

OPTION GRANTS IN LAST FISCAL YEAR

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(4)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------------
NAME GRANTED(1) YEAR(2) ($/SHARE) DATE(3) 5% 10%
---- ---------- ---------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Harris........... 323,888 57.12% $ 2.18 08/08/2008 $445,676 $1,129,432
Alan H. Lynchosky(5)........ 15,000 2.65 3.25 01/28/2008 30,658(5) 7,694(5)
6,000 1.06 3.375 04/28/2008 12,735(5) 32,237(5)
Tony N. Domit(6)............ -- -- -- -- -- --
John H. Wilson.............. -- -- -- -- -- --
Daniel J. Fregeau........... 15,000 2.65 3.25 01/28/2008 30,658 77,694
Peter L. Bradshaw........... 15,000 2.65 3.25 01/28/2008 30,658 77,694
Robert J. Pryor(7).......... 15,000 2.65 3.25 01/28/2008 30,658(7) 77,694(7)
4,000 .71 3.375 04/28/2008 8,490(7) 21,515(7)
Thomas J. Anthony(8)........ -- -- -- -- -- --
</TABLE>

- ---------------
(1) Options in this table are nonstatutory stock options and were granted under
the 1995 Stock Incentive Plan or a written compensatory arrangement and have
exercise prices equal to the fair market value on the date of grant. All
such options have ten-year terms and vest over no more than four years.

(2) We granted options to purchase 567,038 shares of Common Stock to employees
in fiscal 1998.

(3) Options may terminate before their expiration upon the termination of
optionee's status as an employee or consultant, the optionee's death or an
acquisition of Document Sciences.

(4) Potential realizable value assumes that the stock price increases from the
date of grant until the end of the option term (10 years) at the annual rate
specified (5% and 10%). Annual compounding results in total appreciation of
63% (at 5% per year) and 159% (at 10% per year). If the price of the stock
were to increase at such rates from the price at 1998 fiscal year end
($1.625 per share) over the next 10 years, the resulting stock price at 5%
and 10% appreciation would be $2.65 and $4.21, respectively. The assumed
annual rates of appreciation are specified in SEC rules and do not represent
our estimate or projection of future stock price growth. We do not
necessarily agree that this method can properly determine the value of an
option.

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<PAGE> 14

(5) Alan H. Lynchosky resigned from his position as Acting President and Chief
Executive Officer effective September 30, 1998.

(6) Tony N. Domit resigned from his position as President and Chief Executive
Officer effective March 13, 1998.

(7) Robert J. Pryor resigned from his position as Vice President -- Marketing
effective December 11, 1998.

(8) Thomas J. Anthony resigned from his position as Vice President -- Sales
effective September 30, 1998.

OPTION EXERCISES AND HOLDINGS

The following table sets forth, for each of the officers named in the
Summary Compensation Table, certain information concerning stock options
exercised during fiscal 1998, and the number of shares subject to both
exercisable and unexercisable stock options as of December 31, 1998. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the fair market value of our common stock as of December 31, 1998.

AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL 1998 YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF EXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR END AT FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Harris........ -- $ -- -- 323,888 $ -- $ --
Alan Lynchosky(2)..... -- -- -- -- -- --
Tony N. Domit(3)...... -- -- -- -- -- --
John H. Wilson........ -- -- -- -- -- --
Daniel J. Fregeau..... -- -- 47,470 16,619 67,665.00 --
Peter L. Bradshaw..... -- -- 23,497 19,143 28,614.46 2,245.55
Robert J. Pryor(4).... -- -- -- -- -- --
Thomas J.
Anthony(5).......... 14,218 37,620.24 -- -- -- --
</TABLE>

- ---------------
(1) Market value of underlying securities based on the closing price of our
common stock on December 31, 1998 (the last trading day of fiscal 1998) on
the Nasdaq National Market of $1.625 minus the exercise price.

(2) Alan H. Lynchosky resigned from his position as Acting President and Chief
Executive Officer effective September 30, 1998.

(3) Tony N. Domit resigned from his position as President and Chief Executive
Officer effective March 13, 1998.

(4) Robert J. Pryor resigned from his position as Vice President -- Marketing
effective December 11, 1998.

(5) Thomas J. Anthony resigned from his position as Vice President -- Sales
effective September 30, 1998.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

INTRODUCTION

The Compensation Committee of the Board of Directors generally determines
base salary levels for our executive officers at or about the start of the
fiscal year and determines actual bonuses after the end of the fiscal year based
upon individual performance and the performance of Document Sciences. Our
executive pay programs are designed to provide a strong and direct link between
our performance and executive pay. The Compensation Committee's executive
compensation policies are designed to provide competitive levels of compensation
and assist us in attracting and retaining the most qualified executives in the
industry. Target

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<PAGE> 15

levels of the executive officers' overall compensation are intended to be
consistent with compensation of other executives in our industry.

COMPENSATION PHILOSOPHY

The goals of the compensation program are to align compensation with
business objectives and performance against those objectives. In order to
achieve these goals, we have historically positioned our executive base salary
levels at approximately the 50th percentile of survey data, which includes both
our direct competitors and the companies with whom we compete for executive
talent. Pay is sufficiently variable that above-average performance for Document
Sciences or the individual results in above-average total compensation for our
executive officers, and below-average performance results in below-average total
compensation. Our focus is on corporate performance and individual contributions
toward that performance.

COMPENSATION PROGRAM

We use a total compensation program, which consists of both cash and equity
based compensation, and have three components. The three components combined are
intended to attract, retain, motivate and reward executives who contribute to
our long-term success. The three components are:

- Base Salary: Base salary is primarily used as an attraction and retention
device. Base salary increases are made based on long-term contributions
to Document Sciences, as determined by the Compensation Committee, with
the input of senior management at the end of each year. Salary surveys of
leading national compensation consultants are analyzed and individual
salaries are set based on the experience and contribution levels of the
individuals. In general, base salary increases are made based on median
increases in the software industry for same-sized companies with similar
performance profiles.

- Variable Compensation: Variable compensation is intended to reward
individual executives for annual performance against our total revenue
and operating profit objectives by supplementing the base salary plan.
Each executive's annual incentive is a percentage of base salary modified
by plan achievement. Payout begins at 80% and ranges up to 150% of
planned revenues and profits and averages approximately 25% of annual
salary at 100% plan achievement.

- Long-Term Incentives: Long-term incentives are provided through grants of
stock options. The Compensation Committee is responsible for determining,
subject to the terms of the 1995 Stock Incentive Plan, the individuals to
whom grants should be made, the timing of grants, the exercise or
purchase price per share and the number of shares subject to each option.
Stock options are granted under the 1995 Stock Incentive Plan and are
primarily used to motivate executives to maximize stockholder value. The
option program also utilizes vesting periods to encourage key employees
to continue in their employment with us.

An additional important purpose of the stock option awards is to motivate
executives to make the types of long-term changes in the financial performance
of our business that will maximize long-term total return to stockholders.

OTHER

In addition to the compensation paid to executive officers as described
above, executive officers, like other employees, receive benefits under our
health care and life insurance programs.

PERFORMANCE MEASUREMENTS AND INDUSTRY COMPARISONS

We believe that the key to our executive compensation program is setting
aggressive business goals, integrating our executive compensation program with
annual and strategic planning measurement processes, and establishing an
industry comparison to test our results against industry performance levels.

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<PAGE> 16

COMPANY PERFORMANCE AND CHIEF EXECUTIVE OFFICER COMPARISON

As indicated above, our executive compensation program is based upon
business performance. Specifically, the Chairman and Chief Executive Officer's
target base pay level has been set at approximately the 80th percentile for
software companies, using data specifically for software companies of similar
size.

COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

Thomas L. Ringer
Colin J. O'Brien

COMPANY STOCK PRICE PERFORMANCE GRAPH

The following graph and table compare the cumulative total stockholder
return on our common stock from September 20, 1996, the date of our initial
public offering of common stock, through December 31, 1998, with The Nasdaq
Stock Market Index (US) and The Nasdaq Computer & Data Processing Services Stock
Index, using data supplied by The Nasdaq Stock Market. The graph and table
assume an investment of $100 in our common stock and each index on September 20,
1996, and the reinvestment of all dividends.

<TABLE>
<CAPTION>
DOCUMENT SCIENCES NASDAQ COMPUTER & DATA
CORPORATION NASDAQ STOCK MARKET PROCESSING SERVICES STOCKS
----------------- ------------------- --------------------------
<S> <C> <C> <C>
Indexed Returns Sept 20, 1996 100.00 100.00 100.00
Indexed Returns Dec 31, 1996 82.29 105.44 102.93
Indexed Returns Dec 31, 1997 25.00 129.35 126.44
Indexed Returns Dec 31, 1998 13.54 181.83 226.27
</TABLE>

PROPOSAL TWO

AMENDMENT OF 1995 STOCK INCENTIVE PLAN

In October 1995 our Board of Directors adopted, and the stockholders
approved, our 1995 Stock Incentive Plan (the "1995 Plan") under which 779,250
shares were reserved for issuance upon exercise of options and purchase rights
granted to employees, directors and consultants. In May 1998, our stockholders
approved amendments to the 1995 Plan to increase the number of shares issuable
by 750,000 shares. As of March 26, 1999, we had outstanding options to purchase
682,647 shares of common stock under the 1995 Plan held by an aggregate of 159
persons at a weighted exercise price of $2.96 per share. As of March 26, 1999,

13
<PAGE> 17

options to purchase an aggregate of 56,721 shares of common stock under the 1995
Plan had been exercised. The stockholders are requested to approve an amendment
to the 1995 Plan to increase the number of shares issuable this plan by 350,000
shares.

At the Annual Meeting the stockholders will also be asked to approve an
amendment to the 1995 Plan (approved by the Board in August 1998) to provide
that, notwithstanding the 100,000 share limitation on grants to an individual in
any fiscal year, in connection with an individual's initial employment with the
Company, he or she may be granted options or rights to purchase up to an
additional 250,000 shares.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ADOPTION
OF THE PROPOSAL TO AMEND OUR 1995 STOCK INCENTIVE PLAN.

REQUIRED VOTE

The affirmative vote of a majority of the shares represented, in person or
by proxy, and voting at the Annual Meeting and constituting at least a majority
of the required quorum will be required to adopt the proposal to amend our 1995
Stock Incentive Plan.

SUMMARY OF 1995 STOCK INCENTIVE PLAN

General. The purpose of the 1995 Plan is to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees and consultants of the
Company and to promote the success of the Company's business. Options and stock
purchase rights may be granted under the 1995 Plan. Options granted under the
1995 Plan may be either "incentive stock options", as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory
stock options.

Administration. The 1995 Plan may generally be administered by the Board or
a Committee appointed by the Board (as applicable, the "Administrator"). The
Administrator may make any determinations deemed necessary or advisable for the
1995 Plan.

Eligibility. Nonstatutory stock options and stock purchase rights may be
granted under the 1995 Plan to employees and consultants of the Company and any
parent or subsidiary of the Company. Incentive stock options may be granted only
to employees. The Administrator, in its discretion, selects the employees and
consultants to whom options and stock purchase rights may be granted, the time
or times at which such options and stock purchase rights shall be granted, and
the exercise price and number of shares subject to each such grant.

Limitations. Section 162(m) of the Code places limits on the deductibility
for federal income tax purposes of compensation paid to certain executive
officers of the Company. In order to preserve the Company's ability to deduct
the compensation income associated with options and stock purchase rights
granted to such persons, the 1995 Plan currently provides that no employee may
be granted, in any fiscal year of the Company, options and stock purchase rights
to purchase more than 100,000 shares of common stock. In order to be able to
attract senior executive officers, the Board has amended the 1995 Plan to
provide that, notwithstanding the 100,000 share limitation, in connection with
such individual's initial employment with the Company, he or she may be granted
options or stock purchase rights to purchase up to an additional 250,000 shares
of common stock.

Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between the Company and the optionee, and is subject to the following
terms and conditions:

(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the common stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a 10%
stockholder may not be less than 110% of the fair market value of the
common stock on the date such option is granted. The fair market value of
the common stock is generally determined with reference to the closing sale
price for the common stock (or

14
<PAGE> 18

the closing bid if no sales were reported) on the last market trading day
prior to the date the option is granted.

(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option
agreement. The 1995 Plan permits payment to be made by cash, check,
promissory note, other shares of common stock of the Company (with some
restrictions), cashless exercises, a reduction in the amount of any Company
liability to the optionee, any other form of consideration permitted by
applicable law, or any combination thereof.

(c) Term of Option. The term of an incentive stock option may be no
more than ten (10) years from the date of grant; provided that in the case
of an incentive stock option granted to a 10% stockholder, the term of the
option may be no more than five (5) years from the date of grant. No option
may be exercised after the expiration of its term.

(d) Termination of Employment. If an optionee's employment or
consulting relationship terminates for any reason (including death or
disability), then all options held by the optionee under the 1995 Plan
expire on the earlier of (i) the date set forth in his or her notice of
grant or (ii) the expiration date of such option. The 1995 Plan and the
option agreement may provide for a longer period of time for the option to
be exercised after the optionee's death or disability than for other
terminations. To the extent the option is exercisable at the time of such
termination, the optionee (or the optionee's estate or the person who
acquires the right to exercise the option by bequest or inheritance) may
exercise all or part of his or her option at any time before termination.

(e) Nontransferability of Options: Unless otherwise determined by the
Administrator, options granted under the 1995 Plan are not transferable
other than by will or the laws of descent and distribution, and may be
exercised during the optionee's lifetime only by the optionee.

(f) Other Provisions: The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1995 Plan as may
be determined by the Administrator.

Stock Purchase Rights. In the case of SPRs, unless the Administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Administrator.

Adjustments Upon Changes in Capitalization. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the 1995 Plan, the number and class of shares of stock subject to any
option or stock purchase right outstanding under the 1995 Plan, and the exercise
price of any such outstanding option or stock purchase right.

In the event of a liquidation or dissolution, the Administrator may, in its
sole discretion, provide that each optionee shall have the right to exercise all
of the optionee's then exercisable options and stock purchase rights subsequent
to such liquidation or dissolution. Alternatively, the Administrator may
terminate any unexercised options and stock purchase rights, provided that each
optionee shall be given not less than thirty days' written notice in which the
optionee may exercise his or her options and stock purchase rights, to the
extent that such options and stock purchase rights are then exercisable, on the
condition that the liquidation or dissolution actually occurs.

In connection with any merger, consolidation, acquisition of assets or like
occurrence involving the Company, in which the Company does not survive and the
Administrator determines that the event

15
<PAGE> 19

constitutes a liquidation or dissolution, each outstanding option or stock
purchase right may be assumed or an equivalent option or right may be
substituted by the successor corporation. If the successor corporation refuses
to assume the options and stock purchase rights or to substitute substantially
equivalent options and stock purchase rights, the optionee shall have a ten day
period to exercise the option or stock purchase right, to the extent such option
or stock purchase right is then exercisable, on the condition that the
liquidation or dissolution actually occurs. In such cases in which the
Administrator does not determine the event constitutes a liquidation or
dissolution, the option or stock purchase right shall be assumed or substituted
by the surviving corporation.

Amendment and Termination of the 1995 Plan. The Board may amend, alter,
suspend or terminate the 1995 Plan, or any part thereof, at any time and for any
reason. However, the Company shall obtain stockholder approval for any amendment
to the 1995 Plan to the extent necessary and desirable to comply with applicable
law. No such action by the Board or stockholders may alter or impair any option
or stock purchase right previously granted under the 1995 Plan without the
written consent of the optionee. Unless terminated earlier, the 1995 Plan shall
terminate ten years from the date of its approval by the stockholders or the
Board of the Company, whichever is earlier.

FEDERAL INCOME TAX CONSEQUENCES

Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two years after grant of the
option and one year after exercise of the option, any gain or loss is treated as
long-term capital gain or loss. Net capital gains on shares held more than 12
months may be taxed at a maximum federal rate of 20%. Capital losses are allowed
in full against capital gains and up to $3,000 against other income. If these
holding periods are not satisfied, the optionee recognizes ordinary income at
the time of disposition equal to the difference between the exercise price and
the lower of (i) the fair market value of the shares at the date of the option
exercise or (ii) the sale price of the shares. Any gain or loss recognized on
such a premature disposition of the shares in excess of the amount treated as
ordinary income is treated as long-term or short-term capital gain or loss,
depending on the holding period. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% stockholder of the Company. Unless limited by Section 162(m) of
the Code, the Company is entitled to a deduction in the same amount as the
ordinary income recognized by the optionee.

Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. Unless limited by
Section 162(m) of the Code, the Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee. Upon a disposition of
such shares by the optionee, any difference between the sale price and the
optionee's exercise price, to the extent not recognized as taxable income as
provided above, is treated as long-term or short-term capital gain or loss,
depending on the holding period. Net capital gains on shares held more than 12
months may be taxed at a maximum federal rate of 20%. Capital losses are allowed
in full against capital gains and up to $3,000 against other income.

Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time of
purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code, because the Company may repurchase
the stock when the purchaser ceases to provide services to the Company. As a
result of this substantial risk of forfeiture, the purchaser will not recognize
ordinary income at the time of purchase. Instead, the purchaser will recognize
ordinary income on the dates when the stock is no longer subject to a
substantial risk of forfeiture (i.e., when the Company's right of repurchase
lapses). The purchaser's ordinary income is measured as the difference between
the purchase price and the fair market value of the stock on the date the stock
is no longer subject to right of repurchase.
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<PAGE> 20

The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and begin his or her capital gains holding period by
timely filing, (i.e, within thirty days of the purchase), an election pursuant
to Section 83(b) of the Code. In such event, the ordinary income recognized, if
any, is measured as the difference between the purchase price and the fair
market value of the stock on the date of purchase, and the capital gain holding
period commences on such date. The ordinary income recognized by a purchaser who
is an employee will be subject to tax withholding by the Company. Different
rules may apply if the purchaser is also an officer, director, or 10%
stockholder of the Company.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS, AND THE COMPANY WITH RESPECT
TO THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE 1995
PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.

PROPOSAL THREE

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit our financial statements for the fiscal year ending December
31, 1999. Ernst & Young has audited our financial statements since December 31,
1992. A representative of Ernst & Young is expected to be present at the
meeting, will have the opportunity to make a statement and is expected to be
available to respond to appropriate questions.

REQUIRED VOTE

The Board of Directors has conditioned its appointment of our independent
auditors upon the receipt of the affirmative vote of a majority of the shares
represented in person or by proxy, and voting at the Annual Meeting, which
shares voting affirmatively also constitute at least a majority of the required
quorum. In the event that the stockholders do not approve the selection of Ernst
& Young, the appointment of the independent auditors will be reconsidered by the
Board of Directors.
Rider C

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Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between the Company and the optionee, and is subject to the following
terms and conditions:

(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an incentive
stock option may not be less than 100% of the fair market value of the common
stock on the date such option is granted; provided, however, the exercise price
of an incentive stock option granted to a 10% stockholder may not be less than
110% of the fair market value of the common stock on the date such option is
granted. The fair market value of the common stock is generally determined with
reference to the closing sale price for the common stock (or the closing bid if
no sales were reported) on the last market trading day prior to the date the
option is granted.

(b) Exercise of Option; Form of Consideration. The Administrator determines
when options become exercisable, and may in its discretion, accelerate the
vesting of any outstanding option. The means of payment for shares issued upon
exercise of an option is specified in each option agreement. The 1995 Plan
permits payment to be made by cash, check, promissory note, other shares of
common stock of the Company (with some restrictions), cashless exercises, a
reduction in the amount of any Company liability to the optionee, any other form
of consideration permitted by applicable law, or any combination thereof.

(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% stockholder, the term of the option may
be no more than five (5) years from the date of grant. No option may be
exercised after the expiration of its term.

(d) Termination of Employment. If an optionee's employment or consulting
relationship terminates for any reason (including death or disability), then all
options held by the optionee under the 1995 Plan expire on the earlier of (i)
the date set forth in his or her notice of grant or (ii) the expiration date of
such option. The 1995 Plan and the option agreement may provide for a longer
period of time for the option to be exercised after the optionee's death or
disability than for other terminations. To the extent the option is exercisable
at the time of such termination, the optionee (or the optionee's estate or the
person who acquires the right to exercise the option by bequest or inheritance)
may exercise all or part of his or her option at any time before termination.

(e) Nontransferability of Options: Unless otherwise determined by the
Administrator, options granted under the 1995 Plan are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the optionee's lifetime only by the optionee.

(f) Other Provisions: The stock option agreement may contain other terms,
provisions and conditions not inconsistent with the 1995 Plan as may be
determined by the Administrator.

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In connection with any merger, consolidation, acquisition of assets or like
occurrence involving the Company, in which the Company does not survive and the
Administrator determines that the event constitutes a liquidation or
dissolution, each outstanding option or stock purchase right may be assumed or
an equivalent option or right may be substituted by the successor corporation.
If the successor corporation refuses to assume the options and stock purchase
rights or to substitute substantially equivalent options and stock purchase
rights, the optionee shall have a ten day period to exercise the option or stock
purchase right, to the extent such option or stock purchase right is then
exercisable, on the condition that the liquidation or dissolution actually
occurs. In such cases in which the Administrator does not determine the event
constitutes a liquidation or dissolution, the option or stock purchase right
shall be assumed or substituted by the surviving corporation.

FEDERAL INCOME TAX CONSEQUENCES

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recognized in connection with an option exercise by an employee of the Company
is subject to tax withholding by the Company. Unless limited by Section 162(m)
of the Code, the Company is entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Upon a disposition of such shares by
the optionee, any difference between the sale price and the optionee's exercise
price, to the extent not recognized as taxable income as provided above, is
treated as long-term or short-term capital gain or loss, depending on the
holding period. Net capital gains on shares held more than 12 months may be
taxed at a maximum federal rate of 20%. Capital losses are allowed in full
against capital gains and up to $3,000 against other income.

OTHER MATTERS

We know of no other matters to be submitted to the meeting. If any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed proxy card to vote the shares they represent as we may
recommend.

It is important that your shares be represented at the meeting, regardless
of the number of shares that you hold. You are therefore urged to execute and
return, at your earliest convenience, the accompanying proxy card in the
envelope enclosed.

THE BOARD OF DIRECTORS
San Diego, California
May 5, 1999

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DOCUMENT SCIENCES CORPORATION
PROXY FOR 1999 ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
stockholder of DOCUMENT SCIENCES CORPORATION, a Delaware corporation, hereby
acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy
Statement, each dated May 5, 1999, and hereby appoints Charles R. Harris and
John H. Wilson, and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at the 1999 Annual Meeting of Stockholders of DOCUMENT
SCIENCES CORPORATION to be held on May 24, 1999, at 10:00 a.m. local time at the
La Jolla Marriott, 4240 La Jolla Village Drive, La Jolla, California 92037, and
at any adjournment or adjournments thereof, and to vote all shares of common
stock which the undersigned would be entitled to vote, if then and there
personally present, on the matters set forth below.

A majority of such attorneys or substitutes as shall be present and shall
act at said meeting or any adjournment or adjournments thereof (or if only one
shall represent and act, then that one) shall have and may exercise all of the
powers of said attorneys-in-fact hereunder.

THE BOARD RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3 BELOW:
1. ELECTION OF DIRECTORS:
[ ] FOR [ ] WITHHELD

NOMINEES: Barton L. Faber, Charles R. Harris, Charles P. Holt, Colin J.
O'Brien, Thomas L. Ringer, Brian E. Stern

- --------------------------------------------------------------------------------
For all nominees except as noted above

2. Proposal to (i) approve the amendment to our 1995 Stock Incentive Plan to
increase the shares of our common stock reserved for issuance under this plan
by 350,000 shares and (ii) ratify and approve an amendment to our 1995 Stock
Incentive Plan regarding the number of shares that may be granted to an
employee in any one fiscal year:
[ ] FOR [ ] AGAINST [ ] ABSTAIN

(continued on other side)
<PAGE> 25

(continued from other side)

3. Proposal to ratify the appointment of Ernst & Young LLP as our independent
auditors for fiscal 1999:

[ ] FOR [ ] AGAINST [ ] ABSTAIN

In their discretion, the proxies are authorized to vote upon such other
matter or matters which may properly come before the meeting or any adjournment
or adjournments thereof.

SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO
CONTRARY DIRECTION IS INDICATED THE PROXIES WILL HAVE THE AUTHORITY TO VOTE FOR
THE ELECTION OF DIRECTORS, FOR ITEMS 2 AND 3, AND AS SAID PROXIES DEEM ADVISABLE
ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.

This proxy should be marked, dated and signed by the stockholder(s) exactly
as his or her name appears hereon, and returned promptly in the enclosed
envelopes. Persons signing in a fiduciary capacity should so indicate. If shares
are held by joint tenants or as community property, both should sign.

[ ] MARK HERE FOR ADDRESS
CHANGE AND NOTED BELOW

Dated: 1999
----------------

----------------------------
Signature

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Signature if held jointly