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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 Quarterly Period Ended March 31, 2000
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or of organization) Identification No.)
6339 Paseo del Lago
Carlsbad, CA 92009
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(Address of principal executive offices) (Zip Code)
(760) 602-1400
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(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes(X) No
The number of shares of the issuer's Common Stock outstanding as of
April 30, 2000 was 10,920,251.
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DOCUMENT SCIENCES CORPORATION
<TABLE>
<CAPTION>
PAGE
NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets---March 31, 2000 and December 31, 1999 ................................. 3
Consolidated statements of operations---three months ended March 31, 2000 and 1999 ................. 4
Consolidated statements of cash flows---three months ended March 31, 2000 and 1999 ................. 5
Notes to consolidated financial statements ......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 16
Signature .......................................................................................... 16
</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,
2000 1999
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(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,740,325 $ 3,746,357
Short-term investments 13,957,802 13,528,662
Accounts receivable, net 3,707,394 6,063,873
Due from affiliates 2,524,623 1,878,114
Unbilled revenue 451,813 308,063
Other current assets 962,638 913,453
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Total current assets 25,344,595 26,438,522
Property and equipment, net 1,864,068 1,787,245
Capitalized computer software development costs, net 1,180,027 1,332,048
Goodwill, net 847,332 864,863
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Total assets $ 29,236,022 $ 30,422,678
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 565,910 $ 605,038
Accrued compensation 791,646 1,876,813
Other accrued liabilities 611,539 695,754
Deferred revenue 6,276,569 6,638,681
Current portion of obligations under capital leases 9,911 11,376
------------ ------------
Total current liabilities 8,255,575 9,827,662
Obligations under capital leases -- 1,244
Deferred revenue 291,264 313,669
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; Authorized--30,000,000 shares;
Issued and outstanding shares--10,919,051 at
March 31, 2000 and December 31, 1999 10,919 10,919
Deferred compensation -- (10,794)
Treasury stock (609,983) (609,983)
Additional paid-in capital 25,425,809 25,425,809
Accumulated comprehensive income (202,126) (186,500)
Retained earnings (deficit) (3,935,436) (4,349,348)
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Total stockholders' equity 20,689,183 20,280,103
------------ ------------
Total liabilities and stockholders' equity $ 29,236,022 $ 30,422,678
============ ============
</TABLE>
Note: The balance sheet at December 31, 1999 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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
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<S> <C> <C>
Revenues:
Initial license fees $ 2,539,382 $ 1,738,941
Annual renewal license and support fees 2,179,718 1,852,357
Services and other 950,826 1,918,445
----------- -----------
Total revenues 5,669,926 5,509,743
Cost of revenues:
Initial license fees 254,287 286,302
Annual renewal license and support fees 349,961 241,898
Services and other 705,209 783,480
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Total cost of revenues 1,309,457 1,311,680
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Gross margin 4,360,469 4,198,063
Operating expenses:
Research and development 1,163,144 1,374,584
Selling and marketing 1,915,178 1,843,270
General and administrative 1,076,820 969,108
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Total operating expenses 4,155,142 4,186,962
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Income from operations 205,327 11,101
Interest income, net 208,585 214,704
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Income before income taxes 413,912 225,805
Provision for income taxes -- --
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Net income $ 413,912 $ 225,805
=========== ===========
Net income per share--basic $ 0.04 $ 0.02
=========== ===========
Weighted average shares used in basic calculation 10,744,169 10,656,861
=========== ===========
Net income per share--diluted $ 0.04 $ 0.02
=========== ===========
Weighted average shares used in diluted calculation 11,626,292 10,801,804
=========== ===========
</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,
-----------------------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 413,912 $ 225,805
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 140,755 98,845
Amortization of goodwill 17,531 17,531
Loss on disposal of fixed assets 12,533 --
Amortization of computer software costs 152,021 132,502
Amortization of deferred compensation 10,794 14,133
Provision for doubtful accounts (215,493) 22,899
Changes in operating assets and liabilities:
Accounts receivable 2,569,816 270,404
Due from affiliates (649,221) 159,902
Unbilled revenue (143,750) (520,657)
Other current assets (50,494) (86,047)
Accounts payable (37,563) (759,571)
Accrued compensation (1,084,704) (843,059)
Other accrued liabilities (86,379) (568,087)
Deferred revenue (381,962) 346,935
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Net cash provided by (used in) operating activities 667,796 (1,488,465)
INVESTING ACTIVITIES
Purchases of short-term investments (1,745,063) (8,942,185)
Sales of short-term investments 315,923 4,826,816
Maturities of short-term investments 1,000,000 750,000
Purchases of property and equipment, net (299,958) (31,774)
Proceeds from disposal of assets 69,093 --
Unrealized gains (losses) on securities (3,979) (87,412)
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Net cash used in investing activities (663,984) (3,484,555)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (2,709) (17,496)
Issuance of common stock -- 13,543
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Net cash used in financing activities (2,709) (3,953)
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Increase (decrease) in cash and cash equivalents 1,103 (4,976,973)
Foreign currency translation adjustment (7,135) 23,996
Cash and cash equivalents at beginning of period 3,746,357 6,694,420
----------- -----------
Cash and cash equivalents at end of period $ 3,740,325 $ 1,741,443
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 375 $ 1,203
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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DOCUMENT SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
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 1999 have been reclassified to conform
with the 2000 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 1999 Annual Report on Form
10-K. Operating results for the three-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
We recognize revenue in accordance with AICPA Statement of Position (SOP) 97-2,
Software Revenue Recognition. Initial license fees are recognized when a
contract exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable. Any portion of the
initial license fee 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
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 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
Until September 30, 1999, we maintained a strategic marketing alliance with
Xerox Corporation (Xerox) under which both parties agreed to pay each other
commissions 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 $0
and $96,900 for the three months ended March 31, 2000 and 1999, respectively. We
paid no referral commissions to Xerox for the three months ended March 31, 2000
and 1999.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Australia, New Zealand, Canada, Brazil,
Argentina and Chile. 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 $564,900 and $328,100 for the three months ended March 31, 2000
and 1999, respectively. Included in accounts receivable are $746,700 and
$252,600 from these revenues at March 31, 2000 and 1999, respectively.
We have distribution agreements with affiliates providing the non-exclusive
right to sub-license our software in Europe. Revenues under these agreements
totaled $472,900 and $658,100 for the three months ended March 31, 2000 and
1999, respectively. Related accounts receivable are $713,600 and $666,000 at
March 31, 2000 and 1999, respectively.
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Note C-Net Income Per Share
We present our earnings per share information in accordance with FAS No. 128,
"Earnings per Share". Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
includes the dilutive effects of options, warrants and convertible securities.
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,
2000 1999
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<S> <C> <C>
Weighted average common shares outstanding
used in basic earnings per share calculation 10,744,169 10,656,861
Effect of dilutive stock options 882,123 144,943
---------- ----------
Shares used in diluted earnings per share 11,626,292 10,801,804
========== ==========
</TABLE>
Note D-Sales Commitments
In 1999, we began licensing software for non-cancelable three-year terms. Where
we provide extended payment terms to customers (allowing them to make payments
on a quarterly or annual basis), we recognize license revenue when invoices come
due, as SOP 97-2 precludes us from recognizing the portion of these licenses
that is not currently due from the customer. Amounts not currently due from
customers on these agreements are not reflected on our Balance Sheet and are
identified below.
We also began signing customers to non-cancelable three-year maintenance
agreements, which we recognize ratably over the service period. As we invoice
these agreements, the amounts are recorded initially to Deferred Revenue.
Amounts to be invoiced are not reflected on our Balance Sheet and are identified
below.
The following table summarizes these multi-year license and maintenance
agreement activities showing ending balances not reflected on our Balance Sheet
at March 31, 2000:
<TABLE>
<CAPTION>
Unrecognized Revenue Backlog
-----------------------------------------------
Maintenance
Licenses Agreements Totals
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1998 $ -0- $ -0- $ -0-
1999 additions 2,905,033 3,876,105 6,791,237
Invoiced and recognized (2,064,003) (289,463) (2,353,466)
Invoiced and included in Deferred Revenue -0- (661,125) (661,125)
----------- ----------- -----------
Balances at December 31, 1999 841,030 2,925,517 3,766,547
First quarter additions 453,356 563,346 1,016,702
Invoiced and recognized (528,941) (307,823) (836,764)
Invoiced and included in Deferred Revenue -0- (300,678) (300,678)
----------- ----------- -----------
Balances at March 31, 2000 $ 765,445 $ 2,880,362 $ 3,645,807
=========== =========== ===========
</TABLE>
Revenue from the current unrecognized revenue backlog will be recognized by the
end of the first quarter of 2003.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion may contain 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 1999 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 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,
2000 1999
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<S> <C> <C>
Revenues:
Initial license fees 45% 31%
Annual renewal license and support fees 38 34
Services and other 17 35
---- ----
Total revenues 100% 100%
Cost of revenues:
Initial license fees 5% 5%
Annual renewal license and support fees 6 5
Services and other 12 14
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Total cost of revenues 23% 24%
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Gross profit 77% 76%
Operating expenses:
Research and development 21% 25%
Selling and marketing 34 33
General and administrative 19 18
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Total operating expenses 74% 76%
---- ----
Income from operations 3% 0%
Interest income, net 4 4
---- ----
Income before income taxes 7% 4%
Provision for income taxes 0 0
---- ----
Net income 7% 4%
==== ====
</TABLE>
Revenues
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Total revenues increased 3% to $5.7 million for the three months ended March 31,
2000 from $5.5 million for the three months ended March 31, 1999. This growth
was due to increases in initial and annual license fees, which were partially
offset by a decline in services and other revenue.
Sales Channels. We sell our products largely through a direct sales force
domestically, and internationally through distributors and value added resellers
or VARS. Revenues from export sales and sales through our foreign subsidiary
increased 7% to $1.5 million for the three months ended March 31, 2000 from $1.4
million for the three months ended March 31, 1999. This increase is primarily
the result of increased revenues through Xerox affiliates in Brazil and
Australia. Revenues from export sales were 26% and 25% of total revenues for the
three months ended March 31, 2000 and 1999, 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 and support of our products
increased 1% to $1.0 million for the three months ended March 31, 2000 from
$986,200 for the three months ended March 31, 1999. This increase is due
principally to increased revenues through Xerox affiliates in Brazil and
Australia.
Initial license fees. Initial license fee revenues increased 46% to $2.5 million
for the three months ended March 31, 2000 from $1.7 million for the three months
ended March 31, 1999. This increase is due to increased sales activity in the
United States, Brazil and Australia.
Annual renewal license and support fees. Revenues from annual renewal license
and support fees increased 18% to $2.2 million for the three months ended March
31, 2000 from $1.9 million for the three months ended March 31, 1999. The
increase is due to the increasing installed base of customers.
Services and other. Revenues from services and other decreased 50% to $950,800
for the three months ended March 31, 2000 from $1.9 million for the three months
ended March 31, 1999. This decrease is mainly attributable to the nature of this
quarter's software sales, which did not require as much consulting services.
Also, the first quarter of 1999 benefited from Xerox referral commissions of
$96,900 and OEM partner referral fees of $152,600.
Cost of Revenues
Total cost of revenues was 23% and 24% of total revenues for the three months
ended March 31, 2000 and 1999, respectively. The decrease in cost of revenues as
a percentage of total revenues resulted primarily from our revenue mix, which
was weighted more toward higher-margin initial license fees for the three months
ended March 31, 2000.
Operating Expenses
Research and development. Research and development expenses decreased 15% to
$1.2 million for the three months ended March 31, 2000 from $1.4 million for the
three months ended March 31, 1999. We capitalized no software development costs
for the three months ended March 31, 2000 and 1999. The decrease is due
primarily to decreased expenditures for outside consultants.
Selling and marketing. Selling and marketing expenses increased 4% to $1.9
million for the three months ended March 31, 2000 from $1.8 million for the
three months ended March 31, 1999. This increase is due principally to higher
commissions related to higher revenues.
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General and administrative. General and administrative expenses increased 11% to
$1.1 million for the three months ended March 31, 2000 from $969,100 for the
three months ended March 31, 1999. This increase is due principally to higher
professional fees.
Provision for income taxes. For the three months ended March 31, 2000, 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 $17.7 million
at March 31, 2000, representing 61% of total assets. We intend to continue to
invest in short-term, interest-bearing, investment grade securities.
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 and 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.
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:
- the demand for our products;
- the level of product competition and price competition we face;
- the length of our sales cycle;
- the size and timing of individual license transactions;
- the delay or deferral of customer implementations;
- the budget cycles of our customers;
- our success in expanding our direct sales force and indirect
distribution channels;
- the timing of our new product introductions and enhancements, as well
as those of our competitors;
- our mix of products and services;
- our level of international sales;
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- the activities of and acquisitions by our competitors;
- our timing of new hires;
- changes in foreign currency exchange rates;
- our ability to develop and market new products and to control costs;
and
- 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 five
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.
- For the three months ended March 31, 2000, revenues derived from
relationships with Xerox and affiliates of Xerox accounted for
approximately $1.1 million, representing 20% of our total revenues
and
- 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 21% 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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- 2000: $0;
- 1999: $96,900.
These commissions have little or no associated costs and have contributed a
substantial portion of our income from operations for certain prior operating
periods. This commission arrangement was terminated as of September 30, 1999.
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 and 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.
MAINTAINING OUR PROFESSIONAL SERVICES WORKFORCE IS NECESSARY FOR OUR FUTURE
GROWTH.
We rely 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 ability to provide this
assistance 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.
OUR GROWTH DEPENDS ON MARKET ACCEPTANCE OF OUR EXISTING PRODUCTS AND OUR
INTRODUCTION OF NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS.
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Our future business, operating results and financial condition will depend upon
market acceptance of our existing products, as well as 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 existing products, 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.
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 71% of our initial license revenues from licenses of CompuSet and
related CompuSet option products for the three months ended March 31, 2000. Our
initial license fees from DLS and DVS comprised 19% and 10%, respectively, for
the three months ended March 31, 2000. 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 52% of domestic
initial license revenues. Our future success will depend on our ability to
continue to successfully market our products in this and 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.
13
<PAGE> 14
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:
- 26% of our total revenues for the three months ended March 31, 2000
and
- 25% of our total revenues for the three months ended March 31, 1999.
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 VARs are principally Xerox
affiliates who re-market our products. Revenues generated by this subsidiary
were $937,000 and $1.1 million for the three months ended 2000 and 1999,
respectively. Net income from this subsidiary was $654,200 and $626,400 for the
three months ended 2000 and 1999, respectively. In Australia, Canada, Brazil,
Argentina and Chile we distribute our products through Fuji Xerox Co., Ltd.,
Xerox Canada, Ltd., Xerox Brazil, Ltd., Xerox Argentina I.C.S.A., and Xerox de
Chile S.A., respectively. Revenues generated by these Xerox affiliates were
$564,900 and $328,100 for the three months ended 2000 and 1999, 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:
- currency fluctuations;
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers;
- our limited experience in localizing products for foreign countries;
- lack of acceptance of our localized products in foreign countries;
- longer accounts receivable payment cycles;
- difficulties in managing our international operations;
- potentially adverse tax consequences including restrictions on the
repatriation of earnings; and
- 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 and financial
condition.
OUR BUSINESS IS DEPENDENT ON THE MARKET FOR DOCUMENT AUTOMATION SOFTWARE.
14
<PAGE> 15
The market for document automation software is 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 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.
15
<PAGE> 16
Software products as complex as those we offer, particularly our new Visual
CompuSet Professional Edition product, 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:
- loss of revenue or delay in market acceptance;
- diversion of our development resources;
- damage to our reputation; or
- 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 FROM THE EURO
In January 1999, a new currency called the "Euro" was introduced 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 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. 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 2000.
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 9, 2000 /s/ John L. McGannon
- ------------------ --------------------
John L. McGannon
Chief Financial Officer
(Duly Authorized and Principal Financial
Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,740,325
<SECURITIES> 13,957,802
<RECEIVABLES> 6,780,577
<ALLOWANCES> 548,560
<INVENTORY> 0
<CURRENT-ASSETS> 25,344,595
<PP&E> 3,255,457
<DEPRECIATION> 1,391,389
<TOTAL-ASSETS> 29,236,022
<CURRENT-LIABILITIES> 8,255,575
<BONDS> 0
0
0
<COMMON> 10,919
<OTHER-SE> 20,678,264
<TOTAL-LIABILITY-AND-EQUITY> 29,236,022
<SALES> 4,719,100
<TOTAL-REVENUES> 5,669,926
<CGS> 604,248
<TOTAL-COSTS> 1,309,457
<OTHER-EXPENSES> 4,155,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> 413,912
<INCOME-TAX> 0
<INCOME-CONTINUING> 413,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 413,912
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
