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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 0-20981

Document Sciences Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value per share

      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 period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold at June 28, 2002 was $6,589,084. As of March 24, 2003, there were 3,874,730 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III incorporates certain information by reference from Registrant’s definitive proxy statement pursuant to Schedule 14A for its 2003 Annual Meeting of Stockholders to be held on April 29, 2003, which proxy statement will be filed no later than 120 days after the close of Registrant’s fiscal year ended December 31, 2002.

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

      We make forward-looking statements in this Annual Report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our financial condition, operations, plans, objectives and performance. Additionally, when we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements. Many possible events or factors could affect our future financial results and performance. This could cause our results or performance to differ materially from those expressed in our forward-looking statements. You should consider these risks when you review this document, along with the following possible events or factors:

	•	national, international, regional and local economic, competitive and regulatory conditions and developments;
	•	the market for document automation software (currently includes the emerging content processing market);
	•	market acceptance of enhancements to our existing products and introduction of new products;
	•	continued profitability of our professional services;
	•	maintaining our relationships with Xerox Corporation; and
	•	other uncertainties, all of which are difficult to predict and many of which are beyond our control.

      Foreseeable risks and uncertainties are described elsewhere in this report and in detail under “Item 1. Business — Risk Factors.” You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Annual Report. We undertake no obligation to publicly release the results of any revision of the forward-looking statements.

PART I

Item 1.     Business

      Document Sciences Corporation develops, markets and supports a family of document automation software used in high volume print and transactional web-based applications. Document automation has become increasingly important as more companies realize the productivity benefits of automating the generation of personalized documents that include the precise layout of regulated content, personal financial data and in-context, one-to-one marketing information. Document automation, or “content processing”, is becoming recognized as a key component within the emerging Enterprise Content Management (ECM) software market. Our established Autograph document automation software products, as well as our new xPression content processing product family, each enable automated publishing solutions for many industries, including insurance, financial services, managed healthcare, government, telecommunications, manufacturing and commercial print outsourcing. Our software products facilitate an important form of communication between organizations and their customers by employing enterprise database assets and business compliance rules to produce high-quality, highly-personalized regulated documents that are ready to print on demand, to email or to distribute over the web in real-time using HTML or Adobe Systems’ (Adobe) PDF® technology. Our Autograph and xPression software products are licensed to approximately 600 customers worldwide who collectively produce over one billion customized documents per month. Our highly portable Autograph and our new xPression software platforms enable cost-effective, on demand, high volume or real-time transactional publishing that is high quality, in compliance and fully automated. Our software products are compatible with a wide array of popular computing environments from traditional mainframe computer systems, distributed client/server PC and Unix configurations, as well as highly scalable J2EE application server platforms.

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Company Formation

      We were incorporated in Delaware in October 1991 as a wholly owned subsidiary of Xerox Corporation (Xerox). Following our initial public offering of stock in September 1996, Xerox ownership was reduced to approximately 62%. As a result of our tender offer and our exercise of an option to purchase additional shares from Xerox in April 2001, Xerox’s ownership interest has been reduced to 19.9%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

Products

      Our established Autograph and our new xPression software product families currently address two major functional areas within the emerging ECM arena: Regulated Content Management and Document Publishing, as described below. All of our software products can be complemented by our professional services organization.

      We generally license our products for an upfront initial license fee and an annual renewal license and support fee, usually between 15% and 20% of the initial license fee, which is required for the initial year and subsequent years. We also offer the right to license for perpetual use of our products and, in these cases, maintenance agreements are charged at between 15% and 20% of the list price of the initial license fees. The list price for a license of CompuSet, our core Autograph product, is currently $90,000 for a mainframe installation and ranges down to $45,000 for a PC NT server installation. The list price for an initial license of xPression, our new product, is currently $200,000 for the IBM WebSphere platform. Additional product options currently range from $3,000 to $50,000. A typical new account sale through our direct channel is currently about $200,000 for software licenses and approximately $75,000 for professional services.

      Our Autograph and xPression regulated content management products provide solutions for the creation, revision and management of document content used in several types of regulated document automation applications. In the Autograph product family, they consist of the Document Library Service (DLS) Server and Client products, DLS eCor and DLSCOM. Unlike other general-purpose content management products, our Autograph DLS products are optimized for highly regulated document applications such as contract and policy production. In xPression, an enhanced version of the equivalent Autograph product functionality is provided through a more open J2EE/ XML architecture that can be integrated with general-purpose content management. As such, the xPression content processing components can coexist with and significantly extend the capabilities of a scalable ECM environment.

      Autograph DLS Server and Clients. DLS Server manages the document content creation process required in complex, regulated text-intensive documents, such as proposals, contracts, policies and customer correspondence. Our DLS products use a client server architecture for accessing data and files stored on a mainframe or on an NT network server. Our DLS Client product manages the text content created with Microsoft Corporation’s (Microsoft) Word® and internally stored in HTML. The DLS text content is tracked and managed in a multi-authoring environment that supports access security, content searching, revision control and approval workflow. In addition to content creation and management, the DLS Client product enables the definition of complex assembly and business rules required for interactive or automated document assembly and composition using Microsoft Word and/or our CompuSet publishing engine. DLS supports criteria-based content selection mechanism for generating a Microsoft Word document or a CompuSet tagged file, based on application volume requirements. The personalized document assembly can occur in a high volume fashion on the server or in a just-in-time, on-demand fashion on the local DLS Client computer.

      Autograph DLS eCor and DLSCOM. DLS eCor and DLSCOM further augment our DLS technology capabilities by providing a rich feature-set that is targeted at enterprise-wide correspondence applications. DLS eCor enables the on-demand generation of customer correspondence through corporate call centers. DLS eCor is web based and features an integrated Java editor that can be used to make additional manual or exception changes to pre-assembled customer correspondence. DLS eCor supports an email-based change

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      XPression Regulated Content Management: Our new xPression product family provides a migration path for the established Autograph DLS product family. XPression is entirely developed in Java, adhering to J2EE open standards for compatibility with application server platforms such as IBM WebSphere. Furthermore, xPression is based around open XML standards for open data and business logic description and interchange. XPression supports all of the capabilities found within the Autograph DLS product line, as well as significantly extends core functionality in the areas of data capture and handling (xPression Admin), document and rules design (xPression Design), interactive real-time document generation (xPression Response), as well as in the areas of integration and connectivity (xPression Framework). In 2002, we released the first version of xPression following the successful completion of our Beta testing during the third and fourth quarters. In 2003, we expect to release additional extensions to our xPression product family.

      Document Composition. CompuSet software automates content assembly and document composition using corporate data and variable content. CompuSet consists of a rule-based language and a robust composition engine that provides high-speed content assembly and composition of complex personalized documents at a high level of quality. Corporate data and variable content are marked with CompuSet tags that, in turn, are defined in logically separate CompuSet style specifications. The CompuSet tags are conceptually and syntactically similar to HTML or XML tags, the current web standards for content tagging, and the CompuSet style specifications are conceptually similar to CSS and XSL, the current web standards for style definition. Without requiring any real-time user interaction, CompuSet transforms the tagged data, the style specifications, and the variable content into high-quality electronic documents that are assembled and composed at rates in excess of 50 pages per second, depending on the computing platform configuration and the complexity of the document. The document composition features are rich and extensive, including the automatic generation of multi-dimensional dynamic data driven graphics, and the support of full color text and images. The assembly and composition process can be optimized for print, email and/or web presentation media for multi-channel distribution.

      Document Output Processing. The CompuSet Emitters transform CompuSet generated output into a number of popular Page Description Languages, or PDLs, for subsequent printing, electronic distribution and/or archive storage for future retrieval and viewing. These PDLs provide device-specific instructions for rendering text, forms, images and graphics into finished documents. The Emitters also condition the PDLs for transport over a variety of high-speed printing interfaces and for support of various finishing devices. The PDL formats currently supported are Xerox Metacode, International Business Machines Corporation’s (IBM) AFPDS®, Hewlett-Packard Company’s PCL® and Adobe’s PostScript® and Portable Document Format (PDF). Output Processing extends the Emitters by enabling inline output stream manipulation including stream splitting, merging, resequencing, sorting, bundling, and bar coding. These features are necessary for postal optimization, for the support of finishing equipment without further post-processing, and for multi-channel applications that require both print and electronic (email) distribution. This part of the Autograph architecture is extensible and new Emitters can be developed as necessary. In 2002, several additional Emitter extensions were released, including support for Xerox’s popular VIPP specification, enabling high-volume full-color production on Xerox DocuColor and iGen product lines.

      Autograph Rapid Application Development Tools. The Visual CompuSet Professional Edition (VCPro) application development tools run on Microsoft Windows® and simplify variable document application design and prototyping. Visual CompuSet supports all of the composition features of the NT, Unix and mainframe CompuSet production engines to ensure exact design for all supported production platforms, and includes a variety of content Importer, Merge, Font and Emitter tools necessary for basic application development. The content Importers accept externally generated document content, including text and forms,

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      XPression Document Publishing: As with Autograph, our new xPression product family is fully compatible with our core CompuSet, Emitter and Output Processing products. However, and rather than using the Autograph VCPro application development tools, xPression Design is integrated with Microsoft Word, the industry-standard authoring and design tool for regulated documents such as contracts and correspondence. Furthermore, xPression Design has been designed to integrate with other XML-compatible industry-standard tools planned to be supported in the future. In 2002, we began the design and development of a new Java-based composition engine. The design of the new composition engine incorporates the majority of the features available in the established CompuSet engine as well as significant extensions in the areas of complex multi-frame page layout, Unicode multi-language support including support for double-byte Asian languages and scalable multi-threaded performance. The new composition engine will support high-volume print applications as well as real-time transactional eBusiness applications. During 2003, we plan on releasing the first versions of our new xPression composition engine.

      Our products are usually licensed initially for a single document automation application. Regulated content applications such as policies and contracts are typically implemented using our Autograph DLS products whereas statement applications are typically implemented using our Autograph VCPro products, in each case driving document production through the CompuSet products. A growing number of customers are enterprise. Our xPression product family is targeted at customers that require universal content processing services on an open, standardized, enterprise-wide basis.

Professional Services

      In addition to our software products, we provide a comprehensive suite of professional services that can assist customers in the implementation of mission-critical document automation applications. Professional services include on-site software installation, customer training programs, telephone support programs and consulting services. Our consulting services are currently focused on assisting in the sale of high margin initial software licenses by providing project management, requirements analysis, application design and development services. Our consulting services can also be provided in conjunction with our system integration (SI) partners. In addition to consulting services, we provide introductory and advanced-level education classes in Autograph and xPression products at our headquarters in San Diego, our offices in Milwaukee and Washington DC and at customer sites. We believe that the use of our professional services enables customers to deploy our document automation products more rapidly and effectively. The professional services and support organizations employed a staff of 40 as of December 31, 2002.

Sales and Marketing

      Our sales and marketing organization targets vertical industry markets that require document automation and high volume, high quality document personalization. We currently license our products using a combination of direct sales and alternative channels. In North America, we market our products primarily through a direct sales force that manages our existing base of corporate accounts, as well as targets new accounts in select market segments. Our sales account executives are provided with pre-sales technical support through qualified solution analysts. Account executives and solution analysts are located throughout the United States and Canada to provide optimal coverage. Outside of North America, we distribute our

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      We intend to increase both our product offerings and markets through joint marketing, sales and distribution and development relationships with other major companies. Current relationships include formal and informal marketing and sales alliances with IBM, Xerox, American Management Systems Inc. and Edgewater Technology Inc. These relationships provide qualified sales leads for our products and extend our sales coverage and networking capabilities. In addition, we also support partner relationships with complementary technology companies such as Siebel Systems, Inc., FileNet and Oracle, Inc. We participate in joint marketing events with our key partners whenever appropriate and feasible. Furthermore, we actively market our products and solutions at major trade shows, through focused regional seminars and through a variety of web marketing mechanisms, including webinars.

Research and Development

      We are continuing to enhance our web functionality across all of our major product offerings. We engage customers in a formal requirements analysis that is based on the Quality Function Deployment (QFD) process, which is a formal procedure for interviewing customers, identifying their needs and prioritizing specific product features. As a result, we have identified a number of customer requirements for the production of regulated, electronic documents of the future. Our major development initiatives in 2003 address several of these key requirements as brought to our attention through our ongoing QFD process.

      In general, our product development strategy is based on delivering document automation solutions for specific types of documents in one or more vertical markets or industries. A cross-functional team that includes a representative from each discipline in the company is responsible for delivering each focused offering. We use a documented business planning and product delivery process to guide our product development and delivery activities. We also employ iterative and rapid prototyping development methodologies.

      Our recent offerings continue to build on the Autograph family of products. These well-established products are maintained by teams that respond to customer requests for defect corrections and feature enhancements. By building on our existing products, we maximize our reuse of existing software and our expertise and we enable our Autograph customers to purchase these new offerings as upgrades to their existing product configurations.

      The xPression product offerings are being developed as components that adhere to open standards for large-scale systems integration such as J2EE and XML. By developing products using open standards we can expand the delivery of our products through large systems integrators and other channels. By offering application migration paths wherever possible we enable our Autograph customers to purchase our new xPression offerings. We have a two-year, $3.1 million agreement with Objectiva Software Solutions, Inc. (Objectiva) to provide us development services in connection with our development of xPression.

      We can make no assurance that we will be successful in developing, introducing and marketing future new products on a timely and cost-effective basis, if at all, or that such future new products will achieve market acceptance. See “Risk Factors — Our growth depends on market acceptance of our existing products and our introduction of new products and enhancements to existing products.”

      We expect to continue enhancing our existing products and to develop future new products, particularly as they relate to multi-channel content automation applications. Our research and development expenditures have grown substantially since our inception. Such expenditures, not including amounts capitalized, were $5.3 million, $5.9 million and $7.0 million in 2000, 2001 and 2002, respectively. Our development organization

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Competition

      The market for document automation products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our software products are targeted at document intensive organizations that require the ability to produce large quantities of personalized documents in paper or electronic form. We face direct and indirect competition from a broad range of competitors who offer a variety of products and solutions to our current and potential customers. Our principal competition currently comes from systems developed in-house by the internal MIS departments of large organizations where there is a reluctance to commit the time and effort necessary to convert their existing document automation processes to our document automation software. We also face competition from DocuCorp International, Inc. and InSystems Technologies, Inc., in the insurance industry; Metavante in banking and financial services; Group 1 Software, Inc. and Exstream Software, Inc. in commercial direct mailing and marketing, as well as numerous other smaller competitors. Several of our competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and a larger installed base of customers than we do. We believe that the principal competitive factors affecting our market include product performance and functionality, ease of use, scalability, operating across multiple computer and operating system platforms, product and company reputation, client service and support and price.

      It is also possible that we will face competition from new competitors. These include large independent software companies offering personal computer-based application software solutions, such as Microsoft and Adobe, and from large corporations providing database and content management software solutions, such as Oracle Corporation. In addition, Xerox or IBM, either directly or through affiliated entities, could become large competitors. Moreover, as the market for document automation software develops, a number of these or other companies with significantly greater resources than ours could attempt to enter or increase their presence in the document automation market by either acquiring or forming strategic alliances with our competitors or by increasing their focus on the industry. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our current and prospective customers. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition.

Patents, Licenses and Proprietary Rights

      Our success is dependent, in part, on our ability to protect our proprietary technology. We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws. However, these afford only limited protection. We presently have no patents or patent applications pending. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. See “Risk Factors — Our growth is dependent upon successfully protecting our proprietary rights.”

      In addition, we also rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. There can be no assurances that such firms will remain in business, that they will continue to support their products or that their products will otherwise continue to be available to us on commercially reasonable terms. The loss or inability to maintain any of these software licenses could result in delays or reductions in product shipments until equivalent software can be developed, identified, licensed and integrated, which would adversely affect our business, operating results and financial condition.

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Customers

      We derived 17% of our revenues through Xerox and its affiliates in 2002. As a result, discontinuation of agreements and other business transactions that may adversely impact our relationship with Xerox could have a material adverse effect on our business, operating results and financial condition.

Employees

      As of December 31, 2002, we had 127 employees including 40 in professional services, 39 in sales and marketing, 36 in research and development and 12 in finance and administration. None of our employees are represented by labor unions. We have experienced no work stoppages and believe our relationship with our employees is good. Competition for qualified personnel in the industry in which we compete is intense. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.

Financial Information about Segments and Geographic Areas

      The information regarding revenues and operating profit by reportable segments and revenues from unaffiliated customers by geographic region is set forth at the end of the Annual Report under the heading “Notes to Consolidated Financial Statements — 3. Segment Information” and is incorporated herein by reference.

Recent Developments

      On February 10, 2003, we announced that we received approval from the Nasdaq Listing Qualifications department to transfer listing of our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market. The transfer became effective at the opening of business on February 18, 2003.

      We applied to transfer to the Nasdaq SmallCap Market due to a change in a maintenance listing standard of the Nasdaq National Market from one based on Net Tangible Assets to one based on Stockholders’ Equity. In April 2001, we repurchased $14 million worth of its shares via a self-tender offer. This repurchase, which reduced our stockholders’ equity on the balance sheet by $14 million, was undertaken when the maintenance listing standard for the Nasdaq National Market required $4 million of Net Tangible Assets, with which we were in compliance. In November 2002, the Nasdaq National Market replaced the Net Tangible Assets listing standard with a minimum requirement of $10 million of Stockholders’ Equity. A consequence of our share repurchase, undertaken over a year earlier when the Net Tangible Assets listing standard was in place, is that our stockholders’ equity fell short of the Nasdaq National Market’s new Stockholder’s Equity listing standard.

      For more information regarding the transfer of listing of our common stock to the Nasdaq SmallCap Market, please see our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2003.

Risk Factors

      The following is a discussion of certain factors that 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.

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      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 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 or 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;
	•	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 revenues mainly depend on when orders are received and shipped. However, because of our sales model, our customers’ implementation schedule and the complexity in implementing some of our software, 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. Accordingly, 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 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. Revenues derived from relationships with Xerox and affiliates of Xerox accounted for approximately $5.2 million, $4.1 million and $4.0 million in 2000, 2001 and 2002, respectively, representing 23%, 19% and 17% of our total revenues, respectively.

      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 and further develop our existing relationships with Xerox, our strategy is to continue to lessen our dependence

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      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 are or in the future may become 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.

      We rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite these precautions, it may be possible for unauthorized third parties to copy portions of our products or use information we consider proprietary. Policing unauthorized use of our products is difficult and, while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

      We are not aware of any infringement of our products upon the proprietary rights of third parties. However, we cannot assure you that third parties will not claim infringement by us with respect to current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results and financial condition.

      We intend to optimize 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, 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 optimize 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.

      We are continuing our focus on the consulting services component of our professional services to assist customers in the planning and implementation of enterprise-wide, mission-critical document automation applications. This strategy is dependent on retaining and hiring professionals to perform these consulting

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      The market for our document automation products is intensely competitive. We face competition from a broad range of competitors, some of whom have greater financial, technical, and marketing resources than we do. Our principal competition currently comes from systems developed in-house by the internal MIS departments of large organizations and direct competition from numerous software vendors, including DocuCorp International, Inc., Metavante Corporation, Group 1 Software, Inc., Exstream Software, Inc. and InSystems Technologies, Inc. We believe that the principal competitive factors affecting our market include product performance and functionality, ease of use, scalability, operating across multiple computer and operating system platforms, product and company reputation, client service and support and price. Although we believe we currently compete favorably with respect to such factors, we can not assure you that we will be able to maintain our competitive position against current and future competitors, especially those with greater financial, technical and marketing resources than us, or that we will be successful in the face of increasing competition from new products, new solutions introduced by existing competitors or by new companies entering the market.

      Our future business, operating results and financial condition will depend upon market acceptance of our existing products, as well as our ability to respond to emerging industry standards and practices and to develop new products that address the future needs of our target markets. Our Autograph family of products has been applied mainly to document automation applications producing paper-based documents. We have started to extend our core technology to the Internet, intranets and commercial on-line services. However, 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 for technological or other reasons we are unable 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.

      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.

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      We derived 70% and 23% of our initial license revenues from our CompuSet and DLS product lines in 2002, respectively. As a result, factors that may adversely impact the pricing of or demand for these 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 and DLS software and related products.

      Licenses to end users in the insurance, finance and print service industries in the United States accounted for 90%, 97% and 97% of initial license revenues in 2000, 2001 and 2002, respectively. Our future success will depend on our ability to continue to successfully market our products in these and other industries. We cannot assure you that we will continue to be successful in developing and marketing CompuSet and DLS products and related services. Our failure to do so would have a material adverse effect on our business, operating results and financial condition.

      Our revenues from export sales, including sales through our foreign subsidiary, accounted for 28%, 21% and 23% of our total revenues in 2000, 2001 and 2002, respectively.

      Our wholly owned subsidiary, Document Sciences Europe, markets and supports our products in Europe, for which they receive an agent fee. We license our products in Europe through VAR’s and to a much lesser extent, direct sales. Our VARs are principally Xerox affiliates who re-market our products. Revenues generated by the activities of this subsidiary were $3.9 million, $2.7 million and $3.2 million in 2000, 2001 and 2002, respectively.

      In Australia, Canada and Brazil, we distribute our products through Fuji Xerox Co., Xerox Canada, Ltd. and Xerox do Brazil, Ltd., respectively. Revenues generated by these Xerox affiliates were $2.4 million, $2.1 million and $1.7 million in 2000, 2001 and 2002, 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 Euro. Although exchange rate fluctuations have not had a significant impact on us, fluctuations in the value of the

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      The market for document automation software is intensely competitive, highly fragmented and subject to rapid change. We cannot assure you that the market for document automation software will grow or that, if it does grow, 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 demand for related products and services would 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 market.

      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 future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. Only our President and Chief Executive Officer and Chief Scientist have signed employment agreements with us. 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 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.

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      Software products as complex as those we offer 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 general market for software products. 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 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 events occur, it would have a material adverse effect upon our business, operating results and financial condition.

Item 2.     Properties

      We lease approximately 21,300 square feet for our principal administrative, sales, marketing, training and research and development facility in Carlsbad, California. This lease expires on February 28, 2005. Our subsidiary in France occupies approximately 2,200 square feet of office space with a renewable lease expiring on April 15, 2004. In addition, our regional office in Milwaukee, Wisconsin occupies approximately 7,500 square feet of office space pursuant to a lease expiring on June 30, 2003. Sales representatives and field technical support personnel operate from their homes. The current properties that we lease are adequate for our current needs.

Item 3.     Legal Proceedings

      In the ordinary course of business, we may become involved in legal proceedings from time to time. As of March 21, 2003, we were not a party, nor was our property subject, to any material pending legal proceedings.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2002.

PART II

      Our common stock is presently traded on The Nasdaq SmallCap under the symbol “DOCX.” Until February 18, 2003, our common stock was traded on The Nasdaq National Market System. The following table sets forth the range of high and low sales prices of our common stock for the periods indicated, as

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      We had 3,874,730 shares outstanding and 106 record holders of our common stock as of March 24, 2003. We did not make any sales of unregistered stock in 2000, 2001 or 2002. We have not paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

Item 6.     Selected Financial Data

      The following table presents selected financial data of Document Sciences Corporation. This historical data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. The drop in working capital from 2000 to 2001 was due to our tender offer completed in April 2001 where we purchased 6,000,000 shares of our outstanding common stock for $2.00 per share.

      Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those described below, including those risks described in the section entitled, “Business — Risk Factors,” and elsewhere in this Annual Report. Our discussion and analysis of the financial condition and results of operations of Document Sciences and its subsidiary should be read in conjunction with the consolidated financial statements and related notes.

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Critical Accounting Policies

      Our discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United Stat