UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
[ ] 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 0-12965
NESTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3163744
(State of incorporation) (I.R.S. Employer
Identification No.)
One Richmond Square, Providence, RI 02906
(Address of principal executive offices) (Zip Code)
401-331-9640
(Registrant's Telephone Number, Including Area Code)
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 than 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 _________
Common stock, par value .01 per share: 17,404,763 shares
outstanding as of June 30, 1998
NESTOR, INC.
FORM 10Q - June 30, 1998
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1998 and 1997
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART 2 OTHER INFORMATION
<TABLE>
Nestor, Inc.
Consolidated Statements of Operations
<CAPTION)
Six Months Ending June 30, Qtr. Ending June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 886,739 $ 2,303,855 $ 342,898 $ 1,777,861
Engineering services 466,404 902,066 158,096 207,741
Tangible product sales 129,343 101,224 49,677 81,167
Total revenues 1,482,486 3,307,145 550,671 2,066,769
Operating Expenses:
Engineering services 820,859 785,285 381,665 201,598
Tangible product sales 50,005 19,932 15,699 13,848
Research and development 921,778 749,505 477,670 473,696
Selling and marketing
expenses 940,212 1,040,424 520,127 577,697
General and
administrative expenses 623,279 692,592 327,507 337,675
Total costs and
expenses 3,356,133 3,287,738 1,722,668 1,604,514
Income (loss) from
operations (1,873,647) 19,407 (1,171,997) 462,255
Other income (expense) (27,100) 71,668 2,583 92,977
Income (loss) for the
period before
income taxes (1,900,747) 91,075 (1,169,414) 555,232
Income taxes --- --- (7,500) ---
Net Income (Loss)
for the Period $ (1,900,747) $ 91,075 $ (1,161,914) $ 555,232
Income (Loss) Per Share:
Net Income (Loss)
for the Period $ (1,900,747) $ 91,075 $ (1,161,914) $ 555,232
Dividends accrued
on preferred stock 151,397 228,572 37,596 125,410
Income (loss) Applicable
to Common Stock $ (2,052,144) $ (137,497) $(1,199,510) $ 429,822
Income (Loss) Per Share:
Basic $ (0.16) $ (0.02) $ (0.07) $ 0.03
Diluted $ (0.16) $ (0.02) $ (0.07) $ 0.03
Shares Used in Computing
Income (Loss) Per Share:
Basic 13,040,514 9,140,141 16,642,040 12,689,847
Diluted 13,040,514 9,140,141 16,642,040 15,826,534
</TABLE>
The notes to the financial statements are an integral part of
this statement.
<TABLE>
Nestor, Inc.
Consolidated Balance Sheets
<CAPTION>
June 30, 1998 December 31, 1997
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,466,691 $ 386,639
Accounts receivable, net of
allowance for doubtful accounts 517,580 557,212
Unbilled contract revenue 204,225 298,803
Other current assets 269,850 232,492
Total current assets 4,458,346 1,475,146
Noncurrent assets:
Property and equipment at cost -
net of accumulated depreciation 389,986 261,463
Deferred development costs 562,257 574,752
Intangible assets -
net of accumulated amortization 230,135 295,887
Other assets 5,783 5,783
Total assets $ 5,646,507 $ 2,613,031
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and
other current liabilities $ 965,846 $ 920,833
Deferred income 335,770 408,232
Total current liabilities 1,301,616 1,329,065
Noncurrent liabilities:
Long term obligations under
capital leases 51,229 10,220
Total liabilities 1,352,845 1,339,285
Redeemable preferred stock (Note 2) --- 5,792,787
Stockholders' deficit:
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series B - 405,000 shares at
June 30, 1998 (liquidation
value $405,000 - $1.00 per share)
and 1,445,000 shares at
December 31, 1997
(liquidation value $1,445,000 -
$1.00 per share) 405,000 1,445,000
Series D - 170,871 shares at
December 31, 1997 (liquidation value
$265,347 - $1.50 per share plus
accrued dividends) --- 265,347
Common Stock, $.01 par value,
authorized 30,000,000 shares;
issued and outstanding: 17,404,763
shares at June 30, 1998 (Note 3)
and 9,403,987 shares at
December 31, 1997 174,048 94,040
Warrants and options 577,225 523,984
Additional paid-in capital 24,465,468 12,579,920
Retained (deficit) (21,328,079) (19,427,332)
Total stockholders'
equity (deficit) 4,293,662 (4,519,041)
Total Liabilities and
Stockholders' Equity (Deficit) $ 5,646,507 $ 2,613,031
</TABLE>
The notes to the financial statements are an integral part of
this statement.
<TABLE>
Nestor, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Six Months Ending June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,900,747) $ 91,075
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 120,979 80,658
Expenses charged to operations relating
to options, warrants and capital
transactions 53,241 108,442
Discount on payment of vendor obligations --- (100,000)
Changes in assets and liabilities:
Decrease in accounts receivable 39,632 506,870
(Increase) decrease in unbilled
contract revenue 94,578 (511,453)
Decrease in deferred development costs 12,495 364,405
(Increase) decrease in other assets (37,119) 19,391
(Decrease) increase in accounts payable,
and other current liabilities 13,827 (123,018)
(Decrease) increase in deferred income (72,462) 491,924
Net cash provided (used) by
operating activities (1,675,576) 928,294
Cash flows from investing activities:
Purchase of property and equipment (94,086) (36,623)
Net cash (used) by investing activities (94,086) (36,623)
Cash flows from financing activities:
Repayment of obligations under capital leases (17,468) (4,656)
Proceeds from issuance of common stock - net 4,977,676 54,000
Payment of dividends on preferred stock (69,070) ---
Redemption of Preferred Series D stock (41,424) ---
Net cash provided by
financing activities 4,849,714 49,344
Net change in cash and cash equivalents 3,080,052 941,015
Cash and cash equivalents -
beginning of period 386,639 774,457
Cash and cash equivalents -
end of period $ 3,466,691 $ 1,715,472
Supplemental cash flows information
Interest paid $ 13,489 $ 860
Income taxes paid $ 37,500 $ ---
</TABLE>
The notes to the financial statements are an integral part of
this statement.
Notes to Consolidated Financial Statements
Note 1 - Financial statements:
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of
(a) the consolidated results of operations for the three and six
months ended June 30, 1998 and 1997; (b) the consolidated
statements of cash flows for the six months ended June 30, 1998
and 1997; and (c) consolidated financial position at June 30,
1998 have been made. The accompanying interim results of
operations and cash flows are not necessarily indicative of the
results expected for the entire fiscal year.
The accompanying financial statements include the accounts of
Nestor, Inc., Nestor IS, Inc. ("IS"), and Nestor Interactive,
Inc. ("Interactive"). IS and Interactive were organized
effective January 1, 1997 as two wholly owned subsidiaries of
Nestor, Inc. All intercompany transactions and balances have
been eliminated.
Note 2 - Redeemable convertible preferred stock:
On March 31, 1998, the Company and Wand Partners, owner of the
outstanding redeemable convertible preferred stock, agreed to
modify certain terms and conditions governing the stock. Wand
Partners agreed to release Nestor from mandatory redemption of
the stock in exchange for Nestor's agreement to increase the
dividend rate by one percent per annum beginning on July 1, 2000.
On April 29, 1998, Wand Partners converted all of its redeemable
convertible preferred stock into common stock. See also, "Note 3
- - Common stock."
6/30/98 12/31/97
Series E, par value $1.00 per share,
1,444 shares outstanding and $305,577
of accumulated dividends Dec. 31, 1997. --- $1,749,577
Series F, par value $1.00 per share,
599 shares outstanding and $95,821 of
accumulated dividends at Dec. 31, 1997. --- 694,821
Series G, par value $1.00 per share,
777 shares outstanding and $116,650
of accumulated dividends at Dec. 31, 1997. --- 893,650
Series H, par value $1.00 per share,
2,026 shares outstanding and $428,739
of accumulated dividends at Dec. 31, 1997. --- 2,454,739
TOTAL: --- $5,792,787
Note 3 - Common stock:
On April 29, 1998, Nestor sold to Transaction Systems Architects,
Inc. ("TSAI") $5 million of newly issued common stock at a price
of $2 per share and a warrant to purchase an additional 2.5
million shares at $3 per share. Proceeds from the sale consisted
of $4.5 million in cash and surrender of a $500,000 note owed to
TSAI. Concurrent with this transaction, Wand Partners converted
its $5.8 million of convertible preferred stock (Note 2) into
common stock.
Additionally, a conversion offer to Series B stockholders
resulted in 979,200 shares of common stock to be issued as of
June 30, 1998 (Note 4). Such shares are included in common stock
issued and outstanding at June 30, 1998.
Note 4 - Convertible preferred stock:
In conjunction with the TSAI equity financing described in Note
3, the Company took the following actions to simplify its capital
structure and reduce the amount of convertible preferred shares
outstanding:
Series B Convertible Preferred Stock
The Company offered Series B stockholders a 2% conversion premium
payable in common stock for a share-for-share conversion of all
shares held. The conversion offer, which expired on June 26,
1998, resulted in a premium of 19,200 common shares as 960,000
Series B shares were converted. The rights and benefits of
remaining Series B stockholders are unchanged, including ongoing
standard conversion rights.
Series D Convertible Preferred Stock
The Company issued a redemption call for all of the outstanding
Series D shares at a redemption price of $1.50 plus unpaid
dividends payable as of June 30, 1998. Stockholders have the
option of converting into common shares under the Preferred
Shares Agreement. After paying dividends on June 30, 1998, the
Company reclassified the Series D balance of $41,424 to accounts
payable and other current liabilities.
Note 5 - New accounting standards:
Comprehensive Income: In 1998, the Company adopted Financial
Accounting Standard 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
Company does not expect comprehensive income to differ
significantly from net income. Therefore, adoption of this
Statement has had no impact on the Company's results of
operations.
Software Revenue Recognition: As of January 1, 1998, the Company
adopted AICPA Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which is effective for transactions
that the Company enters into in 1998. Prior years have not been
restated. The most significant impact of SOP 97-2 on the
Company's revenue recognition accounting policies is that for
contracts with multiple elements, revenue, in some instances, may
be recognized later than under past practices. Adoption of SOP
97-2 had an insignificant impact on net loss per share for the
quarter and six months ended June 30, 1998.
Segment Reporting: In June 1997, the Financial Accounting
Standards Board issued Statement of Accounting Standards 131,
"Disclosures About Segments of an Enterprise and Related
Information" ("FAS 131"), which is effective for years beginning
after December 15, 1997. However, FAS 131 need not be applied to
interim financial statements in the initial year of application.
FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. Since FAS 131 is effective for financial
statements for fiscal years beginning after December 31, 1997,
the Company will adopt the new requirements retroactively in
1998. Management has not yet determined the impact FAS 131 will
have on disclosures of the Company's reported segments.
Prospective Statements
The following discussion contains prospective statements
regarding Nestor, Inc., its business outlook and results of
operations that are subject to certain risks and uncertainties
and to events that could cause the Company's actual business,
prospects and results of operations to differ materially from
those that may be anticipated by, or inferred from, such
prospective statements. Factors that may affect the Company's
prospects include, without limitation: the Company's ability to
successfully develop new contracts for technology development;
the impact of competition on the Company's revenues or market
share; delays in the Company's introduction of new products; and
failure by the Company to keep pace with emerging technologies.
The Company's quarterly revenues and operating results have
varied significantly in the past and may do so in the future. A
significant portion of the Company's business has been derived
from individually substantial licenses, and the timing of such
licenses has caused material fluctuations in the Company's
operating results. In addition, because the Company provides
certain of its products to customers under licenses with no
significant production, modification or customization required,
it recognizes the majority of its revenue upon the delivery of
the software and acceptance by the customer. Thus, revenues
derived by the Company may be more likely to be recognized in
irregular patterns that may result in quarterly variations in the
Company's revenues.
The Company's expense levels are based in part on its product
development efforts and its expectations regarding future
revenues and in the short term are generally fixed. Therefore,
the Company may be unable to adjust its spending in a timely
manner to compensate for any unexpected revenue shortfall. As a
result, if anticipated revenues in any quarter do not occur or
are delayed, the Company's operating results for the quarter
would be disproportionately affected. Operating results also may
fluctuate due to factors such as the demand for the Company's
products, product life cycles, the development, introduction and
acceptance of new products and product enhancements by the
Company or its competitors, changes in the mix of distribution
channels through which the Company's products are offered,
changes in the level of operating expenses, customer order
deferrals in anticipation of new products, competitive conditions
in the industry and economic conditions generally or in various
industry segments.
The Company expects quarterly fluctuations to continue for the
foreseeable future. Accordingly, the Company believes that
period-to-period comparisons of its financial results should not
be relied upon as an indication of the Company's future
performance. No assurance can be given that the Company will be
able to achieve or maintain profitability on a quarterly or
annual basis in the future.
Readers are cautioned not to place undue reliance on these
prospective statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to
carefully review and consider the various disclosures made by the
Company in this report and in the Company's reports filed with
the Securities and Exchange Commission.
Liquidity and Capital resources
Cash Position and Working Capital
The Company had cash and short term investments of approximately
$3,466,000 at June 30, 1998, as compared with $132,000 at March
31, 1998, and $386,000 at December 31, 1997. At June 30, 1998,
the Company had working capital of $3,156,000 as compared with
working capital of $146,000 at December 31, 1997.
The Company's net worth at June 30, 1998, was $4,293,000, as
compared with a shareholders' deficiency of $4,519,000 at
December 31, 1997. The increase in net worth results from the
sale of newly issued common stock on April 29, 1998 to
Transaction Systems Architects, Inc. ("TSAI"). TSAI purchased
$5,000,000 of common stock at a price of $2 per share and a
warrant to purchase an additional 2,500,000 shares at $3 per
share. Concurrent with this transaction, Wand Partners agreed to
convert its $5,800,000 of convertible preferred stock to common
stock.
Management believes that the Company's liquid assets as at June
30, 1998, are sufficient to meet the Company's anticipated cash
requirements through the end of its fiscal year ending December
31, 1998.
Deferred Income
Operations of the Company have been partly funded by prepayments
under engineering contracts and licenses of the Company's
technology. Such prepayments are recognized as revenue under the
percentage-of-completion method as engineering is completed or
delivery obligations are fulfilled. The Company bases its
estimate of the percentage of completion on the amount of labor
applied to a given project, compared with the estimated total
amount of labor required. The remainder of such prepaid revenue
is reflected on the Company's balance sheet as deferred income,
and is treated as a liability. Total deferred income was
$335,000 at June 30, 1998, as compared with $408,000 at December
31, 1997.
Future commitments
During the quarter ended June 30, 1998, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $84,000. The Company has no
material commitments for capital expenditures although management
expects that the Company may make future commitments for the
purchase of additional computing and related equipment, for
development of hardware, for consulting and for promotional and
marketing expenses.
The Company has placed purchase orders totaling $877,500 with
Intel Corporation for a supply of the Ni1000 Recognition
Accelerator Chips. The Company expects to take delivery of
$195,000 of the chips during 1998; $292,500 after December 1998;
and $390,000 after December 1999.
The Company entered into an agreement on September 25, 1997, for
the modification of one of the components of the TrafficVision
product. Nestor agreed to pay Zeller Research, LTD $75,000 for
engineering, which is expected to be completed by the end of
1998, and to purchase 100 units of the modified component at a
total cost of up to $53,000.
Results of Operations
For the quarter ended June 30, 1998, the Company realized
revenues totaling $551,000, and expenses of $1,723,000 which
resulted in an operating loss for the quarter of $1,172,000. In
the corresponding period of the prior year, revenues totaled
$2,067,000 and expenses totaled $1,605,000, producing income from
operations of $462,000.
For the six months ended June 30, 1998, revenues totaled
$1,482,000, expenses totaled $3,356,000, and the Company
experienced a loss from operations of $1,874,000. In the
corresponding period of the prior fiscal year, the Company
realized revenues of $3,307,000 and expenses of $3,288,000,
producing operating income of $19,000.
Prior year significant transactions
On April 18, 1997, the Company amended its PRISM License
Agreement with Applied Communications, Inc. ("ACI") granting to
ACI expanded rights to distribute the Company's PRISM product
line and revising the rate of royalties payable to the Company on
future income. Pursuant to that amendment, the Company received
in April 1997 an initial, non-refundable license fee of
$2,000,000. Of that fee, the Company recognized as revenues
$1,025,000 in the quarter ended June 30, 1997. The remaining
$975,000 was recognized as revenue over the remainder of calendar
1997.
In June 1997 the Company and Sligos terminated a License
Agreement dated October 26, 1990. Pursuant to the termination
agreement, the Company paid Sligos, in July 1997, $225,000 in
full settlement of its obligation to Sligos, which had been
classified as a current liability on the Company's balance sheet,
and of the repurchase from Sligos of 452,000 shares of Company's
Series A Preferred Stock. The Company allocated $125,000 of the
payment to the settlement of its current liability to Sligos and
consequently recorded other income of $100,000 as a discount on
the payment of a vendor obligation. The Company allocated the
remaining $100,000 of the payment to the repurchase of its Series
A Preferred Stock and, accordingly, reclassified $352,000 to
additional paid-in capital. The Company also eliminated the long-
term deferred income related to Sligos prepayments (which were
received in October 1990) and recorded software licensing
revenues of $480,000.
The Company executed a license agreement on March 28, 1997, made
required deliveries, and recognized in the quarter ended March
31, 1997, $550,000 of revenues under this contract. Since the
installation, the Company has continued to modify and improve the
software although the customer has not yet deployed it. While
management expects that the customer will deploy the software,
management is not able to forecast when it will be deployed.
Accordingly, the revenues associated with this contract were
reversed in the fourth quarter of 1997 and $575,000 of costs were
capitalized as Deferred development costs at December 31, 1997.
During the quarter ended March 31, 1997, the Company recognized
as expense $364,000 of the costs that were capitalized in
December 1996. The deferred development costs are being
amortized over the remaining life of the license.
Revenues
The Company's revenues arise from licensing of the Company's
products and technology, from contract engineering services, and
from the sale of tangible products and are discussed separately
below. During the quarter ended June 30, 1998, revenues
decreased $1,516,000 to $551,000 from $2,067,000 in the quarter
ended June 30, 1997, including revenues under the license
amendment with ACI and revenues associated with the Sligos
transaction. For the six months ended June 30, 1998, revenues
totaled $1,482,000, as compared with total revenues in the year-
earlier period of $3,307,000, including revenues under the
license agreement with ACI, revenues associated with the Sligos
transaction and revenues from the license signed in March 1997.
Software Licensing
Total product-licensing revenues were $343,000 in the quarter
ended June 30, 1998, as compared with $1,778,000 in the same
quarter of the prior year. For the six months ended June 30,
1998, total product-licensing revenues were $887,000, as compared
with $2,304,000 of such revenues in the year-earlier period.
Software licensing revenues from the Company's Prism product line
totaled $331,000 in the second quarter of 1998, as compared with
$1,661,000 in the corresponding quarter of the prior year. Prism
licensing revenues totaled $857,000 in the six months ended June
1998, as compared with $2,181,000 of such revenues in the
corresponding period of the prior fiscal year.
The decrease in revenues from the prior-year periods for the
quarter and year-to-date is attributable primarily to two
factors: the non-recurrence of $481,000 of revenues realized
relating to the Sligos transaction; and the non-recurrence of
$1,025,000 of licensing revenues derived from the ACI license
agreement signed in April 1997. Current year revenues are below
management expectations due to delays in licensing decisions at
financial institutions as a result of increased merger and
acquisition activity and Year 2000 systems compliance
initiatives.
Engineering Services
During the quarter ended June 30, 1998, revenues from engineering
contracts decreased $50,000 to $158,000 from $208,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 30, 1998, revenues from engineering contracts
totaled $466,000, as compared with $902,000 of such revenues in
the corresponding period of the prior fiscal year, including
$550,000 of revenues relating to the license agreement signed on
March 28, 1997. Excluding those revenues, engineering services
revenues in the six months ended June 1998 increased $114,000
over the year-earlier period.
Revenues in the second quarter of 1998 relating to the customer-
funded modification of Nestor's Fraud Detection System totaled
$103,000, a decrease of $91,000 over year-earlier revenues of
$194,000. For the six months ended June 1998, such revenues
totaled $348,000, as compared with year-earlier revenues totaling
$858,000, including $550,000 of revenues relating to the license
agreement signed on March 28, 1997.
The Company has contracts with several government customers to
perform various engineering and development services. The
contracts, signed at various times, call for delivery of
prototype products, but do not specify any subsequent purchasing
or licensing provisions. During the quarter ended June 30, 1998,
revenues from the Company's government contracts totaled $14,000,
equal to such revenues in the year earlier period. Revenues from
government contracts in the six months ended June 30, 1998,
totaled $78,000, as compared with $44,000 of such revenues in the
corresponding period of the prior fiscal year.
Sales of Tangible Products
The tangible products currently sold by the Company are based
upon the Company's Ni1000 Recognition Accelerator Chip, which is
marketed along with development software that enables customers
to develop high-speed recognition applications. Revenues from
the Company's Ni1000 Development System totaled $25,000 in the
quarter ended June 30, 1998, as compared with $81,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 1998, revenues from the Ni1000 Development
System totaled $57,000, a decrease of $33,000 from year-earlier
revenues of $90,000.
The Company is continuing its development of the TrafficVision
product, which incorporates the Ni1000 Recognition Accelerator
Chip (see "Investment in Product Development and Marketing,"
below). During the quarter ended June 30, 1998 and 1997,
TrafficVision revenues totaled $25,000 and $0, respectively.
During the six months ended June 30, 1998, TrafficVision revenues
totaled $73,000, as compared with $12,000 of such revenues in the
year-earlier period.
Operating Expenses
Total operating expenses - consisting of engineering, research
and development, selling and marketing, and general and
administrative expenses - amounted to $1,723,000 in the quarter
ended June 30, 1998, an increase of $118,000 from total operating
costs of $1,605,000 in the corresponding quarter of the prior
fiscal year. For the six months ended June 1998, total operating
expenses were $3,356,000, as compared with $3,288,000 of such
expenses in the year-earlier period.
Included in operating expenses for the March 1997 quarter is the
recognition of $364,000 of costs relating to a project to
customize the Company's Prism Fraud Detection System for a
customer. These costs were incurred during the six months ended
December 31, 1996 but were deferred because the terms of the
agreement were not finalized until March 1997. The Company
accounted for the costs in accordance with SOP 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts," which provides that costs be deferred until delivery
is made under the terms of an enforceable agreement. The
agreement was completed and required deliveries were made in
March 1997.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended June 30, 1998, the Company paid
$901,000 for wages and consulting fees, an increase of $206,000
from total wages and consulting fees of $695,000 paid in the
corresponding quarter of the prior fiscal year. For the six
months ended June 30, 1998, wages and consulting fees totaled
$1,874,000, as compared with $1,365,000 in the year-earlier
period.
The increase in labor costs reflects the increase in staffing:
full-time employees, including consultants, totaled 48 at June
30, 1998, as compared with 41 at June 30, 1997.
Engineering Services
Costs related to engineering services totaled $382,000 in the
quarter ended June 30, 1998, as compared to $202,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 30, 1998, engineering services costs totaled
$821,000, as compared with $785,000 of such costs in the
corresponding period of the prior fiscal year.
As a percentage of revenues, these costs increased from 87% in
the six months ending June 1997 to 176% in the corresponding
period of 1998 reflecting investments the Company made in key-
customer accounts and reflecting the higher percentage of
engineering service revenues derived from government customers in
1998, where margins tend to be lower than for commercial
customers.
Research and Development
Research and development expenses totaled $478,000 in the quarter
ended June 30, 1998, as compared with $474,000 in the year-
earlier period. For the six months ended June 30, 1998, these
costs totaled $922,000, as compared with $750,000 in the year-
earlier period.
The increase in such costs reflects the net of increased
investment in product development in the Company's TrafficVision
and InterSite product lines and the decrease of product
development relating to the Prism products. Product development
in the Company's TrafficVision and InterSite product lines
totaled $818,000 in the six months ended June 30, 1998, as
compared with such product development in the year-earlier period
of $392,000.
Selling and Marketing
Selling and marketing costs totaled $520,000 in the quarter ended
June 30, 1998, as compared with $578,000 of such costs in the
corresponding quarter of the prior fiscal year. For the six
months ended June 30, 1998, selling and marketing costs totaled
$940,000, as compared with $1,040,000 of selling and marketing
costs in the year-earlier period, including $79,000 of costs
deferred from the six months ended December 1996 and recognized
in March 1997 at the time the customer license was signed.
The decrease in selling and marketing costs in both the quarter
and six months ended June 30, 1998 compared to the corresponding
periods of the prior year, reflects the net of a decrease in
Prism selling costs and an increase in such spending in the two
other product groups: Prism selling costs totaled $272,000 and
$500,000 during the June 1998 quarter and six months,
respectively, as compared with $389,000 and $714,000 in the
corresponding periods of the prior year, respectively. Selling
costs relating to the Company's TrafficVision product and Ni1000
Development System totaled $181,000 and $287,000 in the quarter
and six months ended June 1998, respectively, as compared with
$144,000 and $240,000 in the corresponding periods of the prior
fiscal year, respectively. Selling costs associated with
InterSite totaled $68,000 and $153,000 in the first quarter and
six months of 1998, respectively, compared with $45,000 and
$88,000 in the year-earlier periods, respectively.
General and Administrative
General and administrative expenses totaled $328,000 in the
quarter ended June 30, 1998, as compared with $338,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 30, 1998, general and administrative costs
totaled $623,000, as compared with $693,000 of such costs in the
year-earlier period, including $76,000 of costs deferred from the
six months ended December 1996 and recognized in March 1997 at
the time the customer license was signed.
Year 2000
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Management has initiated a Company-wide program to assess the
Company's internal-use computer systems and applications, as well
as the Company's product offerings for the year 2000 readiness.
The Company expects to incur internal staff costs as well as
other expenses related to system enhancements and product
modifications for the year 2000. As the Company's internal-use
computer systems and products have been principally designed and
developed within the past ten years, the Company expects that
they are currently year 2000 compliant. However, the Company has
not yet completed its testing and analysis. The total cost to be
incurred by the Company for all year 2000 related projects is not
expected to have a material impact on the future results of
operations. However, there could be a material adverse effect on
the results of operations of the Company if any required system
enhancements and product modifications for the year 2000 prove
not to be effective.
Investment in Product Development and Marketing
Expenses relating to the Company's PRISM and Fraud Detection
System exceeded revenues by $83,000 in the six months ended June
30, 1998. The Company has expanded its customer base, which is
now reviewing over 100 million cardholder accounts. PRISM is
gaining market share through direct sales efforts and strategic
partner alliances with ACI, CSK and Europay. Nestor's new
customers include such financial institutions and regional
processors as Marshall & Iseley, Honor Technologies, Nippon
Shinpan Co. and Mellon Network Services, with an installation
underway at Bank of Nova Scotia.
Expenses of the Company's Intelligent Sensors Division, which is
responsible for the development and marketing of the
TrafficVision products exceeded revenues in the six months ended
June 30, 1998 by $588,000. The Company extended its contract
with JPL and made initial commercial deliveries in 1997. In 1998
the Company has won contracts to adapt TrafficVision to a
railroad crossing application and to deploy a version of
TrafficVision for automated enforcement of traffic light
violations.
The largest investment made by the Company in the six months
ended June 30, 1998 was in its InterSite product. Nestor
InterSite enables customers to understand individual on-line
customers as they visit Web sites and to dynamically present
personalized content to those visitors. InterSite has been
adopted by industry leaders Lycos, Inc. and Edward Jones. Costs
associated with this effort exceeded revenues by $590,000 in the
six months ended June 1998 due, in part, to the use of outside
consultants to assist in initial product deliveries.
Net Income Per Share
During the quarter ended June 30, 1998, the Company experienced a
loss of $1,162,000 as compared with net income of $555,000 in the
corresponding period of the prior fiscal year. After allowance
for preferred stock dividends of $38,000 in the quarter ended
June 30, 1998, the Company incurred a net loss available for
common stock of $1,200,000, or $.07 per share. In the year-
earlier period, after allowance for preferred stock dividends of
$125,000, the Company generated net income available for common
stock of $430,000, or $.03 per share.
For the six months ended June 30, 1998, the Company experienced a
loss of $1,901,000 as compared with net income of $91,000 in the
corresponding period of the prior fiscal year. After allowance
for preferred stock dividends of $151,000 and $228,000 in the six
months ended June 30, 1998 and 1997, respectively, the net loss
available for common stock was $2,052,000 and $137,000,
respectively.
NESTOR, INC.
FORM 10-Q - June 30, 1998
Item 6 Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K: On May 6, 1998, the
Corporation filed with the Securities and Exchange
Commission a current report on Form 8-K dated April
28, 1998.
FORM 10-Q
NESTOR, INC.
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.
NESTOR, INC.
(REGISTRANT)
DATE: August 14, 1998 By: /S/ Nigel P. Hebborn
Chief Financial Officer
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