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 March 31, 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: 9,486,237 shares
outstanding as of March 31, 1998
NESTOR, INC.
FORM 10Q - March 31, 1998
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1998 and 1997
Consolidated Balance Sheet (Unaudited)
March 31, 1998 and December 31, 1997
Statement of Consolidated Cash Flows (Unaudited)
Three Months Ended March 31, 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
Nestor, Inc.
Consolidated Statements of Operations
Quarter Ending
March 31, 1998 March 31, 1997
Revenues:
Software licensing $ 543,841 $ 525,994
Engineering services 308,308 694,325
Tangible product sales 79,666 20,057
Total Revenue 931,815 1,240,376
Operating Expenses:
Engineering services 439,194 583,687
Tangible product sales 34,306 6,084
Research and development 444,108 275,809
Selling and marketing expenses 420,085 462,727
General and administrative
expenses 295,772 354,917
Total costs and expenses 1,633,465 1,683,224
Loss from operations (701,650) (442,848)
Other expense (29,684) (21,308)
Loss for the period
before income taxes (731,333) (464,156)
Income taxes 7,500 ---
Net Loss for the period $ (738,833) $(464,156)
(Loss) Per Share:
Net (Loss) for the Period $ (738,833) $(464,156)
Dividends accrued on
preferred stock 113,801 103,163
(Loss) Applicable
to Common Stock $ (852,635) $(567,319)
(Loss) Per Share:
Basic and diluted $ (0.09) $ (0.06)
Shares Used in Computing
(Loss) Per Share:
Basic and diluted 9,438,987 8,936,610
The notes to the financial statements are an
integral part of this statement.
Nestor, Inc.
Consolidated Balance Sheets
3/31/98 12/31/97
Current assets:
Cash and cash equivalents $ 132,103 $ 386,639
Accounts receivable, net of
allowance for doubtful accounts 395,229 557,212
Unbilled contract revenue 589,310 298,803
Other current assets 269,735 232,492
Total current assets 1,386,377 1,475,145
Non current assets:
Property and equipment at cost -
net of accumulated depreciation 333,513 261,463
Deferred development costs 574,752 574,752
Intangible assets -
net of accumulated amortization 263,011 295,887
Other assets 5,783 5,783
Total assets $ 2,563,436 $ 2,613,031
Liabilities and Stockholders Equity (Deficit)
Current liabilities:
Line of credit $ 250,000 $ ---
Accounts payable and other
current liabilities 1,291,616 920,833
Deferred income 438,287 408,232
Total current liabilities 1,979,903 1,329,065
Noncurrent liabilities:
Long terms obligations
under capital leases 53,471 10,220
Total liabilities 2,033,373 1,339,285
Redeemable preferred stock --- 5,792,787
Stockholders' equity (deficit):
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series B - 1,365,000 shares at
March 31, 1998 (liquidation
value $1,365,000 - $1.00
per share)and 1,445,000 shares
at December 31, 1997
(liquidation value $1,445,000 -
$1.00 per share) 1,365,000 1,445,000
Series D - 170,871 shares
at March 31, 1998 (liquidation
value $269,833 - $1.50 per
share plus accrued dividends)
and 170,871 shares at
December 31, 1997 (liquidation
value $265,347 - $1.50 per
share plus accrued dividends) 269,833 265,347
Series E, F, G and H - preferred
stock 4,846 shares at March 31,
1998 and December 31, 1997
(liquidation value $1,000
per share plus accrued dividends) 5,866,237 ---
Common Stock, $.01 par value,
authorized 30,000,000 shares;
issued and outstanding; 9,486,237
shares at March 31, 1998 and
9,403,987 shares at December 31,
1997 94,862 94,040
Warrants and options 550,604 523,984
Additional paid-in capital 12,549,692 12,579,921
Retained (deficit) (20,166,166) (19,427,332)
Total stockholders'
equity (deficit) 530,062 (4,519,041)
Total Liabilities and
Stockholders' Equity (Deficit) $ 2,563,436 $ 2,613,031
The notes to the financial statements are
an integral part of this statement.
Nestor, Inc.
Consolidated Statements of Cash Flows
Quarter Ending
March 31, 1998 March 31, 1997
Cash flows from operating activities:
Net loss $ (738,833) $ (464,155)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization 60,490 23,891
Expenses charged to
operations relating to
options, warrants and
capital transactions 26,621 26,621
Changes in assets
and liabilities:
Decrease in accounts
receivable 161,983 128,997
(Increase) in unbilled
contract revenue (365,305) (495,049)
Decrease in deferred
development costs --- 364,405
Decrease (increase)
in other assets (37,244) 16,040
Increase (decrease)
in accounts payable,
and other current
liabilities 337,722 (37,460)
Increase in deferred income 104,853 3,308
Net cash used by
operating activities (449,714) (433,402)
Cash flows from investing activities:
Purchase of property and
equipment (10,000) (17,161)
Net cash used by
investing activities (10,000) (17,161)
Cash flows from financing activities:
Repayment of obligations
under capital leases (13,352) (3,189)
Proceeds from line of credit 250,000 ---
Proceeds from issuance of
common stock 4,395 ---
Payment of dividends on
preferred stock (35,865) ---
Net cash used by
financing activities 205,178 (3,189)
Net change in cash
and cash equivalents (254,536) (453,752)
Cash and cash equivalents
- beginning of period 386,639 774,457
Cash and cash equivalents
- end of period $ 132,103 $ 320,705
Supplemental cash flows
information
Interest paid $ 4,969 $ 396
Income taxes paid $ 30,000 $ ---
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 months ended March 31, 1998 and
1997; (b) the consolidated statements of cash flows for
the three months ended March 31, 1998 and 1997; and (c)
consolidated financial position at March 31, 1998 have
been made. The accompanying quarterly 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. Because
Nestor is no longer required to redeem the stock, it is
classified within equity on the March 31, 1998, balance
sheet in the aggregate amount of $5,866,237. See also,
"Note 3 - Subsequent event."
3/31/98 12/31/97
Series E, par value $1.00 per
share,1,444 shares outstanding and
$305,577 of accumulated dividends
December 31, 1997. --- $1,749,577
Series F, par value $1.00 per
share, 599 shares outstanding and
$95,821 of accumulated dividends at
December 31, 1997 --- 694,821
Series G, par value $1.00 per
share, 777 shares outstanding and
$116,650 of accumulated dividends
at December 31, 1997 --- 893,650
Series H, par value $1.00 per
share, 2,026 shares outstanding and
$428,739 of accumulated dividends
at December 31, 1997. --- 2,454,739
TOTAL: --- $5,792,787
Note 3-Subsequent event:
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. Concurrent with this transaction, Wand Partners
agreed to convert its $5.8 million of convertible
preferred stock to common stock.
Note 4-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 is not
expected to have a significant impact on the Company's
financial position or 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 ended March 31, 1998.
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.
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
$132,000 at March 31, 1998, as compared with $386,000 at December
31, 1997, and $715,000 at September 30, 1997. At March 31, 1998,
the Company had a working capital deficiency of $594,000 as
compared with working capital of $146,000 at December 31, 1997.
The Company's net worth at March 31, 1998, was $530,000, as
compared with negative net worth of $4,519,000 at December 31,
1997. The increase in net worth results from the
reclassification to equity of $5,800,000 of redeemable preferred
stock. On March 31, 1998, the Company and Wand Partners, owner
of the redeemable 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, Nestor sold to Transaction Systems Architects,
Inc. ("TSAI") $5,000,000 of newly issued 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 revenues will generate
sufficient liquidity, when combined with its liquid assets as at
March 31, 1998 and the proceeds of the sale of stock to TSAI, 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
$438,000 at March 31, 1998, as compared with $408,000 at December
31, 1997.
Future commitments
During the quarter ended March 31, 1998, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $10,000. 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 during the third
quarter 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 March 31, 1998, the Company realized a 25%
decrease in revenues compared to the prior year and a 3% decrease
in expenses resulting in a 58% increase in the loss from
operations.
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 will be amortized
over the remaining life of the license. Excluding the effects of
this license from the first quarter 1997 results, revenues in the
March 1998 quarter increased 35% over the prior year while
expenses increased 24%, yielding a 12% increase in the operating
loss.
Revenues
The Company's revenues arise from licensing of the Company's
products and technology, from the sale of tangible products, and
from contract engineering services and are discussed separately
below. During the quarter ended March 31, 1998, revenues
decreased $308,000 to $932,000 from $1,240,000 in the quarter
ended March 31, 1997, including revenues from the license signed
March 28, 1997.
Engineering Services
During the quarter ended March 31, 1998, revenues from
engineering contracts decreased $386,000 to $308,000 from
$694,000 in the corresponding quarter of the prior fiscal year.
Prior year revenues included $550,000 of engineering revenues
relating to the license signed in March 1997 discussed above.
Revenues relating to the customer-funded modification of Nestor's
Fraud Detection System totaled $245,000, a decrease of $419,000
over year-earlier revenues of $664,000. Revenues associated with
the license signed in March 1997 were included in Engineering
services because of the significant level of customization
required by the customer. Excluding those revenues, engineering
services revenues in the first quarter of 1998 increased $131,000
to $245,000 from $114,000 of such revenues in the year-earlier
period.
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 March 31,
1998, the Company recognized revenues totaling $63,000 under its
government contracts, as compared with $30,000 of such revenues
in the year-earlier period.
Software Licensing
Product-licensing revenues totaled $544,000 in the quarter ended
March 31, 1998, as compared with $526,000 in the same quarter of
the prior year. Software licensing revenues from the Company's
Prism product line totaled $526,000 in the first quarter of 1998,
as compared with $519,000 in the corresponding quarter of the
prior 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 $32,000 in the
quarter ended March 31, 1998, as compared with $9,000 in the
corresponding quarter of the prior fiscal year.
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 March 31 1998 and 1997,
TrafficVision revenues totaled $48,000 and $12,000, respectively.
Operating Expenses
Total operating expenses - consisting of engineering, research
and development, selling and marketing, and general and
administrative expenses - amounted to $1,633,000 in the quarter
ended March 31, 1998, a decrease of $50,000 from total operating
costs of $1,683,000 in the corresponding quarter of the prior
fiscal year.
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 March 31, 1998, the Company paid
$974,000 for wages and consulting fees, an increase of $303,000
from total wages and consulting fees of $ 671,000 paid in the
corresponding quarter of the prior fiscal year. The increase in
labor costs reflects the increase in staffing: full-time
employees, including consultants, totaled 48 at March 31, 1998,
as compared with 41 at March 31, 1997.
Engineering Services
Costs related to engineering services totaled $439,000 in the
quarter ended March 31, 1998, as compared to $584,000 in the
corresponding quarter of the prior fiscal year. As a percentage
of revenues, these costs increased from 84% last year to 142%
this year 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 $444,000 in the quarter
ended March 31, 1998, as compared with $276,000 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 $391,000 in the quarter ended March 31, 1998, as
compared with such product development in the year-earlier period
of $119,000. Product development relating to the Prism products
in the quarter ended March 31, 1998, totaled $53,000 as compared
with $157,000 of product development costs in the first quarter
of 1997.
Selling and Marketing
Selling and marketing costs totaled $420,000 in the quarter ended
March 31, 1998. In the corresponding quarter of the prior fiscal
year, selling and marketing costs totaled $462,000, 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. Excluding the costs deferred from December 1996, the
increase in selling and marketing costs 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
$228,000 during the March 1998 quarter as compared with $246,000
in the prior year; selling costs relating to the Company's
TrafficVision product and Ni1000 Development System totaled
$106,000 in 1998 as compared with $95,000 in the quarter ended
March 1997; and selling costs associated with InterSite totaled
$86,000 in the first quarter of 1998 compared with $43,000 in the
year-earlier period.
General and Administrative
General and administrative expenses totaled $296,000 in the
quarter ended March 31, 1998, as compared with $355,000 in the
corresponding quarter of the prior fiscal year, 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
Investment in Product Development and Marketing
Revenues relating to the Company's PRISM and Fraud Detection
System exceeded expenses by $146,000 in the quarter ended March
31, 1998. The Company has installed its products at Mellon Bank,
GE Consumer Credit Financial Services, Banc One, Europay
International (an association of 700 banks in Europe), and with a
European financial-services company. In September 1996, the
Company signed a license agreement with Applied Communications,
Inc. ("ACI") enabling ACI to integrate Nestor's products with
certain products of ACI. ACI provides authorization and
transaction-processing software to nearly 500 financial
institutions worldwide. This agreement was amended in April 1997
to broaden ACI's marketing rights. In March 1997, the Company
signed an agreement with Total Systems, Inc., which, as one of
the world's largest credit, debit, commercial and private-label
card processing companies, represents more than 84 million
cardholder accounts.
Expenses of the Company's Intelligent Sensors Division, which is
responsible for the development and marketing of the
TrafficVision products exceeded revenues in the quarter ended
March 31, 1998 by $218,000. 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 first quarter
of 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 $352,000 in the quarter ended March
31, 1998 due, in part, to the use of outside consultants to
assist in initial product deliveries.
Net Income Per Share
During the quarter ended March 31, 1998, the Company experienced
a loss of $739,000 as compared with a loss of $464,000 in the
corresponding period of the prior fiscal year. After allowance
for preferred stock dividends of $114,000 and $103,000 for the
three months ended March 31, 1998 and 1997, respectively, the net
loss available for common stock was $853,000 and $567,000,
respectively. During the quarter ended March 31, 1998, loss per
share available for common stock was $.09 per share, as compared
with a loss per share of $.06 in the corresponding period of the
prior fiscal year.
During the quarter ended March 31, 1998, there were outstanding a
weighted average of 9,438,987 shares of common stock as compared
with 8,936,610 during the corresponding quarter of the previous
year.
As a result of the equity issuance and preferred stock conversion
on April 29, 1998, the number of shares of common stock
outstanding increased to 16,253,270 as of that date.
NESTOR, INC.
FORM 10-Q - March 31, 1998
Item 6 Exhibits and reports on Form 8-K
(a)Exhibits - None
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: May 14, 1998 By: /s/Nigel P. Hebborn
Chief Financial Officer
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