- -
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 September 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: 17,473,827 shares
outstanding as of September 30, 1998
NESTOR, INC.
FORM 10Q - September 30, 1998
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30, 1998 and 1997
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 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>
Nine Months Ending Sept. 30, Quarter Ending Sept. 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 1,229,843 $3,335,500 $ 343,104 $ 1,031,645
Engineering services 625,634 1,370,455 159,230 468,389
Tangible product sales 129,343 193,534 --- 92,310
Total revenues 1,984,820 4,899,489 502,334 1,592,344
Operating Expenses:
Engineering services 1,101,334 1,137,018 280,475 351,733
Tangible product sales 50,005 66,154 --- 46,222
Research and development 1,588,535 1,151,218 666,757 401,713
Selling and marketing
expenses 1,346,711 1,596,874 406,499 556,450
General and
administrative expenses 954,813 976,939 331,534 284,347
Total operating
expenses 5,041,398 4,928,203 1,685,265 1,640,465
Loss from operations (3,056,578) (28,714) (1,182,931) (48,121)
Other income (expenses) (16,245) 57,830 10,855 (13,838)
Income (loss) for the period
before income taxes (3,072,823) 29,116 (1,172,076) (61,959)
Income taxes --- --- --- ---
Net Income (Loss)
for the Period $(3,072,823) $ 29,116 $(1,172,076) $ (61,959)
Loss Per Share:
Net Income (Loss)
for the Period $(3,072,823) $ 29,116 $(1,172,076) $ (61,959)
Dividends accrued on
preferred stock 151,397 339,892 --- 111,320
Net Loss Available for
Common Stock $(3,224,220) $ (310,776) $(1,172,076) $ (173,279)
Loss Per Share:
Basic and diluted $ (0.22) $ (0.03) $ (0.07) $ (0.02)
Shares Used in Computing
Loss Per Share:
Basic and diluted 14,507,411 9,205,998 17,441,206 9,336,312
</TABLE>
The notes to the financial statements are an integral part of this statement.
<PAGE>
<TABLE>
Nestor, Inc.
Consolidated Balance Sheets
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,418,013 $ 386,639
Accounts receivable, net of
allowance for doubtful accounts 338,853 557,212
Unbilled contract revenue 364,877 298,803
Other current assets 241,259 232,492
Total current assets 3,363,002 1,475,146
Noncurrent assets:
Property and equipment at cost -
net of accumulated depreciation 380,382 261,463
Deferred development costs 524,774 574,752
Intangible assets -
net of accumulated amortization 197,258 295,887
Other assets 6,963 5,783
Total Assets $ 4,472,379 $ 2,613,031
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and
accrued expenses $ 1,041,026 $ 920,833
Deferred income 253,470 408,232
Total current liabilities 1,294,496 1,329,065
Noncurrent liabilities:
Long term obligations
under capital leases 35,343 10,220
Total liabilities 1,329,839 1,339,285
Redeemable preferred stock
(see footnote) --- 5,792,787
Stockholders' equity (deficit):
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series B - 365,000 shares at
September 30, 1998 (liquidation
value $365,000 - $1.00 per share)
and 1,445,000 shares at
December 31, 1997 (liquidation value
$1,445,000 - $1.00 per share) 365,000 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; 17,473,827
shares at September 30, 1998
and 9,403,987 shares at
December 31, 1997 174,738 94,040
Warrants and options 603,846 523,984
Additional paid-in capital 24,499,111 12,579,920
Retained deficit (22,500,155) (19,427,332)
Total stockholders'equity (deficit) 3,142,540 (4,519,041)
Total Liabilities and
Stockholders' Equity (Deficit) $ 4,472,379 $ 2,613,031
</TABLE>
The notes to the financial statements are an integral part of this statement.
<PAGE>
<TABLE>
Nestor, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Nine Months Ending
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,072,823) $ 29,116
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 231,447 137,425
Expenses charged to operations relating to
options, warrants and capital transactions 79,863 135,063
Discount on payment of vendor obligation --- (100,000)
Changes in assets and liabilities:
Decrease in accounts receivable 218,359 257,073
(Increase) in unbilled contract revenue (66,075) (841,368)
Decrease in deferred development costs --- 364,405
(Increase) decrease in other assets (9,947) 62,697
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 90,173 (187,781)
Increase (decrease) in deferred income (154,762) 86,570
Net cash used by operating activities (2,683,765) (56,800)
Cash flows from investing activities:
Purchase of property and equipment (112,096) (51,283)
Net cash used by investing activities (112,096) (51,283)
Cash flows from financing activities:
Repayment of obligations under capital leases (34,520) (7,099)
Redemption of Preferred Series D stock (41,424) ---
Proceeds from issuance of common stock - net 4,972,249 55,875
Payment of dividends on preferred stock (69,070) ---
Net cash provided by financing activities 4,827,235 48,776
Net change in cash and cash equivalents 2,031,374 (59,307)
Cash and cash equivalents - beginning of period 386,639 774,457
Cash and cash equivalents - end of period $ 2,418,013 $ 715,150
Supplemental cash flows information
Interest paid $ 17,221 $ 1,347
Income taxes paid $ 37,500 $ ---
</TABLE>
The notes to the financial statements are an integral part of this statement.
<PAGE>
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 nine months ended September
30, 1998 and 1997; (b) the consolidated statements of
cash flows for the nine months ended September 30, 1998
and 1997; and (c) consolidated financial position at
September 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."
9/30/98 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 - 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 issued as of
June 30, 1998 (Note 4).
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 nine months ended September 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 cash equivalents of approximately
$2,418,000 at September 30, 1998, as compared with $3,466,000 at
June 30, 1998, and $386,000 at December 31, 1997. At September
30, 1998, the Company had working capital of $2,069,000 as
compared with working capital of $146,000 at December 31, 1997.
The Company's net worth at September 30, 1998, was $3,143,000, as
compared with a shareholders' deficiency of $4,519,000 at
December 31, 1997. The increase in net worth results primarily
from: the sale of newly issued common stock on April 29, 1998 to
Transaction Systems Architects, Inc. ("TSAI") and the conversion
of redeemable preferred stock to common shares, offset by the
current period reported net loss. 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
September 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
$253,000 at September 30, 1998, as compared with $408,000 at
December 31, 1997.
Future commitments
During the quarter ended September 30, 1998, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $18,000. 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
$487,500 of the chips 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 September 30, 1998, the Company realized
revenues totaling $502,000 and expenses of $1,685,000, which
resulted in an operating loss for the quarter of $1,183,000. In
the corresponding period of the prior year, revenues totaled
$1,592,000 and expenses totaled $1,640,000, producing a loss from
operations of $48,000.
For the nine months ended September 30, 1998, revenues totaled
$1,985,000, expenses totaled $5,041,000, and the Company
experienced a loss from operations of $3,057,000. In the
corresponding period of the prior fiscal year, the Company
realized revenues of $4,899,000 and expenses of $4,928,000,
producing an operating loss of $29,000.
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, $487,500 in the
quarter ended September 30, 1997, and $487,500 in the quarter
ended December 31, 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 obligation to Sligos. 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 September 30, 1998, revenues
decreased $1,090,000 to $502,000 from $1,592,000 in the quarter
ended September 30, 1997, including revenues under the license
amendment with ACI. For the nine months ended September 30,
1998, revenues totaled $1,985,000, as compared with total
revenues in the year-earlier period of $4,899,000, which included
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 September 30, 1998, as compared with $1,032,000 in the same
quarter of the prior year. For the nine months ended September
30, 1998, total product-licensing revenues were $1,230,000, as
compared with $3,336,000 of such revenues in the year-earlier
period.
Software licensing revenues from the Company's Prism product line
totaled $332,000 in the third quarter of 1998, as compared with
$1,049,000 in the corresponding quarter of the prior year. Prism
licensing revenues totaled $1,189,000 in the nine months ended
September 30, 1998, as compared with $3,229,000 of such revenues
in the corresponding period of the prior fiscal year.
The decrease in revenues from the prior-year for the quarter and
year-to-date is attributable primarily to two factors: the non-
recurrence of $480,000 of revenues realized in the second quarter
relating to the Sligos transaction; and the non-recurrence of
$1,512,000 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 and
installations at financial institutions as a result of increased
merger and acquisition activity and Year 2000 systems compliance
initiatives.
Engineering Services
During the quarter ended September 30, 1998, revenues from
engineering contracts decreased to $159,000 from $468,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1998, revenues from engineering
contracts totaled $626,000, as compared with $1,370,000 of such
revenues in the corresponding period of the prior fiscal year,
which included $550,000 of revenues relating to the license
agreement signed on March 28, 1997. Excluding those revenues,
engineering services revenues in the nine months ended September
30, 1998 decreased $194,000 over the year-earlier period.
Revenues in the third quarter of 1998 relating to customer-funded
modifications and installations of the Company's PRISM Fraud
Detection System totaled $148,000, a decrease of $297,000 over
year-earlier revenues of $445,000. For the nine months ended
September 30, 1998, such revenues totaled $496,000, as compared
with year-earlier revenues totaling $1,303,000, 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 September 30,
1998, revenues from the Company's government contracts totaled
$11,000, as compared to revenues of $22,000 in the year earlier
period. Revenues from government contracts in the nine months
ended September 30, 1998, totaled $89,000, as compared with
$66,000 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 $0 in the quarter
ended September 30, 1998, as compared with $19,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1998, revenues from the Ni1000
Development System totaled $57,000, a decrease of $51,000 from
year-earlier revenues of $108,000.
The Company is continuing its development of the TrafficVision
product, which incorporates the Ni1000 Recognition Accelerator
Chip (see "Net Investment in Product Development and Marketing by
Product Line," below). During the quarters ended September 30,
1998 and 1997, TrafficVision revenues totaled $0 and $73,000,
respectively. During the nine months ended September 30, 1998,
TrafficVision revenues totaled $73,000, as compared with $85,000
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 $1,685,000 in the quarter
ended September 30, 1998, an increase of $45,000 from total
operating costs of $1,640,000 in the corresponding quarter of the
prior fiscal year. For the nine months ended September 30, 1998,
total operating expenses were $5,041,000, as compared with
$4,928,000 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 nine 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 September 30, 1998, the Company
paid $922,000 for wages and consulting fees, an increase of
$97,000 from total wages and consulting fees of $825,000 paid in
the corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1998, wages and consulting fees
totaled $2,796,000, as compared with $2,354,000 in the year-
earlier period.
The increase in labor costs reflects the increase in staffing;
full-time employees, including consultants, totaled 52 at
September 30, 1998, as compared with 42 at September 30, 1997.
Engineering Services
Costs related to engineering services totaled $280,000 in the
quarter ended September 30, 1998, as compared to $352,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1998, engineering services costs
totaled $1,101,000, as compared with $1,137,000 of such costs in
the corresponding period of the prior fiscal year.
As a percentage of engineering revenues, these costs increased
from 83% last year to 176% this year reflecting investments the
Company made in key-customer accounts and unfunded pilot projects
for specific customer opportunities.
Research and Development
Research and development expenses totaled $667,000 in the quarter
ended September 30, 1998, as compared with $402,000 in the year-
earlier period. For the nine months ended September 30, 1998,
these costs totaled $1,589,000, as compared with $1,151,000 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. Product development in the
Company's TrafficVision and InterSite product lines totaled
$608,000 and $674,000, respectively, in the nine months ended
September 30, 1998, as compared with such product development in
the year-earlier period of $432,000 and $237,000, respectively.
Product development relating to the Prism products in the nine
months ended September 30, 1998, totaled $278,000 as compared
with $482,000 of product development costs in the corresponding
period of the prior fiscal year.
Effective November 7, 1998, the Company has ceased further
research and development investment in the InterSite product and
laid-off all employees and consultants related to that effort.
Any future marketing or development of the InterSite product has
been transferred to the Company's financial services division.
Selling and Marketing
Selling and marketing costs totaled $407,000 in the quarter ended
September 30, 1998, as compared with $556,000 of such costs in
the corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1998, selling and marketing costs
totaled $1,347,000 as compared with $1,597,000 of selling and
marketing costs in the year-earlier period, which included
$79,000 of costs deferred from the nine 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 nine months ended September 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
$274,000 and $774,000 during the September 30, 1998 quarter and
nine months, respectively, as compared with $351,000 and
$1,065,000 in the corresponding periods of the prior year,
respectively. The decrease results from a combination of an
increased reliance on third party marketing partners, including
ACI and CSK, and reduced commission expense related to lower
revenues. Selling costs relating to the Company's TrafficVision
product and Ni1000 Development System totaled $107,000 and
$395,000 in the quarter and nine months ended September 30, 1998,
respectively, as compared with $178,000 and $419,000 in the
corresponding periods of the prior fiscal year, respectively.
Selling costs associated with InterSite totaled $25,000 and
$178,000 in the first quarter and nine months of 1998,
respectively, compared with $26,000 and $114,000 in the year-
earlier periods, respectively.
General and Administrative
General and administrative expenses totaled $332,000 in the
quarter ended September 30, 1998, as compared with $284,000 in
the corresponding quarter of the prior fiscal year. Current
quarter expenses include approximately $70,000 of non-recurring
charges including costs associated with relocation expenses for
an executive officer. For the nine months ended September 30,
1998, general and administrative costs totaled $955,000, as
compared with $977,000 of such costs in the year-earlier period,
including $76,000 of costs deferred from the nine 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. As a result, 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.
Management has assessed the Company's internal-use computer
systems and applications, as well as the Company's product
offerings for the year 2000 readiness. The Company is incurring
internal staff costs as well as other expenses related to product
modifications and system enhancements for the year 2000.
Internal engineering labor to update our product offerings is
estimated at 500 hours and is scheduled for completion by April
1999. The Company's internal-use computer systems and products
have been principally designed and developed within the past ten
years and substantially all were found to be year 2000 compliant.
The remaining systems are currently being tested to identify
those systems that would be affected by year 2000 non-compliance.
The Company believes its internal systems will not pose
significant operating issues as a result of year 2000.
In addition to the Company's internal risks, the Company is
dependent upon a number of third parties for information, goods
and services. These include financial institutions, suppliers
and service providers. If these third parties experience
failures in their computer systems or equipment due to year 2000
non-compliance, it could seriously affect the Company's business
operations. The Company is in the process of contacting all of
its significant external business partners to determine the
extent to which the Company is vulnerable to their failure.
As a contingency plan, the Company will identify, if available, a
secondary source for all critical third party providers. No
costs have been incurred yet to address this issue. While the
cost of obtaining year 2000 compliance is not known at this time,
the Company feels that the cost will not be material.
Net Investment in Product Development and Marketing by Product
Group
Direct expenses relating to the Company's PRISM and Fraud
Detection System exceeded revenues by $309,000 in the nine months
ended September 30, 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.
Direct expenses of the Company's Traffic Systems subsidiary,
which is responsible for the development and marketing of the
TrafficVision products, exceeded revenues in the nine months
ended September 30, 1998 by $990,000. 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 called CrossingGuard for automated control of
intersections using intelligent video, including enforcement of
traffic light violations and a delayed green-light safety
feature. The Company is currently evaluating opportunities to
separately finance this subsidiary and its product rollout
expenses.
The Company's Interactive subsidiary product called InterSite
enables customers to understand individual on-line customers as
they visit Web sites and to dynamically present personalized
content to those visitors. Costs associated with this effort
exceeded revenues by $813,000 in the nine months ended September
30, 1998 due, in part, to the use of outside consultants to
assist in initial product deliveries. Effective November 7, 1998,
the Company has ceased further research and development
investment in the InterSite product and laid-off all employees
and consultants related to that effort. Any future marketing or
development of the InterSite product has been transferred to the
Company's financial services division.
Net Income Per Share
During the quarter ended September 30, 1998, the Company
experienced a loss of $1,172,000 or $.07 per share as compared
with a net loss of $62,000 in the corresponding period of the
prior fiscal year. In the year-earlier period, after allowance
for preferred stock dividends of $111,000, the Company generated
a net loss available for common stock of $173,000, or $.02 per
share.
For the nine months ended September 30, 1998, the Company
experienced a loss of $3,073,000 as compared with net income of
$29,000 in the corresponding period of the prior fiscal year.
After allowance for preferred stock dividends of $151,000 and
$340,000 in the nine months ended September 30, 1998 and 1997,
respectively, the net loss available for common stock was
$3,224,000 ($.22 per share) and $311,000 ($.03 per share),
respectively.
NESTOR, INC.
FORM 10-Q - September 30, 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: November 13, 1998 By: /s/ Nigel P. Hebborn
Chief Financial Officer
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