-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EssmngenDWJUmKRnOcSRjJiI16IlJSKSCVMQeRhLkVveIlxnqsSqNABRQccwl3e2 LfeQk/3amkSqYaUa3uQvyg== 0000720851-98-000016.txt : 19981116 0000720851-98-000016.hdr.sgml : 19981116 ACCESSION NUMBER: 0000720851-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NESTOR INC CENTRAL INDEX KEY: 0000720851 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133163744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12965 FILM NUMBER: 98747429 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQ CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4013319640 MAIL ADDRESS: STREET 1: 1 RICHMOND SQUARE CITY: PROVIDENCE STATE: RI ZIP: 02906 10-Q 1 - - 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 Nestor, Inc. Consolidated Statements of Operations
Nine Months Ending Sept. 30, Quarter Ending Sept. 30, 1998 1997 1998 1997 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
The notes to the financial statements are an integral part of this statement. Nestor, Inc. Consolidated Balance Sheets
Sept. 30, 1998 Dec. 31, 1997 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
The notes to the financial statements are an integral part of this statement. Nestor, Inc. Consolidated Statements of Cash Flows
Nine Months Ending September 30, 1998 1997 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 $ ---
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 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 EX-27 2
5 9-MOS DEC-31-1998 SEP-30-1998 2,418,013 0 338,853 0 0 3,363,002 1,672,729 1,292,347 4,472,379 1,294,496 0 0 365,000 174,738 0 4,472,379 129,343 1,984,820 50,005 5,041,398 16,245 0 0 0 0 0 0 0 0 (3,072,823) (.22) (.22)
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