Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended December 31, 1997
[ ] 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, Rhode Island 02906
(Address of principal executive offices)(Zip Code)
(401) 331-9640
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Exhibit Index is on Page _________
The aggregate market value of the voting stock held by non-
affiliates of the registrant, based on the average bid and asked
prices of such stock on March 25, 1998 was $13,847,772. The
number of shares outstanding of the Registrant's Common Stock at
March 25, 1998 was 9,466,237.
DOCUMENTS INCORPORATED BY REFERENCE.
Information to be included in registrant's definitive proxy or
information statement to be filed with the Commission not later
than 120 days following the end of registrant's fiscal year is
incorporated by reference in Part III of the Form 10-K.
ITEM 1. Business
Prospective Statements
The following discussion contains prospective statements
regarding Nestor, Inc. ("Nestor" or "the Company"), 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.
General
Nestor, Inc. designs, develops, markets, and supports intelligent
software solutions for mission-critical decision applications in
real-time environments. Nestor employs proprietary neural
network predictive models to convert existing data and business
experiences into meaningful recommendations and actions. The
Company has leveraged its neural-network software architecture
across a wide range of markets, including financial-institution
credit/debit card fraud and real-time traffic-control systems.
In addition, the Company believes that its technology and
software architecture are well suited for intelligent decision
applications addressing a variety of other markets, including
health care payments, long distance and mobile phone fraud,
database marketing, and intranet/internet information discovery
applications.
Background
The Company was incorporated under the laws of the State of
Delaware on March 21, 1983, in order to exploit, develop and
succeed to certain patent rights and know-how relating to the
Nestor Learning SystemT ("NLS"), which the Company acquired in
1983 from its predecessor Nestor Associates, a limited
partnership. NLS is an adaptive or self-organizing software
system, commonly referred to as a neural network, that is capable
of extracting the salient features of input patterns without
being told what features to look for and of subsequently
recognizing similar patterns identified by such features. Thus,
NLS can be said to learn from its experience.
On January 1, 1997, Nestor, Inc. formed two wholly owned
subsidiaries: Nestor Intelligent Sensors, Inc. (IS) and Nestor
Interactive, Inc. (Interactive). IS develops and markets the
TrafficVision and Ni1000 product lines while Interactive is
developing InterSite, an internet commerce solution.
Nestor Products
Nestor offers complete application-software solutions that
include adaptive decision models, implementation, education,
training, consulting and engineering support services. Current
Nestor software products detect credit/debit card fraud PRISM(R),
provide remote traffic management of freeways and intersections
TrafficVision(R), provide responsive on-line information to
internet Web site visitors (InterSite) and provide much greater
efficiencies in document processing and fax distribution
environments (OmniTools & N'Route, which were exclusively
licensed to NCS in June 1996). Nestor's software solutions are
designed for client-server implementation and flexible
integration with customers' existing computing infrastructures.
Installation time periods for the Company's software solutions
depend upon the particular product involved, and can take as
little as three days or as long as six months. The Company
believes that PRISM customer payback periods for license,
installation, and first year user fees are typically less than
one year.
The Company designs and develops specialized software products
utilizing its proprietary software and information-management
knowledge, and, to a lesser degree, designs hardware components
that will enhance the performance of its software products. The
Company's products comprise the following categories: Fraud
Detection and Risk Assessment Systems - are designed to
effectively detect and control fraudulent transactions for
financial institutions that issue credit, debit, or other
financial use cards. The Company is evaluating the expansion of
these product technologies into additional applications such as
health-care payments, long-distance telephone fraud, mobile-phone
service theft, and database marketing. Traffic Management
Systems - are a combination of internally developed software and
internally and externally developed hardware components that
perform as a traffic management system for open road and
intersection applications. The products enable dual use of video
networks to support both traffic/roadway. Internet Web Server
Systems - are designed to synthesize information from multiple
data sources within an organization and provide content to
present to Web site visitors based on the current state of the
visitor's information. Intersite's purpose is to provide scores
of site visitors which are useful in predicting the purchasing
behavior of visitors. Intelligent Character Recognition Systems
- - include packages of software applications such as OmniTools,
NestorReader, and N'Route which increase productivity in document
processing and fax distribution environments.
Fraud Detection and Risk-Assessment Systems
The Company's PRISM product line includes the Nestor Fraud
Detection System(FDS) and the flagship product, Proactive Risk
Management (PRISM) system which have been licensed to ten
financial-services clients as of December 31, 1997. These
systems can detect bank-card or credit-card fraud, and can be
readily updated by clients to adapt to changing patterns of
fraudulent transactions. By monitoring each cardholder's
historical and current transactions, PRISM is capable of
detecting unusual patterns of card use and of rapidly detecting a
significant proportion of fraudulent transactions with an
extremely low error rate. Customers have reported a reduction of
more than 50% in their credit-card fraud loss experience within
30 days of installation.
In March 1993, the Company completed the installation of its FDS
product at Mellon Bank. The success of the FDS installation at
Mellon has been instrumental in obtaining additional orders for
FDS and PRISM. Like many other credit-card issuers, Mellon Bank
had been using a rule-based system for fraud detection. Mellon
has reported to the Company that FDS is finding 20 times as many
instances of fraud as their rule-based system, while requiring
reviews of only one-third as many accounts.
In December 1994, the Company installed a merchant-fraud
detection system at Europay International S.A., a Master Card
affiliated association of 700 banks that settle international
bank-card transactions involving currency exchange. Experience
with United Kingdom and Belgium banks indicates a counterfeit
detection rate of up to 50%.
In February 1995, the Company announced PRISM. PRISM enhances
the fraud-detection capabilities of FDS to include workflow
management and other PC-based productivity tools that are
designed to enable the fraud manager and fraud-control team to
efficiently identify and track frauds detected by the system.
The initial PRISM system was an FDS installed at G.E. Capital
Consumer Financial Services, which was upgraded to incorporate
PRISM in 1995.
During 1997, the Company expanded its PRISM product line with the
introduction of PRISM DebitAlert (DebitAlert(TM)), PRISM
BankruptcyAlert (BankruptcyAlert), and PRISM CreditAlert
(CreditAlert). DebitAlert is an intelligent risk management
system that detects, monitors, responds to and prevents off-line
debit card fraud. BankruptcyAlert is a bankruptcy decision-
support system that provides transaction-level analysis of each
account and enables card issuers to better manage risk while
increasing portfolio profitability. CreditAlert is a multi-
faceted fraud detection system that dramatically reduces losses
associated with credit and retail card application fraud.
The following are the primary attributes of the Fraud Detection
and Proactive Risk Management Systems:
Flexible neural-network decision engine. The Company's software
implements a powerful, patented neural-network technology for
adaptive fraud detection that is accurate, fast, field-trainable
and operates in real-time. The neural-network and rule-bases are
provided through software that allows the Company's products to
be customized to fit the customers needs and profiles without
extensive custom programming. Unlike other rule-based systems,
the Company's products learn from the experience of the specific
customer accounts instead of applying "industry" experience to
the customer's environment. The Company's software can be
rapidly trained to look for customer-specific fraud potential by
requiring as few as three training passes through a customer's
data. The system automatically adapts itself for problem
complexity and maximizes the detection of actual fraud while
minimizing false positive indications.
Automatic and ongoing learning ability. The Company's software
is trained to detect fraudulent patterns based upon the
customer's own historical data. Subsequent to installation, the
software continues to update its records for current patterns and
automatically modifies its predictive model to respond to fraud
pattern changes in the customer's user base and environment.
Other competitive systems may require extensive updating of the
software to reflect current industry or customer experience. The
Company's software allows the client to operate with the most
current and customer-specific database possible, with simple
updates entirely under client control.
Quick return on initial investment to customers. Due in part to
customizing the PRISM software to react based upon a client's
specific fraud experience, the product has resulted in fraud loss
savings of greater than 50% at G.E. Capital Consumer Financial
Services and over 50% in counterfeit detection at Europay
International S.A.. Performance at this level would provide a
customer experiencing average industry fraud losses a payback on
their first year installation and use fees of approximately four
to six months.
On-line, transaction-based capability. Nestor's software can
provide an immediate, situation-specific response to each
customer transaction. For example, the PRISM system can
immediately detect and report fraudulent activity within the
first one or two transactions, rather than within one or two days
of transactions.
Flexible client-server and operating solutions. Nestor's
solutions can be integrated into a customer's existing
environment or architecture. The Company's products are based
upon a distributed client-server architecture consisting of
operating components that operate on a wide range of industry
standard, client-server platforms, including the IBM, MVS/CICS,
Tandem's proprietary, fault tolerant Non Stop Kernel (NSK), UNIX
and Windows NT operating platforms. The Company believes that
its product is the only one available today that is adapted to
Tandem's NSK operating system, over which the Company estimates
more than 65% of the world-wide volume of ATM and Debit-card
transactions are processed. PRISM also provides an analysis
environment consisting of: a user-friendly, MS Windows-compatible
graphical user interface, an "open-systems" architecture that is
easily adapted to a client's working environment, fully
integrated work flow tools for enhanced productivity,
customizable reporting tools, and in-depth fraud analysis and
system maintenance tools.
Nestor's Fraud Detection and Risk Assessment Strategy
The Company's objectives are: to deliver high quality products
and services using proprietary neural-network technology to the
banking, retail, telecommunications and health-care management
industries, and to accrete a growing revenue stream from ongoing
product usage fees. The Company's strategy for achieving these
objectives includes the following key elements:
Expand current distribution network. The Company plans to expand
its worldwide direct sales, distribution and service forces. The
Company intends to continue developing domestic markets while
augmenting its international growth. Nestor executed a non-
exclusive PRISM reseller agreement with CSK Corporation in Japan
during 1996 (See "Licensing, Joint Venture and Development
Agreements"), and is negotiating marketing agreements in Europe
and South America. The Company also intends to increase direct
sales efforts in North America through expansion of direct sales
staff and through marketing and service agreements with
established providers of products and services to its target
markets. On April 18, 1997, the Company expanded its non-
exclusive license agreement with Applied Communications, Inc.
(ACI), a subsidiary of Transaction Systems Architects, Inc. by
allowing ACI to distribute the newly developed PRISM products
(See "Licensing, Joint Venture and Development Agreements".)
Earn recurring revenues through on-going fees based upon product
usage. The Company's products provide immediate and ongoing
savings to the client through a reduction in the occurrence of
undetected fraud losses. The Company has priced its product to
include upfront fees for licensing and installation, thereby
providing an attractive payback of the customer's initial
investment as discussed above, and including an ongoing usage fee
based upon the number of customer transactions or accounts being
reviewed by the software. This ongoing revenue stream is
expected to grow as new customers install the product. Future
growth may also result from the customer's internal growth in
the number of transactions or accounts being reviewed by the
software.
Apply PRISM products to other markets. The Company believes
that many markets exist which are experiencing fraud type losses
and possess data characteristics similar to the financial
institution industry. The Company plans to extend the successes
of the PRISM product in credit-card fraud detection to other
areas with a high level of transactions and a history of similar
fraud-type loss experience. Some of these market opportunities
may include health-care claim payments and long-distance
telephone fraud. Nestor's strategy is to broaden its product
offerings to address these markets in conjunction with
development funding from strategic government and industry
sources.
Traffic Management Systems
TrafficVision is a combination of Company-developed software and
modular hardware components that provide for remote monitoring to
support traffic data collection and control of traffic flows.
The product is flexible and can be configured to a wide range of
road configurations, including open roads and intersections.
Features include remote video monitoring, real-time vehicle
classification, individual vehicle tracking, simultaneous
communication of video and traffic data over a single
communication network, and generation and logging to a database
of a variety of traffic-information measurements.
Historically, traffic sensing and control has been handled by
wire induction loops buried beneath the road surface. The system
provides basic information such as vehicle counts and speed (with
multiple loop configurations), in support of the function of
controlling traffic light signals when traffic is present. Such
loops experienced a 100% failure rate within the first 10 years
of operation. Replacement/repair is often not performed or
performed long after loop failure due to the high cost of digging
up the roadway.
TrafficVision provides all the benefits currently offered by loop
systems and substantial additional options that increase the
traffic controller's effectiveness in managing traffic
congestion, infractions, and accidents. The fact that
TrafficVision operates completely above ground aids in effective
maintenance. Additionally, the Company believes that the
technology will prove to be cost effective in comparison to loop
technology in applications of multiple-lane intersections.
TrafficVision is designed to incorporate the Company's Ni1000
Recognition Accelerator hardware chip (See "Ni1000 Chip" below).
Development of a working prototype model commenced on September
1, 1995, in conjunction with a funding agreement with California
Institute of Technology Jet Propulsion Laboratory (see
"Licensing, Joint Venture, and Development Agreements"). The
project was completed in December 1996. The Company began a
Phase II contract for field testing of the prototype in 1997 and
expects to complete this work in the second quarter of 1998.
In February 1998, the Rhode Island Department of Transportation
(RIDOT) formally opened its new Operations Center. As an
integral part of that facility, TrafficVision is providing real-
time traffic management capabilities which assist RIDOT in
improving safety, ,monitoring traffic flow, managing congestion
and planning for maximum highway efficiency.
The following are the primary attributes of the Company's Traffic
Management Systems:
Accurate, real-time interpretation of traffic video images. The
Company has leveraged its patented neural-network decision engine
discussed above in Fraud Detection to the application of real-
time processing and learning in the context of video image
interpretation for traffic management and control. Prior
industry attempts to provide video-based detection of traffic
have not proven effective due to the difficulty of designing
robust detection algorithms under a variety of illumination,
visibility and traffic conditions, as well as the need to
implement such algorithms on cost-effective computing platforms
that provide real-time operation. The Company's neural-network
technology, combined with its Ni1000 chip, discussed below, is
able to interpret video images accurately and respond in a real-
time environment.
Rapid deployment and increased services for customers. The
Company's software solutions are designed for rapid deployment
and to provide additional information to customers beyond that
delivered by current loop systems. TrafficVision is designed to
be installed entirely above ground and to tie into existing
customer hardware where appropriate. Maintenance becomes more
efficient than with underground loop systems. TrafficVision
systems allow the customer to obtain the same information and
accuracy as is available through loop technology (e.g. vehicle
count and detection for signal control), and additional benefits
such as remote real-time video monitoring for traffic flow,
vehicle tracking or incidence response.
Leverages customer investment in video infrastructure. State
traffic departments are deploying roadside video cameras to
provide images of road and traffic conditions to better manage
traffic flows and incident response. Nestor's Traffic Monitoring
Systems are designed to support "dual use" of pan-tilt-zoom
equipped cameras for surveillance and traffic detection and
monitoring, thus leveraging the customer's investment in existing
video equipment. Additionally, Nestor's solution supports
simultaneous video and data communication over a single video
communication network, thus further leveraging the customer's
video infrastructure investment.
Compatibility with industry standard platforms. Nestor's traffic
monitoring solutions are architected around dominant industry-
standard platforms: namely, the Windows 95/NT operating system,
tools and communication support components and general "WinTel"
hardware specifications. This facilitates integration into a
customer's existing computing environment, leverages PC economics
to offer a compelling price/performance advantage and lowers
product engineering development costs. Additionally, the
Company's Traffic Monitoring Systems are designed to support the
emerging NTCIP communications standards being mandated in the
traffic detector industry. Further, roadside TrafficVision
detector stations will be compatible with existing and new
traffic controller hardware, such as the new CALTRANS 2070
controller standard.
Nestor's Traffic Management System Strategy
The Company's objectives are to be the high-quality supplier of
intelligent video-based traffic monitoring systems to replace
loop detectors at those sites where video has advantages in
either functionality or cost and to capture new traffic
monitoring applications beyond the capability of loop detector
systems. The Company's strategy for achieving these objectives
contains the following key elements:
Expand national and worldwide distribution. The Company plans to
target leading transportation departments (DOTs) through direct
sales to provide convincing demonstrations of TrafficVision's
superior performance, to create performance standards based upon
TrafficVision functionality and to generate a market pull that
will lead to volume distribution agreements with traffic
integrators and traffic equipment suppliers. The Company intends
to establish distribution agreements with foreign traffic
integrators, concentrating initially in the Far East where the
Company believes large investments are being planned in
transportation infrastructure.
Maintain technology leadership and patent protection in developed
solutions. As noted above, the Company has obtained patent
protection for its proprietary neural networks and hardware
systems (see "Patents") which the Company believes to be uniquely
suited to applications that require field trainability or self-
modification to adapt to new or changing patterns in the data.
The Ni1000 chip allows for high-speed processing applications,
such as video-image processing, on a personal computer platform.
The Company continues to maintain and explore new patent
protection rights for its proprietary software applications. The
Company was issued a new patent in fiscal 1996, and has an
application pending relating to its work in the traffic-
management areas.
Ni1000 Chip, PCI 4000 Recognition Accelerator Board and
IBM ZISC(TM) Chip
Neural networks are inherently parallel systems whose operation,
until recently, has only been simulated on serial computers. The
relative slowness of serial simulation has prohibited the use of
neural networks in many high-value applications that require high-
speed learning and recognition. The Ni1000 Recognition
Accelerator(TM) chip is an embodiment of the Company's technology
that increases typical processing speeds by hundreds of times and
is expected to open these previously untapped markets to neural-
network solutions. Manufactured by Intel and introduced by the
Company in June 1994, the Ni1000 chip was developed with funding
by the Defense Advanced Projects Research Agency ("DARPA").
Commercial delivery of Ni1000 chips and Ni1000 Development
Systems began in June 1994. In April 1994, the Company and Intel
Corporation signed an agreement which provided the Company with
exclusive marketing rights to the Ni1000 Recognition Accelerator,
subject to certain minimum purchases of the Ni1000 Recognition
Accelerator by the Company. (See "Licensing, Joint Venture and
Development Agreements.")
In connection with the development of the Ni1000 Recognition
Accelerator, the Company and Intel were jointly named as winner
of the 1994 Discover Awards for Technological Innovation in the
category of Computer Hardware & Electronics. The Ni1000
Recognition Accelerator was selected by the editors of Electronic
Design News as a finalist in their 1994 "Innovation of The Year"
contest.
Continued development work in neural-network hardware was
centered on the development of a PC-compatible circuit-board
incorporating multiple Ni1000 Recognition Accelerators, and
associated development-environment software. Development of the
circuit board and software were funded, in part, by a contract
dated August 26, 1993, between the Company and Office of Naval
Research and administered by the Advanced Projects Research
Agency of the Department of Defense ("ARPA").
PCI 4000 Recognition Accelerator Board
An outgrowth of the Company's ARPA-funded development work is the
PCI 4000 Recognition AcceleratorT, which was developed
cooperatively with Alta Technology Corporation. The PCI 4000 is
a circuit board containing up to four Ni1000 Recognition
Accelerators and a Pentium controller, which is compatible with
any PC or workstation that provides PCI (Peripheral Component
Interconnect) support.
IBM ZISC Chip
On January 31, 1996, the Company signed a technology licensing
agreement with IBM to use Nestor's pattern recognition
technology in an IBM developed neural-network semiconductor
device called the ZISC (see "Licensing, Joint Venture and
Development Agreements"). The Company believes that the entry of
IBM into the field of neural-network applications may assist the
Company in the marketing of its own hardware components.
Internet Web Server Systems
During 1996, the Company began development of an internet product
incorporating the neural-network technology called Nestor
InterSite. Nestor InterSite is server-side software that enables
the Web host to understand individual on-line customers and
dynamically present personalized content.
To date, the Internet has largely been used as a medium for the
broadcast of static information. Its potential for truly
interactive dialogs has not been realized. However, the
Internet, or more specifically the World Wide Web, is undergoing
a revolution. New technologies are being introduced which will
cause Internet web sites to become dynamic and personalized.
Nestor InterSite will allow vendors to learn about their web
visitor community, permitting the web host to tailor its products
and services accordingly. Vendors should retain more customers,
sell more products to those customers and identify customers who
are interested in premium products and services.
In 1997, two customers selected InterSite for beta installations.
Lycos, Inc. is a free, global Internet navigation and community
network which experiences millions of hits each day and Edward
Jones is the largest financial-services firm in the nation in
terms of offices and is the only firm that serves individual
investors exclusively. The firm traces its roots to 1871, and
today serves more than 2.5 million customers.
The following are the primary attributes of Nestor InterSite:
Neural Network Scoring Models: Nestor InterSite employs multiple
models by which to score visitors, producing scores in several
basic categories:
- -Attitudinal: analyze visitors into psychographic categories
according to their answers to information source preferences and
produce a probability of affiliation with one attitudinal
segment.
- -Conceptual: analysis of full-text within visited Web pages, call
center logs, and chat and news groups enables the extraction of
semantic interests. Nestor InterSite produces the top 10
conceptual categories for each visitor.
- -Sales Receptivity: models the correlation between source data
and purchasing behavior. The purchasing behavior which is scored
includes the probability of interest in an up-sell, a cross-sell,
or a promotion.
Data Acquisition: Nestor InterSite stores a visitor profile for
all registered visitors. The system collects data from all
available sources which are relevant for scoring customer
interests. Supported data sources include legacy databases, call
center logs, Web page forms, and Web site text. Nestor InterSite
combines data from these sources into a set of SQL tables which
are stored locally on the Nestor InterSite server.
Control Center: Site visitors' scores are matched to available
content through a powerful user interface. The Control Center
enables the analysis of the visitor community according to model
measures along with the assignment of content based on scores.
Nestor's Internet Web Server System Strategy
The Company's objective is to deliver high quality products and
services coupling proprietary neural-network technology with
industry-standard Unix and Microsoft platforms. The financial
services industry will be the first industry the Company targets.
The Company's strategy for achieving its objective includes the
following key elements:
Complete initial installations. The Company will concentrate on
completing and installing beta versions of InterSite in early
1998. These installations will become the references for full
product-rollout in mid 1998.
Develop sales channels. Nestor InterSite will be sold as a
complete backoffice solution to automate marketing communications
through the Web. A sale will include integration with legacy
systems, development of custom models, training of webmasters and
business managers and annual maintenance. This type of product
dictates a consultative sales strategy. The Company's initial
approach will be through direct sales. These efforts will be
augmented by teaming with partners who can complement the
productivity improvements provided by Nestor InterSite.
Internationally, Nestor will initially employ direct sales
efforts, leveraging off of the Company's international success
with the Prism product.
Intelligent Character Recognition Products
On June 11, 1996, the Company licensed the exclusive development
and marketing rights in its Intelligent Character-Recognition
("ICR") products (NestorReader, OmniTools, and N'Route) to
National Computer Systems, Inc. ("NCS"), and is no longer
involved in developing, packaging and marketing these products
(see "Licensing, Joint Venture and Development Agreements"). The
Company expects to receive royalties from the sales of these
products and any enhanced versions of these products by the
licensee. The following are the principal ICR products developed
and marketed by the Company through June 11, 1996, and marketed
by NCS since then:
NestorReader(TM)
NestorReader is a software product that is designed to perform
character recognition from images of hand-printed and machine-
printed characters in intelligent character recognition systems.
A principal application of NestorReader has been to replace the
human process of reading data from forms and entering the data
into computers by means of a keyboard. NestorReader is licensed
to original equipment manufacturers, value-added resellers and
systems integrators for integration into image-processing
systems. NestorReader extends the range of optical character
recognition to include hand print and faxed characters at a
price/performance ratio that the Company believes is unequaled by
competitive technologies. In optical character recognition,
existing techniques have successfully solved the problem of
reading conventional, clean, machine-printed characters.
Management believes that hand printed characters - with their
high degree of variability - and faxed characters, with their
high noise level, can only be read satisfactorily by more
powerful technologies like NestorReader.
OmniTools(TM)
OmniTools is a software product that enables corporate
applications developers to access the functionality of
NestorReader from within Windows applications without the need
for C programming. Developers need only use such familiar tools
as Visual Basic or applications macro languages including Visual
Basic for Applications. ICR solutions can thus be developed
from Access, Excel, Foxpro, Lotus 123, Paradox and other Windows
applications. The Company began marketing OmniTools in fiscal
1994.
N'Route
N'Route is a Windows end-user application that automatically
routes incoming faxes and scanned images directly to their
intended recipients. N'Route does this by recognizing the name
or other identifier written on a document and then routing the
document to its destination "mailbox" on Lotus Notes, cc:Mail or
Windows for Workgroups users with Microsoft Mail. Installation
and maintenance by a network administrator is by dialog boxes and
menus and requires no programming or character-recognition
expertise. In February 1995, N'Route was awarded the Imaging
Magazine "Product of The Year" award for 1994.
Sales, Marketing and Methods of Distribution
The Company sells and markets its software and services in North
America through a direct sales organization and through third-
party licensing agreements. Outside of North America, the
Company negotiates marketing agreements with various industry
service providers.
The Company's product lines are targeted toward large commercial
users (e.g., banks for the PRISM product), or federal and state
government agencies (e.g., Departments of Transportation for the
TrafficVision product). The products require technical
assistance through the sales and installation processes.
Accordingly, the Company maintains an in-house staff of engineers
to support the sales, installation, and customer-service
functions.
The Company's FDS and PRISM products are licensed directly by the
Company to financial institutions. The TrafficVision products
will be marketed directly to governmental traffic management
departments or their chosen integrators. The Ni1000 Recognition
Accelerator and the Ni1000 Development System are marketed
directly by the Company to developers of high-speed applications,
and are used in internally developed products. The Company's
Intelligent Character Recognition products are marketed
exclusively by NCS. The Company obtains product inquiries from
product mailings, attendance at trade shows, media advertising,
trade-press coverage and its internet site.
In financial services, the Company has in the past created custom
applications including risk assessment for bank-card fraud
detection, mortgage origination and insurance, consumer credit
and securities trading. Nestor's FDS and PRISM products are an
outgrowth of such development projects. In the United States and
Canada the Company markets FDS and PRISM directly. The Company
has worldwide licenses with Total System Services, Inc. (Total)
to provide its PRISM product to customers for which Total
provides card processing services, and ACI who packages PRISM
with its BASE24 and TRANS24 products for worldwide distribution.
In Japan, custom financial applications are marketed through its
licensee, CSK Corporation. FDS and Prism are licensed to
applications developers in Europe and Japan under a standard, non-
transferable, non-exclusive software license limited to a single
computer. Developers of applications may not make, use or sell
multiple copies of such applications without entering into
additional licensing arrangements with the Company. Management
of the Company believes that the success of the PRISM and FDS
products will create a valuable franchise in each institution,
leading to extensions of the Company's technology to other risk-
assessment applications.
During 1997, ACI and Europay accounted for 39% and 16% of the
Company's revenues, respectively. During the six months ended
December 31, 1996, the Jet Propulsion Laboratory, GE Consumer
Credit Financial Services, BankOne, Mellon Bank and Customer
Services, Inc. accounted for 19%, 18%, 15%, 13% and 11%, of the
Company's revenues respectively. In fiscal 1996, National
Computer Systems and Europay International accounted for 30% and
13% of the Company's revenues, respectively. In fiscal 1995,
Europay International accounted for 16% of the Company's
revenues. The loss of any of these customers for any reason
could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is not required to maintain significant inventories
in order to deliver its products. The Company does not generally
grant payment terms to customers in excess of 90 days. At
December 31, 1997, the Company had a backlog of approximately
$248,000 in undelivered development and installation contracts
and $259,000 in prepaid royalties. At December 31, 1996, the
Company had a backlog of $209,000 in undelivered development and
installation contracts and $582,000 in prepaid royalties. As of
June 30, 1996, the Company had a backlog of $408,000 in
undelivered development and installation contracts and $431,000
of prepaid royalties and fees. As of June 30, 1995, the Company
had a backlog of $101,000 in undelivered development and
installation contracts and $439,000 of prepaid royalties and
fees.
Technology
The Company's technology deals with the problem of pattern
recognition. When presented with a pattern of information, it
can be valuable to identify that pattern, whether it is a pattern
of fraudulent credit card use, fraudulent health care claims,
handwritten characters, vehicles in a traffic flow, and so on.
Several methods currently exist to address the problem of
processing information in order to recognize a pattern in the
information. Included among these are "expert" systems of rules,
and neural networks. The Company's products combine both of
these methods to optimize pattern recognition capabilities.
Rule-Based Technology. The Company's systems employ expert or
rule-based technology to define customer strategy, policy and
procedures in its products. Rule-based systems contain decision
trees of conclusions based on the existence of various
conditions. For example, a credit card transaction has been
authorized. To determine if that transaction was fraudulent and
whether or not an account should be investigated, the following
set of questions may be asked: has the card been reported lost or
stolen since the transaction occurred? If "yes", the transaction
equals "fraud"; if no, did the purchase amount exceed the credit
limit? If "yes", did the purchase occur less than one hour after
the previous purchase? If "yes, and so on. It is almost
impossible to cover all possibilities of combinations of
circumstances even with the most comprehensive suite of rules.
So, while allowing the implementation of select rules may be
beneficial, a decision based solely on rules may not always be
correct or practical.
Neural-Network Technology. Neural-networks simulate a virtual
network of interconnected units, processing data in parallel, and
communicating with each other at lightning speeds. A trained
neural-network expects input and then outputs a response: either
"unrecognized", "recognized", or "not sure". Exceeding the
capability of if-then-else conditional rules, the power of the
neural-networks is in their ability to accurately recognize
input, such as attempting to recognize characters from a scanned
handwritten sample, which is ill-defined (i.e. written in very
light pencil), affected by "noise" (i.e. smudged), or blatantly
unusual (i.e. overly large or small, or containing skewed
characters). Nestor, as the result of extensive research, has
created a proprietary neural-network technology referred to as
the Restricted Coulomb Energy ModelT (RCE) which has been granted
five patents.
The RCE model has many unique features. It has the fastest
learning and processing speed of any neural-network system. It
has been demonstrated that the RCE will learn to recognize
patterns orders of magnitude faster than a typical public domain
neural-network such as Back Propagation (BP). RCE has the
ability to add new features or classes without the need to
retrain and re-engineer the complete system. For example, using
BP, experts must re-engineer and completely retrain the entire
system if new features or classes are added. Re-engineering and
retraining is impractical for many real-world applications. RCE
is a dynamic configuration of the network so that it can scale
and configure itself to accommodate the complexity of a problem
and make the most efficient use of available hardware. With BP,
one must precisely engineer the number of neurons through
experimentation in order to use the technology, and a stable
solution is not guaranteed.
Nestor has also been granted a sixth patent for a multi-unit
system referred to as the Nestor Learning SystemT (NLS) which is
ideally suited for many real-world pattern recognition
applications. The NLS has a patented hierarchical, multi-network
system for better control and accuracy. This approach is
analogous to the way the human neural-network is believed to
function. The Company believes that the rapid model development
and operational flexibility afforded by its technology provides a
competitive advantage in the development of intelligent-decision
software solutions.
Research and Development Activities of the Company
The Company believes that its future depends upon its ability to
improve its current technologies and products and to develop new
technologies and products. The Company intends to pursue new and
enhanced technologies and products. The Company attempts to
locate external resources to assist in the costs of developing
new technologies or products, but may bear all or a portion of
such costs internally.
The Company's research is almost entirely applied research
intended to develop solutions to specific pattern-recognition
problems. This research has resulted in various patents relating
to improvements to the Company's basic technology (see
"Patents"). The Company received one new patent in fiscal 1996
and has one application pending as of December 31, 1996. These
improvements are incorporated into the Company's products.
The market for the Company's products may be impacted by changing
technologies. The Company's success will depend upon its ability
to maintain and enhance its current products and develop new
products in a timely and cost-effective manner that meets
changing market conditions. There can be no assurance that the
Company will be able to develop and market on a timely basis, if
at all, product enhancements or new products that respond to
changing market conditions or that will be accepted by customers.
Any failure by the Company to anticipate or to respond adequately
to changing market conditions, or any significant delays in
product development or introduction could have a material adverse
effect on the Company's business, financial condition and results
of operations.
The Company expended in the year ended December 31, 1997, in the
six months ended December 31, 1996, and in the fiscal years ended
June 30, 1996 and 1995, respectively, $1,498,000, $294,000,
$823,000 and $2,093,000 in support of the various aspects of
Company-sponsored research and development.
Patents
The Company has continually sought and obtained patent protection
for its proprietary neural networks and systems, which have as a
principal feature rapid learning from a relatively small number
of examples. The Company believes that this capability makes the
Company's technology uniquely suited to applications that require
field trainability or self-modification to adapt to new or
changing patterns in the data. The Company's patents also cover
multiple-neural-network systems, which enable the company to
develop products that combine high accuracy with high processing
speeds; and the Company's RCE neural network, which exhibits
rapid learning and minimizes the internal connections needed for
its functioning. This sparse connectivity has enabled the
Company to develop, with Intel Corporation, a neural-network
integrated circuit (the Ni1000 Recognition AcceleratorT chip)
containing many more nodes than has been possible with other
designs.
The Company owns ten United States patents and twenty-three
foreign patents issued in eleven countries. In addition, there
is one application pending in the United States, and there are
five applications pending in various foreign countries, as of
December 31, 1997. The foreign patents and patent applications
correspond to one or more of the United States patents.
In the field of web server systems, the Company faces competition
from a number of sources, including commodity-software providers,
traditional database vendors, and vertical solution providers.
The first two groups include such companies as Microsoft,
Netscape and Oracle. Companies providing vertical solutions
include BroadVision, Inc. and Firefly, Inc. The market for
internet-oriented products is intensely competitive with new
competitors emerging frequently.
The Company believes that eight of its United States patents, and
eleven corresponding foreign patents, are material to its
business. These United States patents expire at various times
from 1998 to 2014. The corresponding foreign patents expire at
various times from 1995 to 2008. The following table lists the
Company's material United States patents:
Patent Year of
Number Title Date of Issue
Expiration
4,254,474 An Information Processing System Using
Threshold Passive Modification March 3, 1981 1998
4,326,259 Self-organizing General Pattern Class
Separator and Identifier April 20, 1982 1999
4,760,604 Parallel, Multi-unit, Adaptive, Nonlinear
Pattern Class Separator and Identifier July 26, 1988 2005
4,897,811 N-Dimensional Coulomb Neural Network Which
Provides for Cumulative Learning of Internal
Representations January 30, 1990 2007
4,958,375 Parallel, Multi-unit, Adaptive Pattern
Classification System Using Inter-unit
Correlations And An Intra-class Separator
Methodology September 18, 1991 2008
5,054,093 Parallel, Multi-unit, Adaptive, Nonlinear
Pattern Class Separator and Identifier October 1, 1991 2008
5,479,574 Method and Apparatus for Adaptive
Classification December 26, 1995 2012
5,701,398 Adaptive Classifier Having Multiple Subnetworks December 23, 1997 2014
Competition
In the field of fraud-detection and risk-assessment systems,
the Company encounters competition from a number of sources,
including (a) other software companies, (b) companies'
internal MIS departments, (c) network and service providers,
and (d) neural-network tool suppliers. In the fraud-
detection market, the Company has experienced competition
from Fair, Isaac & Co., HNC Software, Inc., IBM, NeuralTech
Inc., Neuralware, Inc., Visa International and others. The
Company's fraud detection product also competes against
other methods of preventing credit-card fraud, such as card-
activation programs, credit cards that contain the
cardholder's photograph, smart cards and other card
authorization techniques. The introduction of these and
other new technologies will result in increased competition
for the Company and its products.
In the field of traffic management systems, the Company's
TrafficVision products (see "Recent Product Developments")
face competition primarily from standard providers of
existing loop system products. Other technologies exist
from various sources that provide some of the basic traffic
management functions provided by the loop system, such as
Microwave, Ultrasonic, Infrared, and Acoustic. The Company
believes that these technologies have limitations and do not
provide the full range of options available through
TrafficVision. Video-based systems are also available
through other companies such as Econolite, Peek Traffic,
Odetics, Traficon, Siemens, and Rockwell International.
However, the Company believes that the platforms on which
these video-based products operate do not provide the image
processing capabilities possessed by TrafficVision and the
Ni1000 Recognition Accelerator Chip.
In the field of high-speed processing, the Company's Ni1000
Recognition Accelerator product (see "Recent Product
Developments", above) faces competition primarily from
Adaptive Solutions, Inc., whose CNAPS board contains
proprietary parallel-processing integrated circuits. The
Company believes that the CNAPS board is a general-purpose
parallel processor that is not optimized for pattern
classification. The Company further believes that the CNAPS
board and associated software have a list price that is
approximately 50% higher than similar configurations of the
Company's Ni1000 products, and that the Company's hardware
products typically operate at speeds 10 to 50 times faster
than the CNAPS product in pattern-classification
applications.
Most of the Company's competitors have significantly greater
financial, marketing and other resources than the Company.
As a result, they may be able to respond more quickly to new
or emerging technologies or to devote greater resources to
the development, promotion and sale of their products than
the Company. Competitive pressures faced by the Company may
materially adversely affect its business, financial
condition and results of operations.
Employees
As of December 31, 1997, the Company had 43 full-time
employees, including 28 in product development, 8 in sales
and marketing and 7 in finance and administration. Three of
these employees have earned Ph.D. degrees. One of the
Company's current directors (and a founder of Nestor
Associates) received the Nobel Prize in Physics in 1972.
All of these employees are located in the United States.
None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and
believes its employee relationships are generally good.
The Company's success depends to a significant degree upon
the continued employment of the Company's key personnel.
Accordingly, the loss of any of the Company's key personnel
could have a materially adverse effect on the Company's
business, financial condition and results of operations. No
employee currently has an employment contract in place with
the Company. The Company believes its future success will
depend upon its ability to attract and retain industry-
skilled managerial, engineering, and sales personnel, for
whom the competition is intense. In the past, the Company
has experienced difficulty in recruiting a sufficient number
of qualified sales people. In addition, competitors may
attempt to recruit the Company's key employees. There can
be no assurance that the Company will be successful in
attracting, assimilating and retaining such qualified
personnel, and the failure to attract, assimilate and retain
key personnel could have a materially adverse effect on the
Company's business, financial condition and results of
operations.
Licensing, Joint Venture and Development Agreements
The Company seeks to enter into license agreements and
research and development contracts in order to obtain
greater market penetration and additional funding of the
development of its technology in specific fields of use.
Total System Services, Inc.
During the six month period ended December 31, 1996, the
Company designed and installed a fraud detection system for
Total System Services, Inc. (Total), a major provider of
card processing services for financial institutions. Total
will provide PRISM fraud detection services to its customers
along with the other transaction processing services. The
Company will receive fees based upon the number of
transactions that are scored by PRISM and expects revenues
to commence in 1998.
Applied Communications, Inc. (ACI)
On April 18, 1997, the Company expanded its non-exclusive
license agreement with ACI. The expanded license grants to
ACI the right to integrate and distribute throughout the
world all of the PRISM products. ACI provides authorization
and transaction processing software to more than 500
customers throughout the world. The Company will receive
royalties based on PRISM license, engineering and ongoing
use fees received from ACI sublicenses.
National Computer Systems, Inc. (NCS)
On June 11, 1996, the Company entered into an exclusive
Licensing Agreement and an Asset Purchase Agreement with NCS
transferring the development, production, and marketing
rights of the Company's Intelligent Character Recognition
(ICR) products to NCS. The Company received $1,400,000 as
an initial license fee pursuant to the Licensing Agreement,
and expects to receive royalties on future sales of the
product by NCS. Minimum annual royalties range from
$160,000 in 1997 to $350,000 in 2001 and beyond. If NCS
terminates its exclusive rights under the contract, minimum
royalty payments would not be required subsequent to such
termination.
The Asset Purchase Agreement transferred tangible and
intangible assets used exclusively in the ICR business to
NCS for $300,000. The initial license fee and asset sale
proceeds were recognized as revenues in Fiscal 1996.
IBM ZISC
On January 31, 1996, the Company signed a technology
licensing agreement with IBM to use Nestor's pattern
recognition technology in an IBM developed neural network
semiconductor device. IBM has the right to use the
technology in the IBM ZISC (zero instruction set computing)
digital integrated Neural Network chip and in future
versions of the chip and related product enhancements. The
IBM ZISC chip is expected to enable such complex mission-
critical applications as image recognition for satellite,
military and medical operations, financial data management
and risk assessment, automotive applications, as well as
highly sensitive identification systems such as sonar and
fingerprinting and other crime-scene type analysis. The
Company will receive royalties from the sales of the chip
and related products.
California Institute of Technology Jet Propulsion Laboratory
(JPL)
On September 1, 1995, the Company commenced a partially
funded development agreement with JPL to design a Traffic
Surveillance and Detection Technology capable of directly
measuring desired traffic parameters simultaneously,
combined with higher accuracy and at a lower cost than
available with current technology. The Company is applying
its expertise in rapid pattern recognition and neural
network designs to the project. The prototype and initial
program was completed in December 1996. The Company began a
Phase II contract for field testing of the prototype in 1997
and expects to complete this work in the second quarter of
1998.
The total value of the expanded contract is $730,000, of
which $675,000 had been recognized as revenue by December
31, 1997.
DARPA/ARPA
The Company entered into a development agreement dated March
13, 1990 with DARPA for the development of a neural-network
chip prototype embodying the Company's proprietary
technology. On April 21, 1992 the Company and DARPA agreed
to increase the contract to approximately $1,630,000 and
extended the expected completion date to May 1993. In May
1990, the Company signed a Technology Development Agreement
with Intel Corporation, under which Intel agreed to provide
the design and manufacturing capabilities to satisfy the
requirements of the contract with DARPA. The total cost to
the Company of the subcontract with Intel is $750,000. On
April 30, 1992, the cost of the subcontract was increased to
$1,050,000. During the year ended June 30, 1993 the Company
included in revenue approximately $436,000 relating to its
work under the DARPA contract.
On August 26, 1993, the Company entered into a follow-on
program with ARPA (formerly known as DARPA) to design and
produce a PC compatible application design and development
environment, comprising both hardware and software, which
will enable users to incorporate the Ni1000 into products.
The total value of this contract, which was completed in
December 1995, was $776,167, of which approximately $423,000
was realized in fiscal 1994.
CSK
On June 13, 1996, the Company executed a nonexclusive PRISM
Reseller Agreement with CSK Corporation to market, install,
maintain, train and support the PRISM product in Japan. The
agreement is for a term of two years. As of December 31,
1997, CSK had installed PRISM at Nippon Shinpan Company
(NICOS), a leading credit card issuer in Japan.
Intel Corporation
On October 15, 1993, the Company and Intel Corporation
entered into a license agreement, pursuant to which Intel
acquired a non-exclusive right to develop and sell products
incorporating the Company's technology. On April 7, 1994,
the license agreement was amended to grant to the Company
exclusive marketing rights to the Ni1000 Recognition
Accelerator Chip, which Intel will manufacture and sell to
the Company. In accordance with the license agreement, Intel
notified the Company of its intention to phase out
manufacturing of chips based on the .8 micron geometry.
The Company placed a purchase order in 1997 and expects to
take delivery of the order in several increments with the
last delivery scheduled for after December 1999. Given the
number of chips the Company has in inventory together with
the chips it has ordered, management does not believe there
will be a material adverse impact on its operations as a
result of the termination of the manufacturing of the
current version of the Ni1000 chips.
ITEM 2. Properties.
The Company leases offices and research and development
facilities, consisting of approximately 13,000 square feet,
located at One Richmond Square, Providence, Rhode Island
02906, for which the annual base rental is $195,000. The
Company believes these facilities will be adequate to serve
its needs in the foreseeable future.
ITEM 3. Legal Proceedings.
There are no material pending legal proceedings as of the
date of this filing.
ITEM 4. Submission of Matters to a Vote of Security
Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the year ended December 31,
1997.
ITEM 5. Market for Registrant's Common Stock
and Related Securityholder Matters
The Company's common stock was first offered to the public
in December, 1983. The principal market in which the
Company's common stock is traded is the over-the-counter
market. The quotations below reflect inter-dealers prices,
and do not include retail markups, markdown or commissions
and may not necessarily represent actual transactions. The
shares of common stock are traded in the over-the-counter
market and bear the symbol "NEST".
Low Bid High Ask
Year Ended December 31, 1997
1st Quarter 1-21/32 2-9/16
2nd Quarter 1-3/4 2-9/16
3rd Quarter 1-1/4 2-9/32
4th Quarter 1-1/4 3-1/16
Period Ended December 31, 1996
1st Quarter 1-11/16 3-1/4
2nd Quarter 2-1/8 3
Year Ended June 30, 1996
1st Quarter 1-1/4 1-11/16
2nd Quarter 9/16 1-3/8
3rd Quarter 23/32 2-3/16
4th Quarter 1-3/8 3-3/16
Year Ended June 30, 1995
1st Quarter 1 2-3/8
2nd Quarter 5/8 1-1/4
3rd Quarter 1/2 3-3/8
4th Quarter 1-1/4 2-1/2
As at March 25, 1998, the number of holders of record of the
issued and outstanding common stock of the Company was 399.
The Company has not declared any cash dividends with respect
to its common stock since its formation.
ITEM 6. Selected Financial Data
Six Months
Year Ended Ended
December 31, December 31, Years Ended June 30,
1996 1996 1995 1994 1993 1992
Operating
revenue $5,681,076 $1,195,904 $5,461,580 $ 3,195,563 $ 2,230,474 $ 1,849,104
Other income
(expense) $ 31,321 $ (16,220) $ 39,950 $ (221,024) $ (282,418) $ (27,459)
Net income
(loss) $ (294,664) $(935,337) $ 12,690 $(3,457,422) $(1,758,584) $(1,613,565)
Earnings per share
Weighted
number of
outstanding
shares 9,243,508 8,689,031 7,847,510 7,411,502 6,840,407 6,801,929
(Loss)
per share $ (0.08) $ (.13) $ (.03) $ (.48) $ (.26) $ (.22)
SELECTED BALANCE SHEET DATA:
Total assets $ 2,613,031 $2,817,944 $ 3,351,871 $ 1,812,495 $ 1,096,314 $ 935,337
Working
capital $ 146,081 $ 879,172 $ 1,983,661 $(1,882,875) $ 220,243 $ 131,827
Long-term
Redeemable
Preferred
Stock $ 5,792,787 $5,398,908 $ 5,207,538 $ 1,600,328 $ --- $ ---
Capital
leases $ 10,220 $ 9,455 $ 9,455 $ --- $ 3,363 $ 5,413
Deferred
income $ --- $ 430,899 $ 430,899 $ 438,896 $ 954,491 $ 954,491
Prior period Selected Financial Data has been reclassified to conform to 1997
classifications.
ITEM 7: Management's Discussion and Analysis
Prospective Statements
The following discussion contains prospective statements
regarding Nestor, Inc. and its subsidiaries (the Company),
its business outlook and results of operations, all of which
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 $387,000 at December 31, 1997, as compared
with $774,000 at December 31, 1996. At December 31, 1997,
the Company had working capital of $146,000, as compared
with $879,000 at December 31, 1996. The decrease in working
capital from 1996 to 1997 reflects primarily the loss for
the period and the investment in deferred development costs
reduced by the proceeds from the sale of common stock.
The Company had a negative net worth of $4,519,000 at
December 31, 1997, as compared with a negative net worth of
$4,332,000 at December 31, 1996.
Additional capital will be required to enable the Company to
carry out needed marketing campaigns for its products, for
continued development and upgrading of its present products,
and for customer support. On March 25, 1998, the Company
entered into a $1,500,000 Line of Credit agreement with
Transaction Systems Architect, Inc. ("TSAI") The loan
matures one year from the date of execution and is secured
by the royalty stream produced by the Company's License
Agreement with Applied Communications, Inc., a subsidiary of
TSAI. Interest on the loan is equal to the prime rate.
Management believes that the Company's revenues will
generate sufficient liquidity, when combined with its liquid
assets as of December 31, 1997 and the financing described
above, to meet the Company's anticipated cash requirements
through the end of the year ending December 31, 1998. If
the Company does not realize revenues sufficient to maintain
its operations at the current level, management of the
Company would curtail certain of the Company's operations
until additional funds become available through investment
or revenues.
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.
Total deferred income was $408,000 at December 31, 1997, as
compared with $769,000 at December 31, 1996.
In June 1997, the Company and Sligos, S.A. terminated their
license agreement dated October 26, 1990. The Company paid
to Sligos $225,000 in July 1997 in full settlement of its
current liability due to Sligos and of the repurchase of
452,064 shares of the Company's Series A Preferred Stock.
The Company also eliminated $431,000 of long-term deferred
income related to Sligos prepayments received in 1990 which
had not been taken into income. (See "Results of
Operations" below.)
Future Commitments
During the year ended December 31, 1997, the Company
acquired additional property and equipment (primarily
computers and related equipment) at a cost of $88,000. The
Company valued its investments in computers and related
equipment (net of depreciation) at $261,000 at December 31,
1997. The Company has no material commitments for capital
expenditures although management expects that the Company
may make future commitments for the purchase of additional
computers and related computing equipment, for furniture and
fixtures, 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 first quarter of 1998, and to
purchase 100 units of the modified component at a total cost
of up to $53,000.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any computer programs that have time-
sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company believes it has no significant exposure to
contingencies related to the Year 2000 Issue for either the
products it has sold or the software used internally.
The Company will commence a formal communication program in
1998 with its large customers and financial institutions to
determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. There is no guarantee
that the systems of other companies on which the Company's
systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
Inflation
Management believes that the rate of inflation in recent
years has not had a material effect on the Company's
operations.
Results of Operations
Analysis of the Years Ended December 31, 1997 and 1996
In the year ended December 31, 1997, the Company realized a
26% increase in revenues compared to the prior calendar
year. Expenses increased 22% in 1997 resulting in a 27%
decrease in the operating loss when compared with the prior
year.
On June 11, 1996, the Company entered into an exclusive
Licensing Agreement with National Computer Systems, Inc.
(NCS) transferring the development, production, and
marketing rights of the Company's Intelligent Character
Recognition (ICR) products to NCS. Pursuant to the License
Agreement, NCS paid the Company an initial license fee of
$1,400,000, and has paid the Company a ten percent royalty
on revenues NCS has realized from the ICR products since
their transfer to NCS. Such revenues, including the initial
license fee, accounted for 47% of revenues in calendar
1996, including the initial license fee, as compared to 2%
in 1997.
The Company began in the quarter ended September 30, 1996, a
project to customize its PRISM Fraud Detection System for a
customer. Because the terms of the agreement had not been
finalized, the Company accounted for the development 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. For the year
ended December 31, 1996, the Company deferred $364,000 of
costs associated with this project.
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. The deferred development costs will be amortized over
the remaining life of the license upon deployment by the
customer.
Revenues
The following table compares revenues for calendar 1997 with
calendar 1996 including and excluding revenues from ICR
operations transferred to NCS:
Total Total Total Revenues
Revenues Revenues Year Ended
Year Ended Year Ended Dec. 31, 1996
Dec. 31,1997 Dec. 31, 1996 Change Excluding ICR Change
$5,681,000 $4,508,000 +26% $2,409,000 +136%
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 year ended December 31, 1997,
revenues increased $1,173,000 to $5,681,000 from $4,508,000
in the prior calendar year. Revenues in the year-earlier
period included $2,099,000 of revenues associated with the
ICR products that were licensed exclusively to NCS in June
1996.
Software Licensing
Product-licensing revenues totaled $4,390,000 in 1997, as
compared with $2,450,000 in 1996. The increase in these
revenues reflects the net of an increase in license fees
realized from the PRISM products and the decrease in
licensing revenues from the ICR products transferred to NCS.
PRISM licensing revenues amounted to $4,263,000 in 1997, an
increase of $3,847,000 from year-earlier revenues of
$416,000. The increase in PRISM-related licensing revenues
results from an increase in unit volume through the
Company's resellers, Applied Communications, Inc. ("ACI"),
Europay International, S.A., and CSK Corporation ("CSK").
During the year ended December 31, 1997, the Company
realized $120,000 of royalty revenue from NCS, as compared
with $1,958,000 of ICR licensing revenues, the initial
license fee from NCS, and subsequent royalties from NCS
realized in 1996.
Engineering Services
Engineering revenues totaled $1,055,000 in 1997, as compared
with $1,908,000 in calendar 1996. Revenues relating to
customer-funded modifications of Nestor's PRISM product
totaled $969,000 in 1997, a decrease of $260,000 from
$1,229,000 of such revenues in 1996.
The Company's contract with the Defense Advanced Research
Projects Agency (DARPA) requires engineering services
rendered by the Company to develop a circuit board for use
with the Ni1000 Recognition Accelerator Chip. The contract,
signed August 26, 1993, is in the amount of $776,000; as of
December 31, 1997, approximately $773,000 had been earned.
On September 1, 1995, the Company signed a contract with the
Jet Propulsion Laboratory (JPL) to develop a prototype
sensor system designed for vehicular-traffic surveillance
and detection. The contract was valued at approximately
$597,000. On March 31, 1997, the Company extended its
contract with JPL to include in-field evaluation of the
prototype system developed under the original JPL contract.
The value of the contract was increased to $730,000; as of
December 31, 1997, approximately $657,000 had been earned.
The terms of the DARPA and JPL contracts call for delivery
of prototype products, but do not specify any subsequent
purchasing or licensing provisions.
During the year ended December 31, 1997, the Company
recognized revenues totaling $67,000 under its government
contracts. In the year-earlier period such revenues totaled
$507,000.
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 $105,000 in the year ended
December 1997, as compared with $149,000 in the prior year.
The Company is continuing its development of the
TrafficVision product, which will incorporate the Ni1000
Recognition Accelerator Chip (see "Investment in Product
Development and Marketing," below). During the year ended
December 1997, initial commercial shipments of TrafficVision
totaled $130,000.
Operating Expenses
Total operating expenses - consisting of engineering,
research and development, selling and marketing, and general
and administrative expenses - amounted to $5,977,000 in the
year ended December 31, 1997, an increase of $1,065,000 over
total operating costs of $4,912,000 in the prior year.
Included in the year ended December 31, 1997 and 1996, were
$0 and $972,000, respectively, of expenses attributable to
the ICR products, which were licensed to NCS in June 1996.
Expenses associated with the ICR products are no longer
incurred by the Company as NCS hired most of the Company's
staff assigned to development, sales, and support of the ICR
products.
Engineering Services
Costs related to engineering services totaled $1,151,000 in
1997, as compared with $1,927,000 in 1996. The decrease in
these costs reflects the decrease in engineering-services
revenues. As a percentage of such revenues, engineering
costs totaled 109% of related revenues in 1997, as compared
with 101% of similar revenues in the year-earlier period.
Management expects that engineering costs, as a percent of
engineering revenues, will remain high in 1998 as two of the
Company's product groups make initial deliveries to
customers requiring higher engineering support.
Research and Development
Research and development expenses totaled $1,498,000 in the
year ended December 31, 1997, as compared with $628,000 in
the prior year. The increase in such costs reflects the net
of increased investment in product development in all of the
Company's product lines in the current year and the absence
of product development relating to the ICR products.
Investment in the ICR products in the year ended December
31, 1996 totaled $295,000.
Selling and Marketing
Selling and marketing costs increased $662,000 to $1,986,000
in the year ended December 31, 1997, from $1,324,000 in the
prior year.
The increase in selling costs in the year reflects,
primarily, the net of two effects: an increase in sales and
marketing costs in each of the Company's product lines and
the absence of selling costs relating to the ICR products.
PRISM selling costs totaled $1,279,000 in the year ended
December 1997, as compared with $406,000 in the prior year.
Selling costs relating to the Company's TrafficVision
product and Ni1000 Development System totaled $514,000 in
1997, as compared with $279,000 in 1996. Selling costs
associated with InterSite, which the Company began to
develop in July 1996, totaled $195,000 in 1997, as compared
with $31,000 in the prior year. Selling and marketing costs
relating to the ICR products totaled $0 and $605,000 in 1997
and 1996, respectively.
General and Administrative
General and administrative expenses totaled $1,207,000 in
1997, as compared with $975,000 in the previous year.
General and administrative costs for the year ended December
1996 reflect the capitalization of $76,000 of costs
associated with the PRISM development project. Apart from
that item, the increase in general and administrative costs
reflects the growth of the Company's three businesses.
Other Income (Expense)
For 1997, net other income was $31,000, as compared with net
other income of $204,000 in the year-earlier period. In
June 1997, the Company recorded other income of $100,000 as
a discount on the payment relating to the termination of
the License Agreement with Sligos. In June 1996, the
Company recorded other income of $213,000 as a gain on the
sale of intangibles relating to the sale of the ICR products
to NCS.
Investment in Product Development and Marketing
The Company has not capitalized any expense relating to
development or marketing of its products. The following
information details the amounts by which the Company's
expenses in connection with each of its major product lines
exceeded early-stage revenues for such product lines.
The largest investment made by the Company was in its
Intelligent Sensors subsidiary, which is responsible for the
development and marketing of the TrafficVision products, an
outgrowth of work under the JPL contract. The Company
extended its contract with JPL and made initial commercial
deliveries in the September 1997 quarter. For the year
ended December 31, 1997, expenses of this group exceeded
revenues by $1,127,000.
The Company began development in July 1996 of products for
use in internet and intranet environments. Costs associated
with this effort totaled $628,000 in 1997. In October 1997
Lycos, Inc., which hosts one of the most active Web sites on-
line, selected Nestor's InterSite product to provide
intelligent personalization for Lycos' global Internet
navigation center.
The Company did not make any net investment in its PRISM
product line or in its Fraud Detection System. Revenues
relating to the Company's PRISM Fraud Detection System
exceeded expenses by $2,544,000 in 1997, including $480,000
of license revenue relating to the termination of the
License Agreement with Sligos.
Net Income
During 1997, the Company experienced a loss of $295,000, as
compared with a loss of $199,000 in the prior year. For the
year ended December 31, 1997, loss per share available for
common stock was $0.08 per share, as compared with a loss
per share of $0.09 in the corresponding period of the prior
fiscal year. For the year ended December 31, 1997, there
were outstanding a weighted average of 9,243,508 shares, as
compared with 8,376,345 in the year-earlier period.
Analysis of Six Months Ended December 31, 1996 Compared to
Six Months Ended December 31, 1995
On June 11, 1996, the Company entered into an exclusive
Licensing Agreement with National Computer Systems, Inc.
(NCS) transferring the development, production, and
marketing rights of the Company's Intelligent Character
Recognition (ICR) products to NCS. Largely as a result of
the transfer of ICR operations to NCS, for the transition
period the Company realized a 26% decrease in revenues
compared to the corresponding period of the prior fiscal
year. Expenses in the transition period decreased 8% and
the operating loss increased 62% when compared with the
corresponding period of the prior year.
The Company began, in the quarter ended September 30, 1996,
a project to customize its PRISM Fraud Detection System for
a customer. Because the terms of the agreement have not
been finalized, the Company is accounting for the
development 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 Company executed its agreement on March 28,
1997 and made required deliveries. For the six months ended
December 31, 1996, the Company deferred $364,000 of costs
associated with this project.
Revenues
In 1996, the Company changed its accounting period to a
calendar year from a fiscal year ending on June 30. The
following table compares revenues for the transition period
in 1996 with revenues for the comparable period of the
preceding year, including and excluding revenues from ICR
operations transferred to NCS:
Total
Revenues
Total Total Six-Month
Revenues Revenues Period Ended
Six-Month Six-Month Dec. 31, 1995
Period Ended Period Ended Excluding
Dec. 31, 1996 Dec. 31, 1995 Change ICR Change
$1,196,000 $2,149,000 -44% $1,195,000 0%
During the six months ended December 31, 1996, total
revenues decreased $953,000 to $1,196,000 from $2,149,000 in
the corresponding period of the prior fiscal year. Revenues
in the year-earlier period included $954,000 of revenues
associated with the ICR products that were licensed to NCS
in June 1996.
Software Licensing
In the transition period, product-licensing revenues totaled
$526,000, as compared with $902,000 in the year-earlier
period. The decrease in software licensing revenues
reflects, primarily, the net of two effects: a decrease in
ICR licensing revenues and an increase in licensing revenues
relating to the Company's PRISM Fraud Detection product.
During the transition period royalties paid by NCS relating
to its sales of ICR products amounted to $68,000, a decrease
of $704,000 in ICR revenues the Company recognized in the
six months ended December 31, 1995.
Revenues from the Company's PRISM product totaled $396,000
in the transition period, as compared with $150,000 in the
corresponding period of the prior fiscal year. The growth
of such revenues reflects additional PRISM licenses and
increased license fees from existing licensees.
Engineering Services
During the six months ended December 31, 1996, revenues from
engineering contracts totaled $606,000 as compared to
$1,076,000 in the year-earlier period, including $182,000 of
engineering revenues relating to the ICR products.
Excluding engineering revenues relating to ICR products,
revenues in the transition period decreased $288,000
compared with the corresponding period of the prior fiscal
year.
Revenues relating to customer-funded modifications of
Nestor's Fraud Detection System totaled $380,000 in the
transition period, as compared with $743,000 in the six
months ended December 31, 1995.
The Company's contracts with the Defense Advanced Research
Projects Agency (DARPA) require engineering services
rendered by the Company to develop a generic commercial
application of the Company's technology to high-speed
pattern recognition through the creation of an integrated
circuit, associated circuit boards, and supporting
development software. The Company has two contracts with
DARPA. The first contract, which was signed in April 1990,
is in the amount of $1,630,000; as of December 31, 1996,
approximately $1,623,000 had been earned. The second
contract, signed August 26, 1993, is in the amount of
$776,000; as of September 30, 1996, approximately $773,000
had been earned.
On September 1, 1995, the Company signed an agreement with
the Jet Propulsion Laboratory (JPL) to develop a prototype
sensor system designed for vehicular-traffic surveillance
and detection. The contract, valued at approximately
$597,000, was completed in December 1996. The terms of the
DARPA and JPL contracts call for delivery of prototype
products, but do not specify any subsequent purchasing or
licensing provisions.
During the six months ended December 31, 1996, the Company
recognized revenues totaling $226,000 under its government
contracts. In the year-earlier period such revenues totaled
$97,000.
Sales of Tangible Products
The tangible products currently sold by the Company are
based upon the Company's Ni1000 Recognition Accelerator Chip
and the PCI4000 Recognition Accelerator Board, which are
marketed along with development software that enables
customers to develop high-speed recognition applications.
Revenues from the Company's Ni1000 Development System
totaled $64,000 in the transition period, as compared with
$191,000 in the corresponding period of the prior fiscal
year. The decrease in revenues is accounted for by a
decrease in unit volume as the Company focused on its
TrafficVision product, which incorporates the Ni1000
Recognition Accelerator Chip (see Investment in Product
Development and Marketing, below).
Operating Expenses
Total operating expenses - consisting of engineering,
research and development, sales and marketing, and general
and administrative expenses - amounted to $2,115,000 in the
six months ended December 31, 1996, as compared with
$2,691,000 in the year-earlier period.
Included in expenses for the six months ended December 31,
1995 are approximately $1,068,000 of expenses attributable
to the ICR products, which were licensed to NCS in June
1996. Most of the expenses associated with the ICR products
are no longer incurred by the Company as NCS hired most of
the staff assigned to development, sales, and support of the
ICR products.
Offsetting the decrease in expenses attributable to the
absence of the ICR products is the Company's increased
spending on its PRISM Fraud Detection System, on its
TrafficVision product, and on its newest product, Nestor
InterSite, which is designed for use in internet and
intranet environments. During the transition period the
Company increased its spending on its PRISM Fraud Detection
System by approximately $23,000 as compared with the year-
earlier period. Spending on TrafficVision increased
$358,000 from last year to this year, and the Company spent
$167,000 on InterSite.
Engineering Services
Costs related to engineering services totaled $922,000 in
the transition period, as compared to $805,000 in the
corresponding period of the prior fiscal year. As a
percentage of revenues, these costs increased from 75% last
year to 152% this year reflecting additional costs incurred
on projects that had been expected to conclude in the
quarter ended September 30, 1996.
Research and Development
Research and development expenses totaled $294,000 in the
six months ended December 31, 1996, as compared with
$472,000 in the corresponding period of the prior fiscal
year. The decrease in such costs was due, primarily, to the
net of two effects: research and development costs relating
to the ICR products totaled $350,000 in the year-earlier
period, while there were no such costs in the transition
period; and the Company began development in July 1996 of
its Nestor InterSite product and such development costs
totaled $137,000.
Selling and Marketing
The largest decrease in expenses was in selling and
marketing. In the transition period selling and marketing
expenses decreased $440,000 to $457,000 from $897,000 in the
corresponding period of the prior fiscal year. The decrease
in selling costs reflects the net of the absence of selling
and marketing costs associated with the ICR products in the
transition period and an increase in selling costs
associated with the PRISM and TrafficVision products. ICR
selling costs in the six months ended December 1995 totaled
$637,000.
General and Administrative
General and administrative expenses totaled $432,000 in the
transition period, as compared with $493,000 in the year-
earlier period. The decrease in costs from last year to
this year reflects the net of numerous account decreases and
increases, with no single expense changing materially.
Expenditures on Product Development and Marketing
Revenues relating to the Company's PRISM Fraud Detection
System exceeded expenses by $71,000 in the six months ended
December 31, 1996, The Company has installed its products
at Mellon Bank, GE Consumer Credit Financial Services,
BankOne, Europay International (an association of 700 banks
in Europe). In September 1996, the Company signed a license
agreement with Applied Communications, Inc. (ACI) enabling
ACI to integrate and market Nestor's products with certain
products of ACI. ACI provides authorization and transaction-
processing software to nearly 500 financial institutions
worldwide.
The largest investment made by the Company was in its
Intelligent Sensors Division, which is responsible for the
development and marketing of the TrafficVision products, an
outgrowth of work under the JPL contract. The Company
expects commercial products will be available in the second
quarter of 1997. For the six months ended December 31,
1996, expenses of this group exceeded revenues by $437,000.
The Company began development in July 1996 of a product for
use in internet applications. Nestor InterSite enables
customers to understand individual on-line customers as they
visit Web sites and to dynamically present personalized
content to those visitors.
Net Income Per Share
During the transition period, the Company experienced a loss
of $935,000, as compared with a loss of $723,000 in the
corresponding period of the prior fiscal year. For the six
months ended December 31, 1996, loss per share available for
common stock was $0.13 per share, as compared with a loss
per share of $0.11 in the corresponding period of the prior
fiscal year. For the six months ended December 31, 1996,
there were outstanding a weighted average of 8,689,031
shares, as compared with 7,719,371 in the year-earlier
period.
Analysis of Years Ended June 30, 1996 and 1995
For its fiscal year ended June 30, 1996, the Company
realized a 71% increase in revenues over the prior fiscal
year while expenses decreased 15% from the prior year,
resulting in a profit of $12,690 after taxes.
Included in Total Revenues for the fiscal year ended June
30, 1996 is an initial license fee of $1,400,000 that the
Company received pursuant to its License Agreement with NCS.
In addition to the initial license fee, the Company's
agreement with NCS provides for royalties on future sales
of the products by NCS. Minimum annual royalties to
maintain exclusive rights range from $160,000 in the year
ending June 30, 1997, to $350,000 in the years ending June
30, 2001 and beyond.
The Company also signed in June 1996 an Asset Purchase
Agreement which transferred tangible and intangible assets
used exclusively in the ICR business to NCS for $300,000.
The net gain on the sale of these assets was approximately
$213,000 and is recognized as "Other income" in the quarter
ended June 30, 1996.
Revenues
The Company realized revenues from operations of $5,461,000
during the fiscal year ended June 30, 1996, including the
$1,400,000 license fee from NCS, as compared with $3,195,000
realized during fiscal 1995.
Software Licensing
The Company's software licensing revenues in fiscal 1996
were derived primarily from licenses of its ICR products.
Licensing fee revenues totaled $2,825,000 in the fiscal year
ending June 30, 1996, including the $1,400,000 license fee
from NCS, as compared with $1,714,000 in the prior fiscal
year. The increase in revenues from 1995 to 1996 is
attributable to the initial license fee paid by NCS;
excluding that transaction, license fee revenues decreased
from 1995 to 1996 as a result of lower unit volume.
For 1997, the Company did not receive ICR licensing fees but
instead received royalties from NCS on the sales of the ICR
products by NCS under the Licensing Agreement signed in June
1996. The minimum annual royalty for the license year-
ending June 1997 was $160,000. (See Expenses, below, for a
discussion of the effect on the Company's expenses of this
licensing arrangement.)
Engineering Services
Revenues from engineering contracts totaled $2,378,000 in
fiscal 1996, as compared with $1,195,000 in the prior year.
The components of these revenues are separately analyzed
below.
During the fiscal year ended June 30, 1996, the Company
realized revenues from engineering contracts with industrial
and commercial customers of approximately $324,000, as
compared with $81,000 during the preceding year. The
increase in these revenues from 1995 to 1996 reflects a
shift in the allocation of engineering efforts from
internally funded product-development efforts to customer-
funded projects, in part intended to offset reduced ICR
licensing revenues.
During fiscal 1996, customizing the Company's fraud-
detection system produced engineering revenues of
approximately $1,593,000, as compared with $771,000 in
fiscal 1995.
During the fiscal year ended June 30, 1996, revenues from
the Company's government contracts totaled $378,000, as
compared with such revenues of $342,000 in the prior year.
Tangible Product Sales
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 $257,000 in the fiscal year ended
June 30, 1996, as compared with $286,000 in the prior year.
Expenses
Total operating expenses - consisting of operations, selling
and marketing, and general and administrative expenses -
amounted to $5,488,000 for the fiscal year ended June 30,
1996, as compared with $6,431,000 in the prior year.
Expenses in fiscal 1995 reflect the reclassification of
$210,500 to "Other income (expense)". These amounts
represent non-cash charges relating to the issuance of stock
or warrants at below-market prices.
Included in fiscal 1996 expenses are approximately
$1,997,000 of expenses attributable to the ICR products,
which were licensed to NCS in June 1996. Most of the
expenses associated with the ICR products are no longer
incurred by the Company as NCS hired most of the staff
assigned to development, sales, and support of the ICR
products.
The decrease in expenses from 1995 to 1996 reflects both
staff attrition and management's efforts to reduce expenses.
The majority of the decrease in total expenses derived from
decreases in promotion, salaries and consulting, recruiting
and subcontracting.
Labor costs were the Company's single greatest expense
category. During fiscal 1996, the Company paid $3,103,000
for wages and consulting fees, as compared with $3,302,000
in the prior. The decrease from 1995 to 1996 reflects a
decrease in staffing: full-time employees totaled 33 at June
30, 1996, as compared with 53 at June 30 1995. In mid-June
1996, NCS hired 14 full-time employees who had been employed
by the Company prior to signing the License agreement with
NCS. Immediately prior to the transfer of these employees,
the Company had 47 employees.
Operating Expenses
Operating expenses, which are primarily labor costs related
to product development, engineering and sales totaled
$5,488,000 for the fiscal year ended June 30, 1996, as
compared with $6,431,000 in the prior year.
Operating costs and expenses related to the production of
revenues from software licensing totaled $686,000 in fiscal
1996, as compared with $1,979,000 in the prior year. The
decrease in such costs from 1995 to 1996 reflects
management's decision to shift engineering resources from
internally funded product-development efforts to customer-
funded engineering projects.
Costs related to engineering services totaled $1,833,000 in
the fiscal year ended June 1996, as compared to $665,000 in
the prior year. The increase of these costs reflects the
increase in engineering services revenues.
The Company's expenditures for research and development were
$823,000 in fiscal 1996 and $2,093,000 in fiscal 1995.
Selling and marketing expenses represented the largest
decrease in expenses from 1995 to 1996. Such expenses
totaled $1,764,000 in the fiscal year ending June 30, 1996,
as compared with $2,661,000 in the preceding year. The
decrease in expenses from 1995 to 1996 reflected
management's decision in the fourth quarter of 1995 to
terminate an aggressive marketing plan for the Company's ICR
products, which had begun in the second quarter of fiscal
1995. That plan had entailed increases in sales staff,
promotional expenditures, and the staffing of a customer-
support group dedicated to ICR product support.
Sales and marketing compensation, consisting of salaries,
fringe benefits, and commissions, totaled $999,000 in fiscal
1996, as compared with $1,030,000 in the prior year.
Related consulting decreased to $69,000 in fiscal 1996 from
$195,000 in 1995.
Promotional expenses, comprising advertising, promotion, and
conventions and meetings, decreased $513,000 to $232,000 in
fiscal 1996 from $745,000 in the prior year.
General and administrative expenses totaled $1,035,000 in
fiscal 1996, as compared with $997,000 in the preceding
year. As noted above, general and administrative expenses
in fiscal 1995 reflect the reclassification of $210,500 to
"Other income (expense)". These amounts represent non-cash
charges relating to the issuance of stock or exercise of
warrants at below-market prices.
Other Income (Expense)
In fiscal 1996, the Company recorded "Other income" of
approximately $40,000, net of "Other expense". Included in
this amount is a gain on the sale of intangibles of $213,000
relating to the Asset Purchase Agreement with NCS signed in
June 1996. The Company recorded interest expense, net of
interest income, totaling $39,000. Additionally, the
Company recorded a non-cash expense of $131,000 relating to
the reduction of exercise price of outstanding warrants in
connection with the Rights Offering completed in the second
fiscal quarter.
In the fiscal year ended June 30, 1995, the Company recorded
"Other expense" of $221,000. Non-cash charges relating to
the issuance of stock at below-market prices totaled
$210,000, and the Company recorded net interest expense of
$11,000.
Investment in Product Development and Marketing
The largest investment made by the Company in fiscal 1996
was in its Intelligent Character Recognition group. During
the fiscal year ended June 1996, product-development and
marketing expenses exceeded revenues (excluding the initial
license fee paid by NCS) by approximately $436,000. As
noted above, on June 11, 1996, National Computer Systems,
Inc. signed a License Agreement which transferred to them
the right to develop and market these products. NCS is
required to pay minimum annual royalties to maintain its
exclusive license. The Company has terminated most of the
costs associated with these products.
Expenses of the Company's generic products (the Ni1000
Recognition Accelerator and the Company's proprietary
software-development tools) exceeded revenues by
approximately $212,000 in fiscal 1996. In September 1995,
the Company began work on a contract with the Jet Propulsion
Laboratory to develop a prototype sensor system designed for
vehicular-traffic surveillance and detection.
Revenues relating to the Company's PRISM Fraud Detection
System exceeded expenses by approximately $256,000 in fiscal
1996. The Company has license agreements with Mellon Bank,
GE Consumer Credit Financial Services, Bank One, and Europay
International (an association of 700 banks in Europe) for
the use of these products.
Net Income Per Share
For the fiscal year ended June 1996, the Company experienced
a gain of $12,690, as compared with a loss of $3,457,422 in
the prior year. For the fiscal year ended June 1996, loss
per share available for common stock was $0.03 per share, as
compared with a loss per share of $0.48 in fiscal 1995. For
the fiscal year ended June 30, 1996, there were outstanding
a weighted average of 7,847,510 shares, as compared with
7,411,502 in the prior year.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
the report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NESTOR, INC.
(Registrant)
/s/David Fox
President and CEO
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures
Signatures Title Date
/s/Leon N Cooper Co-Chairman of the Board March 31, 1998
and Director
/s/Charles Elbaum Co-Chairman of the Board March 31, 1998
and Director
/s/David L. Fox President, Chief Executive March 31, 1998
Officer and Director
/s/Herbert S. Meeker Secretary and Director March 31, 1998
/s/Sam Albert Director March 31, 1998
/s/Jeffrey Harvey Director March 31, 1998
/s/Thomas F. Hill Director March 31, 1998
/s/Bruce Schnitzer Director March 31, 1998
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K
December 31, 1997
NESTOR, INC. Part II
Item 8
CONTENTS
Independent Auditor's Report
Statement No.
Consolidated Balance Sheets 1
Consolidated Statements of Operations -
For the Six Months Ended December 31, 1996 and
For the Years Ended June 30, 1996, 1995 and 1994 2
Consolidated Statements of Cash Flows -
For the Six Months Ended December 31, 1996 and
For the Years Ended June 30, 1996, 1995 and 1994 3
Consolidated Statements of Stockholders' Equity -
For the Six Months Ended December 31, 1996 and
For the Years Ended June 30, 1996, 1995 and 1994 4
Notes to Consolidated Financial Statements
Part II
Item 8
Report of Independent Auditors
The Board of Directors and Stockholders
of Nestor, Inc.
We have audited the accompanying consolidated balance sheets of
Nestor, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows and
stockholders' equity for the year ended December 31, 1997 and the
period July 1, 1996 to December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Nestor, Inc. at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows
for the year ended December 31, 1997 and the period July 1, 1996
to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
Providence, Rhode Island
March 26, 1998
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Nestor, Inc.
Providence, Rhode Island
We have audited the consolidated statements of operations, cash
flows and stockholders' equity of Nestor, Inc. for each of the
two years in the period ended June 30, 1996. Our audits also
included the financial statement schedule listed in the index at
item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated statements of operations, cash flows and
stockholders equity are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated statements of
operations, cash flows, and stockholders equity. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the consolidated statements of operations, cash
flows, and stockholders equity. We believe that our audits of
the consolidated statements of operations, cash flows and
stockholders equity provide a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, cash
flows, and stockholder's equity present fairly, in all material
respects, the results of operations, cash flows, and stockholders
equity of Nestor, Inc. for each of the two years in the period
ended June 30, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/GASSMAN, REBHUN & CO., P.C.
New York, New York
September 6, 1996
Consolidated Balance Sheets
December 31,
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ 386,639 $ 774,457
Accounts receivable,
net of allowance
for doubtful accounts 557,212 1,009,149
Unbilled contract revenue 298,803 126,945
Other current assets 232,492 276,615
Total current assets 1,475,146 2,187,166
Property and equipment at cost -
net of accumulated depreciation 261,463 255,590
Deferred development costs 574,752 364,405
Intangible assets - net of
accumulated amortization 295,887 ---
Other assets 5,783 10,783
Total Assets $ 2,613,031 $ 2,817,944
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and
accrued expenses $ 906,494 $ 670,742
Other current liabilities 14,339 298,848
Deferred income 408,232 338,404
Total current liabilities 1,329,065 1,307,994
Noncurrent liabilities:
Long term obligations under
capital leases 10,220 12,212
Total liabilities 1,339,285 1,320,206
Long term portion of
deferred income --- 430,899
Series E, F, G and H redeemable
convertible preferred stock
4,846 shares at
December 31, 1997 and 1996
(liquidation value $1,000 per
share plus accrued dividends) 5,792,787 5,398,908
Commitments and contingencies --- ---
Stockholders' deficit:
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series A - 0 shares at
December 31, 1997 and
452,064 shares at
December 31, 1996 --- 452,064
Series B - 1,445,000 shares at
December 31, 1997 and
1,635,000 shares at
December 31, 1996 1,445,000 1,635,000
Series D - 170,871 shares at
December 31, 1997 and
179,671 shares at
December 31, 1996 265,347 279,230
Common stock, $.01 par value,
authorized 30,000,000 shares;
issued and outstanding:
9,403,987 shares at
December 31, 1997 and
8,916,141 shares at
December 31, 1996 94,040 89,161
Warrants and options 523,984 417,500
Additional paid-in capital 12,579,920 11,927,644
Retained (deficit) (19,427,332) (19,132,668)
Total stockholders' deficit (4,519,041) (4,332,069)
Total Liabilities and
Stockholders' Deficit $ 2,613,031 $ 2,817,944
Consolidated Statements of Operations
Six
Year Months
Ended Ended Years Ended June 30
12/31/97 12/31/96 1996 1995
Revenue:
Software licensing $4,390,479 $ 526,353 $ 2,825,600 $ 1,713,897
Engineering
services 1,055,459 605,776 2,378,135 1,195,201
Tangible product
sales 235,138 63,775 257,845 286,465
Total revenue 5,681,076 1,195,904 5,461,580 3,195,563
Operating Expenses:
Engineering
services 1,151,147 922,325 1,833,531 665,421
Tangible product
sales 134,305 8,978 32,189 13,838
Research and
development 1,498,181 294,136 823,000 2,093,616
Selling and
marketing 1,986,340 457,281 1,764,585 2,661,453
General and
administrative 1,207,088 432,301 1,035,535 997,633
Total operating
expenses 5,977,061 2,115,021 5,488,840 6,431,961
Loss from operations (295,985) (919,117) (27,260) (3,236,398)
Other income
(expense) - net 31,321 (16,220) 39,950 (221,024)
Income (loss)
before income
taxes (264,664) (935,337) 12,690 (3,457,422)
Income taxes 30,000 --- --- ---
Net Income (Loss) $ (294,664) $ (935,337) $ 12,690 $(3,457,422)
Loss Per Share:
Net Income (Loss) $ (294,664) $ (935,337) $ 12,690 $(3,457,422)
Dividends accrued
on preferred stock 447,191 201,094 261,210 100,328
Net Loss Available
for Common Stock $ (741,855) $(1,136,431) $ (248,520) $(3,557,750)
Loss Per Share:
Basic and diluted $ (0.08) $ (0.13) $ (0.03) $ (0.48)
Shares Used in
Computing
Loss Per Share:
Basic and diluted 9,243,508 8,689,031 7,847,510 7,411,502
The Notes to the Financial Statements are an integral part of this
statement.
Consolidated Statements of Cash Flows
Six
Year Months
Ended Ended Year Ended
Dec. 31 Dec. 31 June 30
1997 1996 1996 1995
Cash flows from
operating activities:
Net income (loss) $(294,664) $(935,337) $ 12,690 $(3,457,422)
Adjustments to reconcile
net income (loss) to
net cash used by
operating activities:
Depreciation and
amortization 194,311 45,328 104,559 113,562
Loss on disposal of
fixed assets 3,573 --- 4,346 ---
Expenses charged to
operations relating
to options, warrants and
capital transactions 161,684 42,500 178,375 210,500
Discount on payment of
vendor obligation (100,000) --- --- ---
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable 451,937 (414,839) 67,424 (340,651)
(Increase) decrease in
unbilled contract
revenue (171,858) 155,991 (74,584) (87,674)
(Increase) in deferred
development costs (210,347) (364,405) --- ---
(Increase) decrease in
other assets 41,635 (45,877) (99,025) (115,721)
(Decrease) increase in
accounts payable,
accrued expenses and
other liabilities (63,845) (83,593) (568,309) 786,010
(Decrease) increase in
deferred income ( 361,071) 252,300 796 (15,630)
Net cash used by
operating activities (348,645) (1,347,932) (373,728) (2,907,026)
Cash flows from
investing activities:
Purchase of property
and equipment (88,622) (71,390) (57,531) (249,319)
Proceeds from the
disposal of
fixed assets --- --- 85,000 ---
Net cash provided
(used) by
investing activities (88,622) (71,390) 27,469 (249,319)
Cash flows from
financing activities:
Repayment of obligations
under capital leases (11,913) (5,338) (7,924) (10,796)
Proceeds from notes payable --- --- 300,000 1,700,000
Rights offering expense --- --- (136,421) (39,769)
Proceeds from issuance
of common stock 96,975 185,800 99,510 73,288
Proceeds from issuance
of preferred stock - net --- --- 1,651,823 1,470,000
Payments of dividends
on preferred stock (35,613) --- --- ---
Net cash provided
by financing activities 49,449 180,462 1,906,988 3,192,723
Net change in cash and
cash equivalents (387,818) (1,238,860) 1,560,729 36,378
Cash and cash equivalents -
beginning of period 774,457 2,013,317 452,588 416,210
Cash and cash equivalents -
end of period $ 386,639 $ 774,457 $2,013,317 $ 452,588
Supplemental cash flows
information:
Interest paid $ 3,598 $ 3,227 $ 4,372 $ 3,728
Income taxes paid $ --- $ --- $ --- $ ---
Significant non-cash transactions are described in Notes 7, 10, 12, and 19.
The Notes to the Financial Statements are an integral part of this statement.
Nestor, Inc. Consolidated Statement of Stockholders' Equity
Common Stock Preferred Stock Additional Retained Stock
Shares Amount Shares Amount Paid-in Capital (Deficit) Warrants Total
Balance at
June 30, 1993 6,802,710 $ 68,027 2,407,064 $ 2,407,064 $ 10,033,105 $(12,994,015) $ --- $ (485,819)
Issuance of
Capital Stock 332,625 3,326 815,000 815,000 906,367 --- --- 1,724,693
Conversion of
Preferred Stock
to Common Stock 95,000 950 (95,000) (95,000) 94,050 --- --- ---
(Loss) for the
year ended
June 30, 1994 --- --- --- --- --- (1,758,584) --- (1,758,584)
Balance at
June 30, 1994 7,230,335 $ 72,303 3,127,064 $ 3,127,064 $ 11,033,522 $(14,752,599) --- $ (519,710)
Issuance of
Capital Stock 141,375 1,414 --- --- 282,374 --- --- 283,788
Issuance of
Preferred Stock --- --- 100,000 100,000 100,000 --- --- 200,000
Cost of rights
offering --- --- --- --- (39,769) --- --- (39,769)
Conversion of
Preferred Stock
to Common Stock 235,000 2,350 (235,000) (235,000) 232,650 --- --- ---
Dividends accrued
on Redeemable
Convertible
Preferred Stock
Series C --- --- --- --- (100,328) --- --- (100,328)
Reclassification
of Series C
Redeemable
Convertible
Preferred Stock
from capital --- --- --- --- (405,000) --- 375,000 (30,000)
(Loss) for the
year ended
June 30, 1995 --- --- --- --- --- (3,457,422) --- (3,457,422)
Balance at
June 30, 1995 7,606,710 $ 76,067 2,992,064 $ 2,992,064 $11,103,449 $ (18,210,021) $375,000 $(3,663,441)
Issuance of
Common Stock 177,998 1,780 --- --- 175,928 --- --- 177,708
Issuance of
Preferred Stock --- --- 210,549 315,824 (10,000) --- --- 305,824
Conversion of
Preferred Stock
to Common Stock 490,878 4,909 (490,878) (503,817) 498,908 --- --- ---
Dividends on
Preferred Stock
Series D paid in
Common Stock 5,355 53 --- --- 13,495 --- --- 13,548
Dividends accrued
on Preferred Stock --- --- --- --- (274,819) --- --- (274,819)
Expenses incurred
in reduction of
exercise price of
outstanding
warrants --- --- --- --- 131,250 --- --- 131,250
Costs incurred in
connection with
August 1995
securities
registration --- --- --- --- (136,421) --- --- (136,421)
Income for the
year ended
June 30, 1996 --- --- --- --- --- 12,690 --- 12,690
Balance at
June 30, 1996 8,280,941 $ 82,809 2,711,735 $ 2,804,071 $11,501,790 $(18,197,331) $375,000 $(3,433,661)
Issuance of
Common Stock 190,200 1,902 --- --- 183,898 --- --- 185,800
Conversion of
Preferred Stock
to Common Stock 445,000 4,450 (445,000) (447,500) 443,050 --- --- ---
Dividends accrued
on Preferred
Stock Series D --- --- --- 9,723 (9,723) --- --- ---
Accretion of value
of warrants --- --- --- --- --- --- 42,500 42,500
Dividends accrued
on Redeemable
Convertible
Preferred Stock --- --- --- --- (191,371) --- --- (191,371)
(Loss) for the
six months ended
December 31, 1996 --- --- --- --- --- (935,337) --- (935,337)
Balance at
December 31, 1996 8,916,141 $ 89,161 2,266,735 $ 2,366,294 $11,927,644 $ (19,132,668) $417,500 $(4,332,069)
Issuance of
Common Stock 279,592 2,796 --- --- 472,769 --- --- 475,565
Conversion of
Preferred Stock
to Common Stock 198,800 1,988 (198,800) (203,200) 201,212 --- --- ---
Dividends on
Preferred Stock
Series D paid in
Common Stock
and cash 9,454 95 --- (18,381) 18,222 --- --- (64)
Repurchase of
Preferred Stock
Series A --- --- (452,064) (452,064) 352,063 --- --- (100,001)
Dividend accrued on
Preferred Stock
Series D --- --- --- 17,698 (17,698) --- --- ---
Dividends accrued
on Redeemable
Convertible
Preferred Stock --- --- --- --- (429,492) --- --- (429,492)
Issuance of non-
qualified options --- --- --- --- 55,200 --- --- 55,200
Accretion of value
of warrants --- --- --- --- --- --- 106,484 106,484
(Loss) for the
year ended
December 31, 1997 --- --- --- --- --- (294,664) --- (294,664)
Balance at
December 31, 1997 9,403,987 $ 94,040 1,615,871 $1,710,347 $12,579,920 $(19,427,332) $523,984 $(4,519,041)
The Notes to the Financial Statements are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
A. Organization
Nestor, Inc. (the "Company") was organized on
March 21, 1983 in Delaware to exploit, develop and
succeed to certain patent rights and know-how which the
Company acquired from its predecessor, Nestor
Associates, a limited partnership. The Company's
principal office is located in Providence, RI.
The accompanying financial statements include the
accounts of Nestor, Inc., Nestor IS, Inc. ("IS"),
Nestor Interactive, Inc. ("Interactive"), and Nestor
Financial Services Group, a joint venture (organized in
December, 1986, and dissolved effective December 31,
1995. IS and Interactive are wholly owned subsidiaries
formed January 1, 1997. All intercompany transactions
and balances have been eliminated.
B. Product and patent development costs
The costs of development of the Company's software
which consist primarily of labor and outside consulting
and which are an inherent cost of the Company's
business and costs of research and development are
expensed until technological feasibility has been
established for the product. Thereafter, all software
production costs are capitalized and subsequently
reported at the lower of unamortized cost or net
realizable value. Capitalized costs are amortized on a
straight-line basis over the estimated economic life
(three to five years) of the product.
Patent-development costs are expensed or
capitalized, as appropriate. Amortization of
capitalized costs would be on a straight-line basis
over the shorter of the estimated economic life, or
statutory life, of the patent. At December 31, 1997
and 1996, there were no capitalized patent-development
costs.
C. Depreciation and amortization
Depreciable assets are recorded at cost.
Depreciation is provided on the straight-line method
over the estimated useful lives of the respective
assets.
Maintenance and repairs are expensed as incurred.
Major renewals and betterments are capitalized.
D. Revenue recognition
The Company recognizes revenue based upon the
following methods:
a) Revenue from software licensing is
recognized upon delivery provided that no
significant vendor and post-contract support
obligations remain outstanding and collection of the
resulting receivable is deemed probable. Where
there are insignificant post-contract support
obligations and/or warranties remaining at the time
of delivery, the Company recognizes revenue and
accrues the estimated cost of fulfilling such
obligations or warranties.
Product returns or exchanges are charged
to operations as incurred. Where the Company
anticipates significant returns of products sold,
the Company establishes an allowance for anticipated
returns or exchanges at the time of sale. If
customer acceptance is uncertain, revenue is
recognized upon approval by the customer.
b) Engineering contract revenue from long-
and short-term contracts and from modeling services
is recognized on the percentage-of-completion
method, based upon the pattern of actual performance
under the agreement with the customer. Management
records expected losses on contracts in the period
in which such losses become foreseeable.
c) Training revenue is recognized upon the
completion of training sessions with the customer.
E. Cash equivalents
For the purpose of the statement of cash flows,
the Company considers all highly liquid debt
instruments purchased with a maturity of 90 days or
less to be cash equivalents.
F. Accounting for issuance and exercise of warrants
and options to purchase Common Stock
The Company records no expense upon the issuance
of warrants and options issued at fair market value.
For warrants and options issued at an exercise price
below fair market value, the Company records an expense
equal to the difference between the market value of the
underlying shares of Common Stock and the exercise
price of such options or warrants. When the Company
induces warrant or option holders to exercise at a
price lower than the original exercise price, the
Company recognizes an expense equal to the fair value
of the securities issued less the proceeds received for
the securities, but not more than the reduction in the
exercise price.
G. Concentrations of credit risk
The Company's financial instruments that are
exposed to concentrations of credit risk consist
primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and
temporary cash investments with high credit quality
institutions. At times such investments may be in
excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its
customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is
limited. The Company does not require collateral from
its customers. Management believes the allowance
carried for doubtful accounts receivable is adequate to
cover potential losses associated with uncollectible
accounts receivable.
H. Inventory
Inventory, consisting primarily of finished goods,
is valued at the lower of cost or market on the first-
in, first-out basis. Inventories are included as
"Other current assets" on the Consolidated Balance
Sheets.
I. Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
J. Change in Fiscal Year
The Company changed its fiscal year from June 30
to December 31 effective December 31, 1996. The
results for the six month period ended December 31,
1996 have been presented in the main body of the
financial statements.
K. Change in Presentation
In order to conform with the December 31, 1997
presentation, certain balances at December 31, 1996,
have been reclassified.
Note 2 - Comparative Financial Information:
The following financial information for the six months
ended December 31, 1995 and the year ended December 31,
1996, is unaudited and is being presented for
comparative purposes:
Year-Ended Six Months Ended
Dec. 31, 1996 Dec. 31, 1995
(Unaudited) (Unaudited)
Total revenues $ 4,508,397 $ 2,149,088
Loss from operations (403,741) (542,385)
Net loss (199,420) (723,227)
Net loss per share $ (0.09) $ (0.09)
Note 3 - Income (loss) per share:
The Company has adopted on December 31, 1997, the
provisions of the Financial Accounting Standards Board
Statement No. 128, Earnings Per Share ("FAS 128").
Pursuant to this Statement, the Company has replaced
the reporting of "primary" earnings per share ("EPS")
with "basic" EPS. Basic EPS is calculated by dividing
the income available to common stockholders by the
weighted average number of common shares outstanding
for the period, without consideration for common stock
equivalents. "Fully diluted" EPS has been replaced by
"diluted" EPS. Diluted EPS is computed similarly to
fully diluted EPS under the provision of APB Opinion
No. 15. There was no effect on current or prior year
EPS computations from the adoption of FAS 128.
Note 4 - Accounts receivable, net of allowance for doubtful
accounts:
December 31,
1997 1996
Trade accounts receivable $ 711,766 $ 1,154,384
Allowance for doubtful
accounts (154,554) (145,235)
Accounts receivable,
net of allowance
for doubtful accounts $ 557,212 $ 1,009,149
Note 5 - Deferred development costs:
The Company began, in the quarter ended September 30,
1996, a project to customize its PRISM fraud detection
system for a customer. For the six months ended
December 31, 1996, the Company had deferred $364,000 of
costs associated with this project. During 1997, an
additional $211,000 of such costs were capitalized in
connection with engineering and installation of the
project. Management believes that these costs, which
are subject to a binding contract entered into upon
delivery of the software on March 28, 1997, will be
fully recovered over the five year term of the
aforementioned contract
During the quarter ended March 31, 1997, the Company
recorded a sale in the amount of approximately $550,000
based upon its delivery of a PRISM fraud detection
system for a customer. As a result of new information
(much of which was learned by management subsequent to
December 31, 1997 when it was evaluating the fourth
quarter, 1997, performance of the product) as to the
customer's intention to delay implementation management
has re-evaluated its decision to recognize the revenues
on this contract and reversed the record revenue. In
addition, the Company has deferred the associated costs
and will amortize those costs against future revenues,
as earned. This change, which reduced recorded
revenues and costs by approximately $550,000 and
$575,000, respectively, had an insignificant effect on
net loss per share.
Note 6 - Property and equipment at cost - net:
Useful Life
in Years or
December 31, Lease Term
1997 1996
Leasehold improvements $ 22,945 $ 22,945 Lease Term
Office furniture and
equipment 199,254 199,254 5 - 7
Computer equipment 1,285,643 1,184,981 3 - 5
1,507,842 $1,407,180
Less: Accumulated
depreciation and
amortization 1,246,379 1,151,590
$ 261,463 $ 255,590
Depreciation and amortization expense on the above
assets of $95,682, $45,327, $104,559, and $100,229 was
recorded for the year ended December 31, 1997, for the
six months ended December 31, 1996, and for the years
ended June 30, 1996 and 1995, respectively.
Note 7 - Intangible Asset:
On March 31, 1997, the Company purchased from Cyberiad
Software, Inc. ("Cyberiad"), a Rhode Island
corporation, substantially all of Cyberiad's assets.
In this transaction, the Company issued 200,000 shares
of its Common stock to Cyberiad and agreed to assume
approximately $10,500 of Cyberiad's liabilities.
Accordingly, the Company recorded as an intangible
asset the excess of its acquisition cost over the fair
value of the net liabilities assumed ($394,517) and is
amortizing this asset over 36 months. Amortization
expense recorded in the year ended December 31, 1997
was $98,629.
Note 8 - Accounts payable and accrued expenses:
Accounts payable and accrued expenses consists of the
following:
December 31,
1997 1996
Trade accounts payable $ 316,670 $231,395
Accrued salaries 333,046 185,842
Other accrued expenses 256,778 253,505
$906,494 $670,742
Note 9 - Line of credit:
On July 29, 1997 Nestor, Inc. entered into a $200,000
Revolving Line of Credit with a bank. The interest
rate is equal to the prime rate plus 1.5%, and the Line
expires on July 1, 1998. The loan is secured by the
tangible assets of Nestor, Inc. There were no amounts
outstanding at December 31, 1997. In March 1998, the
Line of Credit was increased to $500,000 and the
expiration date was extended to September 1, 1998.
Note 10 - Redeemable convertible preferred stock:
The Company is required to redeem all of the following
series of convertible preferred stock on or before
August 1, 2004. Accordingly, this preferred stock
subject to mandatory redemption has been presented
separately outside of permanent stockholders' equity in
the accompanying financial statements.
December 31,
1997 1996
Series E, par value $1.00
per share, 1,444 shares
outstanding at December
31, 1997 and 1996.
$305,577 and $189,226 of
accumulated dividends at
December 31, 1997 and
1996, respectively. $ 1,749,577 $1,633,226
Series F, par value $1.00
per share, 599 shares
outstanding at December
31, 1997 and 1996.
$95,821 and $51,313 of
accumulated dividends at
December 31, 1997 and
1996, respectively. 694,821 650,313
Series G, par value $1.00
per share, 777 shares
outstanding at December
31, 1997 and 1996.
$116,650 and $46,875 of
accumulated dividends at
December 31, 1997 and
1996, respectively. 893,650 823,875
Series H, par value $1.00
per share, 2,026 shares
outstanding at December
31, 1997 and 1996.
$428,739 and $265,494 of
accumulated dividends at
December 31, 1997 and
1996, respectively. 2,454,739 2,291,494
TOTAL $ 5,792,787 $5,398,908
Series F and G Convertible Preferred Stock
Except as noted below the Series F and G Preferred
Stock have the same terms and conditions. Each share
of Series F and G Preferred Stock is convertible at the
option of the holder at any time and from time to time
into shares of Common Stock at a conversion price of
$1.25 per share, subject to adjustment, after June 30,
1996. With respect to dividend rights, redemption
rights and rights on liquidation, winding up or
dissolution, the Series F Preferred Stock ranks pari
passus with the Series G Preferred Stock and ranks
prior to the Series B, D, E, and H Preferred Stocks and
the Common Stock of the Company.
Except as provided herein, any holder of Series G
Preferred Stock that is subject to the Bank Holding
Company Act of 1956 ("BHCA Holder"), as amended, shall
have no voting rights. Each holder of Series G
Preferred Stock that is not a BHCA Holder shall be
entitled to vote on all matters as to which
stockholders of the Company are entitled to vote, and
each such holder shall be entitled to cast a number of
votes equal to the greatest number of whole shares of
Common Stock into which such holder's shares of Series
G Preferred Stock could be converted. The holders of
the Series F Convertible Preferred Stock are entitled
to one vote for each share of Common Stock into which
the shares are convertible.
In the event the Company is in default with respect to
the payment of (i) two consecutive cash dividends after
the "Restricted Period" as hereinafter defined or (ii)
two dividends within any six consecutive dividend
periods the holders of the Series F and G Preferred
Stock shall have the right to elect two directors for
so long as the default continues. In the event the
Company is in default with respect to the payment of
(i) four consecutive cash dividends after the
Restricted Period as hereinafter defined or (ii) four
dividend payments within any eight consecutive
quarterly dividend periods, the holders shall have the
right to elect four directors for so long as the
default continues.
In the event the Company violates the provisions of, or
is in default under the terms of any loan agreement or
in the event a judgment is entered against the Company
or any subsidiary in the amount of $50,000 or more, the
holders of the Series F and G Convertible Preferred
Stock shall have the right to elect four directors.
The holders of the Series F and G Preferred Stock,
except during the Restricted Period, are entitled to
receive out of funds of the Company legally available
for such purpose as and when declared by the Board of
Directors of the Company quarterly dividends in cash at
a rate of nine percent (9%) compounded quarterly per
annum of the stated value per share ($1,000.00 on
original issuance) of Series F and G Preferred Stocks.
Dividends shall accrue, be accumulated and added to the
stated value whether or not declared. So long as any of
the shares of Series F and G Preferred Stock are
outstanding, the Company shall not declare or pay any
dividends on any outstanding Common or Preferred Stock,
other than the Series D, F and G Preferred Stock. The
Restricted Period as it relates to the payment of
dividends on the Series F and G Preferred Stock means
the period beginning on the date of issuance of the
Series F or G Preferred Stock and ended on September
30, 1997. While no dividends were payable during the
Restricted Period, they accrued and accumulated during
the Restricted Period. The Company paid on December
31, 1997 for the quarter then ended, cash dividends
totaling $35,613 on the Series F and G Preferred Stock.
The Company is obligated to redeem all the outstanding
shares of Series F and G Preferred Stock outstanding at
the stated value plus accrued dividends on August 1,
2004. The holders of the F and G Preferred Stock have
the right to require that the Company redeem, to the
extent the Company may lawfully do so, all or a portion
of the then outstanding shares of Series F and G
Convertible Preferred Stock at the stated value plus
accrued and unpaid dividends in the event of a merger,
reorganization, transfer of the majority of the voting
securities of the Company, or sale of more than 25% of
the assets of the Company.
Series E and Series H Convertible Preferred Stock
Except as noted below, the Series E and Series H
Preferred Stock have the same terms and conditions.
Each share of Series E and H Preferred Stock is
convertible at the option of the holder at any time and
from time to time into shares of Common Stock at a
conversion price of (a) $1.50 per share subject to
adjustment prior to August 1, 2004 or (b) on or after
August 1, 2004 at a conversion price which is the lower
of $1.00 or the conversion price in effect pursuant to
(a). With respect to dividend rights, redemption
rights and rights on liquidation, winding up or
dissolution, the Series E and H Preferred Stocks rank
(i) junior to the Series F Preferred Stock and the
Series G Preferred Stock; and (ii) rank prior to the
Series B Preferred Stock, the Series D Preferred Stock,
and the Common Stock of the Company.
Except as provided herein, any holder of Series E
Preferred Stock that is subject to the Bank Holding
Company Act of 1956 ("BHCA Holder"), as amended, shall
have no voting rights. Each holder of Series E
Preferred Stock that is not a BHCA Holder shall be
entitled to vote on all matters as to which
stockholders of the Company are entitled to vote, and
each such holder shall be entitled to cast a number of
votes equal to the greatest number of whole shares of
Common Stock into which such holder's shares of Series
E Preferred Stock could be converted. The holders of
the Series H Convertible Preferred Stock are entitled
to one vote for each share of Common Stock into which
the shares are convertible.
Except as hereinafter provided, the holders of the
Series E Preferred Stock and the Series H Preferred
Stock shall have the right, voting separately as a
class, to elect two directors to the Board of Directors
of the Company. However, in the event the Company is
in default with respect to the payment of (i) two
consecutive cash dividends after the "Restricted
Period" as hereinafter defined or (ii) two dividends
within any six consecutive quarterly dividend periods,
the holders shall have the right to elect four
directors for so long as the default continues. In the
event the Company is in default with respect to the
payment of (i) four consecutive cash dividends after
the 'Restricted Period" as hereinafter defined or (ii)
four dividend payments within any eight consecutive
quarterly dividend periods, the holders shall have the
right to elect six directors for so long as the default
continues.
In the event the Company violates the provisions of, or
is in default under the terms of any loan agreement or
in the event a judgment is entered against the Company
or any subsidiary in the amount of $50,000 or more, the
holders of the Series E and H Convertible Preferred
Stock shall have the right to elect eight directors.
The holders of the Series E Preferred Stock and the
Series H Preferred Stock, except during the Restricted
Period, are entitled to receive out of funds of the
Company legally available for such purpose as and when
declared by the Board of Directors of the Company
quarterly dividends in cash at a rate of seven percent
(7%) compounded quarterly per annum of the stated value
per share ($1,000.00 on original issuance) of Series E
and H Preferred Stocks. Dividends shall accrue, be
accumulated and added to the stated value whether or
not declared. So long as any of the shares of Series E
and H Preferred Stock are outstanding, the Company
shall not declare or pay any dividends on any
outstanding Common or Preferred Stock, other than the
Series D, F and G Preferred Stock. The Restricted
Period as it relates to the payment of dividends on the
Series E and H Preferred Stock means the period
beginning on the date of issuance of the Series E and H
Preferred Stock and ending on the earlier of (a) the
first day of the calendar quarter in which the Company
first pays cash dividends on its Common Stock or (b)
June 30, 1998. While no dividends are payable during
the Restricted Period, they will accrue and accumulate
during the Restricted Period.
The Company is obligated to redeem all the outstanding
shares of Series E and H Preferred Stock outstanding at
the stated value plus accrued dividends on August 1,
2004. The holders of the E and H Preferred Stock have
the right to require that the Company redeem, to the
extent the Company may lawfully do so, all or a portion
of the then outstanding shares of Series E and H
Convertible Preferred Stock at the stated value plus
accrued and unpaid dividends in the event of a merger,
reorganization, transfer of the majority of the voting
securities of the Company, or sale of more than 25% of
the assets of the Company.
Note 11 - Convertible Preferred stock:
In June 1997 the Company repurchased from Sligos S.A.
all of the outstanding shares of the Series A Preferred
Stock. See Note 19, Termination of License Agreement.
Series A Preferred Stock was convertible at any time
into one fully paid and non-assessable share of Common
Stock. Series A Preferred had the same dividend rights
as shares of Common Stock but carried no voting rights.
Each share of Series A Preferred had the right to
receive in liquidation $2.00 before any distribution
was made on Common Stock or on any other class of stock
ranking junior to Series A. The liquidation value of
Series A Preferred was $0 and $904,128 at December 31,
1997 and 1996, respectively.
Series B Convertible Preferred Stock is convertible
into Common Stock of the Company at any time on a share-
for-share basis. Series B Convertible Preferred Stock
has the same rights with respect to voting and
dividends as the Common Stock, except that each share
of Series B Convertible Preferred Stock has the right
to receive in liquidation $1.00 before any distribution
is made to holders of the Common Stock. The
liquidation value of Series B Preferred was $1,445,000,
and $1,635,000, at December 31, 1997 and 1996,
respectively.
Series D Convertible Preferred Stock is convertible
after January 1, 1996 at the option of the holder at
any time, and from time to time, into one fully paid
and non-assessable share of Common Stock of the Company
on a share-for-share basis. The Series D Preferred
shall have the right to receive annual dividends at the
rate of seven percent (7%) of the stated value per
share ($1.50), which dividend shall be paid in cash or
in shares of Common Stock at the option of the Company.
On June 30, 1997 and 1996, the Company paid stock
dividends on the Series D Preferred totaling $18,381
and $13,548, respectively. The Company shall have the
right, after June 1, 1996, to redeem in cash the Series
D Preferred, in whole or in part from time to time, at
the stated value per share plus accrued dividends. The
liquidation value of Series D Preferred was $265,347
and $279,230 at December 31, 1997 and 1996,
respectively.
The Series D Convertible Preferred Stock ranks on a
parity with Series B Convertible Preferred Stock with
respect to dissolution, liquidation, or winding up of
the Company and is entitled to receive, out of assets
of the Company available for distribution upon
liquidation, dissolution or winding up of the Company,
$1.50 per share plus an amount equal to all dividends
on shares accrued but unpaid, and is junior to all
series of Redeemable Convertible Preferred Stock. The
holders of the Series D Preferred are entitled to one
vote for each share of Common Stock into which the
Series D Preferred is convertible, and therefore have
the same voting rights on a share-for-share basis, as
the holders of the Common Stock.
Note 12 - Options and warrants:
On April 1, 1984, the Company adopted an Incentive
Stock Option Plan providing for the granting of options
to purchase shares of the Company's common stock at a
price equal to the market price of the stock at the
date of grant. The Company's Stock Option Plan has
authorized the grant of options to employees for up to
2,450,000 shares of the Company's common stock.
Options are exercisable for five years from the date of
grant.
On May 6, 1997, the Company adopted the 1997 Stock
Option Plan providing for the granting of options to
purchase shares of the Company's common stock at a
price equal to the market price of the stock at the
date of grant. The 1997 Stock Option Plan has
authorized the grant of options to employees for up to
1,000,000 shares of the Company's common stock.
Options are exercisable for up to ten years from the
date of grant, although all options currently
outstanding expire five years from the date of grant.
The Company has adopted the disclosure-only provisions
of Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation ("FAS
123") which is first applicable to the Company's fiscal
year ended June 30, 1996. The Company will continue to
account for its stock option plans in accordance with
the provisions of APB 25, Accounting for Stock Issued
to Employees. Accordingly, no compensation cost has
been recognized in the financial statements for
qualifying grants issued pursuant to the Company's
Stock Option Plan.
The following table presents the activity of the
Company's Stock Option Plan for the year ended December
31, 1997, for the six months ended December 31, 1996
and for the fiscal years ended June 30, 1996 and 1995:
Six Months
Yr. Ended Ended Year Ended 6/30,
12/31/97 12/31/96 1996 1995
Weighted Weighted Weighted Weighted
Av. Ex. Av. Ex. Av. Ex. Av. Ex.
Shares Price Shares Price Share Price Shares Price
Outstanding
beginning
of year 1,781,500 1.50 1,356,000 1.03 1,399,000 1.80 1,141,000 1.90
Granted 484,000 1.81 612,000 2.38 1,406,000 1.04 348,000 1.60
Exercised 46,875 1.00 186,500 0.98 100,500 1.09 13,875 1.52
Canceled 4,625 1.67 ------ 1,348,500 1.83 76,125 2.43
Outstanding
end of year2,214,000 1.58 1,781,500 1.50 1,356,000 1.03 1,399,000 1.80
Options
exercisable
at year end1,470,250 1.39 1,101,875 1.22 1,023,500 1.00 950,375 1.88
Weighted
average fair
value of
options
granted
during
the year $ 1.44
The following table presents weighted average price
and life information about significant option groups
outstanding at December 31, 1997.
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Weighted
Outstanding Remaining Average Number Averaged
Range of at Contractual Exercise ExercisableExercisable
Exercise Prices 12/31/97 Life (Years) Price at 12/31/97 Price
$ .87 - $1.00 1,034,000 2.69 $0.99 976,250 $0.99
$1.50 - $2.00 405,500 4.48 1.59 125,500 1.60
$2.14 - $2.44 707,500 3.73 2.30 335,000 2.31
$2.81 - $2.94 67,000 3.77 2.86 33,500 2.86
2,214,000 3.38 $1.58 1,470,250 $1.39
The following are the pro forma net loss and net loss
per share for the year ended December 31, 1997, for the
six months ended December 31, 1996, and for the year
ended June 30, 1996, as if the compensation cost for
the option plan had been determined based on the fair
value at the grant date for grants in those periods and
reflected in the financial statements:
Year Ended Six Months Ended Year Ended
December 31, 1997 December 31, 1997 June 30, 1996
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net income
(loss) $(294,664) $(876,280) $(935,337) $(1,277,841) $ 12,690 $(633,262)
Net (loss)
per
share $ (0.08) $ (0.14) $ (0.13) $ (0.17) $ (0.03) $ (0.11)
The effects on the year ended December 31, 1997, the
six months ended December 31, 1996, and the year ended
June 30, 1996, pro forma loss per share of expensing
the estimated fair value of stock options are not
necessarily representative of the effects on reporting
the results of operations for future years because
additional options will vest subsequent to December 31,
1997 and the Company expects to grant additional
options in future years. Because FAS No. 123 is first
applicable to the Company's fiscal year ended June 30,
1996, the full effects on pro forma earnings will not
be felt until 1998.
The fair value of each option grant was estimated using
the Black-Scholes model with risk-free interest rates
on the date of grant which ranged from 5.4% to 6.8%.
The Company has never declared nor paid dividends on
its common stock and does not expect to in the
foreseeable future. The volatility factor of the
expected market price of the Company's common stock
used in estimating the fair value of the grants was
.815 and the expected life of the options was estimated
as five years.
The Company, at the discretion of the Board of
Directors, has granted warrants from time to time,
generally in conjunction with the sale of equities.
The following table presents warrants outstanding:
Dec. 31, 1997 Dec. 31, 1996
Officers --- 10,000
Others 2,709,089 2,826,239
Eligible, End of Year
for Exercise
Currently (at prices
ranging from $.65 to $4.62
per share) 2,709,089 2,836,239
Warrants issued --- ---
Low exercise price $ --- $ ---
High exercise price $ --- $ ---
Of the warrants outstanding at December 31, 1997,
210,050 were issued in conjunction with the issuance of
the Series D Convertible Preferred Stock. These
warrants entitle the registered owner to purchase one-
half of one share of Common Stock at the per-share
exercise price of $2.00. All other outstanding
warrants entitle the owner to purchase one share of
Common Stock for each warrant, at prices ranging from
$0.65 to $2.00 per share.
The warrants outstanding as of December 31, 1997, are
currently exercisable and expire at various dates
through October 5, 2005.
During the year ended June 30, 1996, the exercise price
of 1,000,000 warrants issued in the prior year was
reduced from $1.50 to $.65. The maximum cumulative
expense to be recorded by the Company upon exercise of
these warrants will be $850,000. During the period
ended December 31, 1996, the Company began recording,
on a prorated basis, the maximum expense over the
remaining life of the warrants. Accordingly, the
Company recognized expenses totaling $106,000 and
$42,000 for the year and six months ended December 31,
1997 and 1996, respectively.
Also during the year ended June 30, 1996, the Company
issued to Wand Partners, Inc. 700,000 ten-year warrants
to purchase shares of the Common Stock of the Company
at $1.00 per share. The Company recorded a charge of
$131,250 representing the difference between the market
value of the underlying Common Stock of the Company and
the aggregate exercise price of such warrants during
the fiscal year ended June 1996.
Note 13 - Major customers:
In the year ended December 31, 1997, two customers
accounted for 39% and 16% of the Company's revenues.
In the six months ended December 31, 1996, five
customers accounted for 19%, 18%, 15%, 13% and 11% of
the Company's revenues. In the fiscal year ended June
30, 1996, one customer accounted for 30% of the
Company's total revenues. Another customer, who
accounted for 16% of the Company's 1997 revenues,
accounted for 13% of the Company's revenues during the
year ended June 1996 and 16% of the Company's revenues
during the year ended June 1995. A third customer
accounted for 11% of the Company's revenues during the
year ended June 1995.
Note 14 - Revenue from sources outside the United States:
Revenues from licenses, engineering and sales of
tangible products sold outside the United States were
as follows:
Year Ended Six Months Year Ended June 30,
12/31/97 12/31/96 1996 1995
France $ 480,899 $ 30,000 $ 65,085 $ 98,785
Belgium 903,662 42,000 727,375 507,900
Germany --- --- 173,877 81,649
Japan 531,590 14,094 36,424 2,100
Canada 223,000 --- 41,710 27,985
Singapore --- --- 65,530 65,315
All other
countries 150,100 24,760 279,798 289,501
$ 2,289,251 $ 110,854 $ 1,389,799 $ 1,073,235
Note 15 - Other income (expense) - net:
Other income (expense) as reflected in the consolidated
statements of operations consists of the following:
Six Months
Year Ended Ended Year Ended 6/30
12/31/97 12/31/96 1996 1995
Interest expense $ (3,598) $ (3,227) $ (51,574) $ (34,801)
Expense relating
to financing
operations (106,484) (42,500) (131,250) (210,500)
Net gain on sale of
tangible and
intangible assets
(See Note 20) --- --- 213,185 ---
Other - net 141,403 29,507 9,589 24,277
Other Income
(Expense) - Net $ 31,321 $(16,220) $ 39,950 $(221,024)
Note 16 - Income taxes:
The Company accounts for income taxes using the
deferred liability method as required by Financial
Accounting Standards Board Statement No. 109,
Accounting for Income Taxes. Under FAS 109, deferred
tax assets and liabilities are determined based on
differences between financial reporting and the tax
basis of assets and liabilities, and are measured using
the enacted rates and laws that will be in effect when
the differences are expected to reverse.
The components of the provision (benefit) for income
taxes are:
December 31, December 31,
1997 1996
Current:
Federal $ 30,000 $ ---
State --- ---
Deferred:
Federal --- ---
State --- ---
--- ---
Total Income Taxes $ 30,000 $ ---
[/TABLE]
Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1997 and 1996
are as follows:
December 31, December 31,
1997 1996
Deferred tax liabilities:
Accounts receivable $ --- $ ---
Unbilled contract revenue --- ---
Accrued expenses 43,000 ---
Other - net --- ---
Total deferred tax liabilities 43,000 ---
Deferred tax assets:
Accounts receivable 62,000 58,000
Accrued expenses 205,000 104,000
Deferred income 60,000 173,000
Other - net --- 2,000
Tax credits 30,000 ---
Net Operating Loss 6,563,000 6,354,000
Total deferred tax assets 6,920,000 6,691,000
Valuation allowance (6,877,000) (6,691,000)
Net deferred tax assets 43,000 ---
Net Deferred Tax Balance $ --- $ ---
In accordance with FAS 109, a valuation allowance must
be established until it is more likely than not that
future benefits arising from net deferred tax assets
will be realized. Management has established an
allowance equal to the value of the net deferred tax
assets due to the Company's history of net losses. The
realization of the deferred tax assets is not assured
because of the potential for future losses and
potential limitations on the Company's ability to
utilize its net operating loss carryforwards due to
certain provisions contained in Section 382 of the
Internal Revenue Code.
A reconciliation of the provision for income taxes to
the amount computed using the Federal statutory tax
rates consists of the following:
Six Six
Months Months
Ended Ended
Dec. 31 Dec. 31 Year Ended June 30,
1997 1996 1995 1994
Income (Loss)
Before Taxes $(294,664) $(892,000) $ 13,000 $(3,457,000)
Tax at statutory
rate of 34% $(101,000) $(303,000) $ 4,000 $(1,176,000)
State income tax
(net of
federal benefit) (19,000) (53,000) 1,000 (207,000)
Effect of permanent
differences (36,000) 3,000 7,000 7,000
Valuation Allowance 186,000 353,000 (12,000)
1,376,000
Income Tax Expense $ 30,000 $ --- $ --- $ ---
The Company and its subsidiaries have available at
December 31, 1997, $17,857,000 and $8,267,000 of net
operating loss carryforwards for federal and state
purposes, respectively. These loss carryforwards may be
applied against future taxable income and begin to
expire in 1998.
Note 17 - Related party transactions:
Herbert S. Meeker, a director of the Company, is a
partner in the law firm of Baer, Marks & Upham, which
the Company uses for legal services. For the year
ended December 31, 1997, the six months ended December
31, 1996, and for the years ended June 30, 1996, and
1995, the Company recorded an expense for Baer, Marks &
Upham of $14,400, $7,200, $14,440, and $14,440,
respectively. In addition, in the year ended June 30,
1995, the Company recorded a charge against additional
paid-in capital of $26,736 for the work done by Baer,
Marks & Upham on the Company's Rights Offering.
Included in Accounts payable and accrued expenses at
December 31, 1997, and Other current liabilities at
December 31, 1996 are $4,325 and $8,045, respectively,
due Baer, Marks & Upham.
Bruce W. Schnitzer, who became a director of the
Company in August 1994, is Chairman of Wand Partners,
Inc., a private investment firm that the Company uses
for management consulting. For the year ended December
31, 1997, the six months ended December 31, 1996, and
for the years ended June 30, 1996 and 1995, the Company
recorded an expense for Wand Partners, Inc. of $49,479,
$25,060, $46,076 and 43,530, respectively. During 1997
the Company granted Mr. Schnitzer, as a director of the
Company, a non-qualified stock option for a total of
5,000 shares and recognized an expense of $6,900.
Additionally, on December 31, 1997, the Company paid to
Wand Partners a dividend totaling $35,613 on the Series
F and G preferred stock held by Wand. Included in
Accounts payable and accrued expenses at December 31,
1997 and Other current liabilities at December 31, 1996
are $23,301 and $0, respectively, due Wand Partners,
Inc.
Thomas F. Hill, who became a director of the Company in
August 1994, is President of Thomas F. Hill, Inc., a
consulting firm that the Company uses for marketing
consulting. During 1997 the Company granted Mr. Hill,
as a director of the Company, a non-qualified stock
option for a total of 5,000 shares and recognized an
expense of $6,900. For the year ended June 30, 1995,
the Company recorded an expense for Hill & Partners of
$106,679.
Thomas D. Halket, who became an officer of the Company
in January 1993, is a partner in the law firm of Halket
& Pitegoff LLP, which the Company uses as outside
counsel. For the year ended December 31, 1997, the six
months ended December 31, 1996, and for the years ended
June 30, 1996 and 1995, the Company recorded an expense
for Halket & Pitegoff LLP of $100,961, $65,425,
$144,176, and $103,326, respectively. Included in
Accounts payable and accrued expenses at December 31,
1997 and Other current liabilities at December 31, 1996
are $67 and $6,864, respectively, due Halket & Pitegoff
LLP.
During 1997 the Company issued non-qualified options to
Mr. Sam Albert, Dr. Leon Cooper, Dr. Charles Elbaum,
and Mr. Jeffrey Harvey as directors of the Company.
Each option was for 5,000 shares and the Company
recognized an expense of $27,600.
Note 18 - Commitments and contingencies:
The Company leases a facility in Rhode Island under an
operating lease dated July 1, 1985, as amended. This
lease provides for minimum annual rentals of $141,742
until February 1998, $195,000 until March 2001,
$201,500 until March 2002, and $208,000 until March
2003. Through February 1998 the Company is also
obligated to pay its proportionate share of increases
in real estate taxes and common area maintenance over a
base period; after February 1998 such costs are
included in the base rent.
Rent expense of $188,936, $47,989, $171,928, and
$153,385 was charged to operations for the year ended
December 31, 1997, for the six months ended December
31, 1996 and for the years ended June 30, 1996, and
1995, respectively.
On August 1, 1994, the Company signed a Financial
Advisory Agreement with Wand Partners, Inc. The terms
of the Agreement specify that Wand Partners, Inc. will
provide consulting services for a fee of $40,000 per
year, plus out-of-pocket expenses. The Agreement is in
effect so long as Wand Partners, Inc. owns at least
500,000 shares of Nestor's Common Stock, or other
equities which are convertible into that number of
shares of Common Stock (See Note 17 - Related party
transactions).
The Company has placed purchase orders, including an
end-of-life order, 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 in the second quarter of 1998,
and to purchase 100 units of the modified component at
a total cost of up to $53,000.
The aggregate minimum payments due over the remaining
term of the above agreements is as follows:
December 31, 1998 $ 553,924
December 31, 1999 527,500
December 31, 2000 625,000
December 31, 2001 240,417
December 31, 2002 246,917
Thereafter 74,667
$ 2,268,425
Note 19 - Termination of license agreement:
In December 1994, Sligos agreed to convert $200,000 of
its prepayment into equity and the Company agreed to
refund to Sligos its prepayments of royalties and
engineering fees under its license agreement with the
Company, which was dated October 16, 1990. At December
31, 1996, such long-term portion of deferred income
remaining on the books of the Company amounted to
$430,899 after giving effect to the application of
$200,000 of deferred income to the purchase by Sligos
of 100,000 shares of Series A Preferred Stock, $30,000
refunded by the Company to Sligos, and the
reclassification of $275,000 to Other current
liabilities.
In June 1997 the Company and Sligos terminated their
License Agreement. 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 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.
Note 20 - Significant transactions:
On June 11, 1996, the Company entered into an exclusive
Licensing Agreement and an Asset Purchase Agreement
with National Computer Systems, Inc. (NCS) transferring
the development, production, and marketing rights of
the Company's Intelligent Character Recognition (ICR)
products to NCS. The Company received $1,400,000 as an
initial license fee pursuant to the Licensing
Agreement, and has the right to receive royalties on
future sales of the products by NCS. Minimum annual
royalties range from $160,000 in the year ended June
30, 1997 to $350,000 in the years ended June 30, 2001
and beyond. The Company recognized $120,000 of revenue
under this license agreement in calendar 1997. If NCS
terminates its exclusive rights under the contract,
minimum royalty payments would not be required
subsequent to such termination. The initial license
fee was included in software licensing revenue in the
year-ended June 30, 1996.
The Asset Purchase Agreement transferred tangible and
intangible assets used exclusively in the ICR business
to NCS for $300,000. The net gain on the sale of these
assets was recognized as Other income in the year-ended
June 30, 1996.
Note 21 - New accounting standards:
In June 1997, the Financial Accounting Standards Board
issued two new accounting pronouncements: Statement of
Financial Accounting Standards Numbers 130 and 131
("FAS 130" and "FAS 131"). Management believes that
the adoption of FAS 130, Reporting Comprehensive Income
and FAS 131, Disclosures About Segments of an
Enterprise and Related Information, will not have a
material effect on the Company's financial statements.
In October 1997, the AICPA issued SOP 97-2, Software
Revenue Recognition, which changes the requirements for
revenue recognition effective for transactions that the
Company will enter into beginning January 1, 1998. The
Company has not yet determined the effects SOP 97-2
will have on its financial position or the results of
its operations.
Note 22 - Subsequent Event:
On March 25, 1998, the Company entered into a
$1,500,000 Line of Credit agreement with Transaction
Systems Architect, Inc. ("TSAI"). The loan matures one
year from the date of execution and is secured by the
royalty stream produced by the Company's License
Agreement with Applied Communications, Inc., a
subsidiary of TSAI. Interest on the loan is equal to
the prime rate as published daily in the Wall Street
Journal.
NESTOR, INC. Part IV
Item 14
Schedule II
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance Addition
at Charged Balance
Beginning Charged to at
of to Other Deductions End
Description Period Expense Accounts Reserve of Period
Allowances
deducted from
accounts
receivable:
Year ended
June 30, 1995 $ 23,230 $ 45,276 $ --- $(10,530) $ 57,976
Year ended
June 30, 1996 $ 57,976 $120,656 $ --- $(12,923) $ 165,709
Six months
ended
December 31,
1996 $ 165,709 $ 38,888 $ --- $(59,362) $ 145,235
Year ended
December 31,
1997 $ 145,235 $ 80,495 $ --- $(71,176) $ 154,554
ITEM 8. Financial Statement and Supplementary Data
See annexed financial statements.
ITEM 9. Changes in or Disagreement with Accounting and
Financial disclosure
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's
definitive proxy or information statement to be filed
with the Commission not later than 120 days following
the end of the Company's fiscal year.
ITEM 11. Executive Compensation.
Incorporated by reference from the Company's
definitive proxy or information statement to be filed
with the Commission not later than 120 days following
the end of the Company's fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
Incorporated by reference from the Company's definitive
proxy or information statement to be filed with the
Commission not later than 120 days following the end of
the Company's fiscal year.
ITEM 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's
definitive proxy or information statement to be filed
with the Commission not later than 120 days following
the end of the Company's fiscal year.
ITEM 14. Exhibits, Financial Statement, Schedules and Reports on
Form 8-K.
(a)The following documents are filed as part of this
report:
(1) The financial statements of the Company and
accompanying notes, as set forth in the
contents to the financial statements annexed
hereto, are included in Part II, Item 8.
Schedule II: Valuation and Qualifying Accounts and
Reserves
All other schedules are omitted because such
information is not applicable.
(2) Exhibits numbered in accordance with Item 601
of Regulation S-K.
(See Exhibit Index)
Exhibits filed herewith:
(None)
(b) Reports on Form 8-K:
On April 8, 1997, the Corporation filed with the
Securities and Exchange Commission a current Form
8-K dated March 28, 1997 is hereby incorporated by
reference.
On April 10, 1997, the Corporation filed with the
Securities and Exchange Commission a current Form
8-K dated March 31, 1997 is hereby incorporated by
reference.
On April 30, 1997, the Corporation filed with the
Securities and Exchange Commission a current Form
8-K dated April 18, 1997 is hereby incorporated by
reference.
On May 7, 1997, the Corporation filed with the
Securities and Exchange Commission a current Form
8-K dated May 6, 1997 is hereby incorporated by
reference.
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
3.1 Certificate of Incorporation of the Company, filed as
an Exhibit to the Company's Registration Statement on
Form S18, Commission File No. 286182-B, is hereby
incorporated herein by reference.
3.2 Amendment to the Certificate of Incorporation of the
Company, dated December 5, 1985, filed as an Exhibit to
the Company's Form 8 amending the Company's Form 10-K
for the fiscal year ended June 30 1987 (the "1987 Form
8"), is hereby incorporated herein by reference.
3.3 Amendment to the Certificate of Incorporation of the
Company, dated December 4, 1986, filed as an Exhibit to
the 1987 Form 8, is hereby incorporated herein by
reference.
3.4 Bylaws of the Company, as amended, filed as Exhibit to
the 1987 Form 8, is hereby incorporated herein by
reference.
4 Nestor, Inc. Incentive Stock Option Plan, as amended,
filed as an Exhibit to the Company's Registration
Statement on Form S-8, filed May 5, 1987, is hereby
incorporated herein by reference.
10.1 Non-Exclusive Field-of-Use License Agreement dated June
21, 1988 between the Company and Morgan Stanley & Co.
Incorporated, filed as an Exhibit to the Company's Form
10-K for the fiscal year ended June 30, 1988, is hereby
incorporated herein by reference.
10.2 Cooperative Marketing Agreement dated May 26, 1988
between the Company and Arthur D. Little, Inc., filed
as an Exhibit to the Company's Form 10-K for the fiscal
year ended June 30, 1988, is hereby incorporated herein
by reference.
10.3 Lease Rider dated February 6, 1985 between Richmond
Square Technology Park Associates and the Company,
filed as an Exhibit to the Company's Report on Form 10-
K for the fiscal year ended June 30, 1986, is hereby
incorporated herein by reference.
10.4 Employment Agreement dated August 4, 1986 between the
Company and Michael G. Buffa, filed as Item 5 of the
Company's Report on Form 8-K dated September 11, 1986,
is hereby incorporated herein by reference.
10.5 Joint Venture Agreement between the Company and Oliver,
Wyman & Co., dated December 4, 1986, filed as an
Exhibit to the 1987 Form 10-K, is hereby incorporated
herein by reference.
10.6 Employment Agreement dated as of July 1, 1989 between
the Company and David Fox filed as an Exhibit to the
1989 Form 10-K is hereby incorporated by reference.
10.7 Employment Agreement dated as of September 15, 1988
between the Company and Douglas L. Reilly filed as an
Exhibit to the 1989 Form 10-K is hereby incorporated by
reference.
10.8 Memorandum dated January 1, 1989 regarding stock bonus
plan for Douglas L. Reilly filed as an Exhibit to the
1989 Form 10-K is hereby incorporated by reference.
10.9 Amendment to Joint Venture Agreement dated May 8, 1990
between the Company and Oliver, Wyman & Co. filed as an
Exhibit to the 1992 Annual Report on Form 10-K is
hereby incorporated by reference.
10.10 License Agreement dated October 26, 1990 by and between
the Company and Sligos, S. A. filed as an Exhibit to
the Company's 1992 Annual Report on Form 10-K is hereby
incorporated by reference.
10.11 Supplemental License Agreement dated September 9, 1991
by and between the Company and Sligos, S. A., filed as
an Exhibit to the Company's 1992 Annual Report on Form
10-K, is hereby incorporated by reference.
10.12 NestorWriterT License and Development Agreement dated
September 11, 1991 between the Company and Poqet
Computer Corporation.
10.13 License Agreement for Product Development and Marketing
dated October 30, 1990 between the Company and
Lyonnaise des Eaux-Dumez.
10.14 Software Development Agreement dated October 30, 1990
between the Company and Lyonnaise des Eaux-Dumez.
10.15 License Agreement dated November 27, 1990 between the
Company and Atari Corporation.
10.16 License Agreement for Product Development and Marketing
dated March 18, 1991 between the Company and Dassault
Electronique.
10.17 Agreement of Purchase and Sale dated August 16, 1991
between the Company and Diversified Research Partners
filed as Item 5 of the Company's report on Form 8-K
dated August 21, 1991 is hereby incorporated herein by
reference.
10.18 License Agreement dated October 15, 1993, between the
Company and Intel Corporation filed as an Exhibit to
the Company's 1994 Annual Report on Form 10-K is hereby
incorporated by reference.
10.19 Exclusive Marketing Agreement dated April 7, 1994,
between the Company and Intel Corporation filed as an
Exhibit to the Company's Current Report on Form 8-K
dated April 7, 1994, is hereby incorporated by
reference.
10.20 Securities Purchase Agreement dated August 1, 1994,
between the Company and Wand/Nestor Investments L.P.
("Wand") filed as Item 5 of the Company's report on
Form 8-K dated August 8, 1994, is hereby incorporated
herein by reference.
10.21 Standby Financing and Purchase Agreement dated as of
March 16, 1995 between the Company and Wand, filed as
an Exhibit to the Company's Current Report on Form 8-K
dated March 16, 1995, is hereby incorporated by
reference.
10.22 First Amended and Restated Standby Financing and
Purchase Agreement dated June 30, 1995 between the
Company and Wand, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 7, 1995, is
hereby incorporated by reference.
10.23 Amendment Agreement dated December 20, 1994 between the
Company and Sligos, S.A., filed as an Exhibit to the
Company's Registration Statement on Form S-2,
Commission File No. 33-93548, is hereby incorporated
herein by reference.
10.24 Technology Development Subcontract dated December 20,
1994, between the Company and Alta Technology
Corporation, filed as an Exhibit to the Company's
Registration Statement on Form S-2, Commission File No.
33-93548, is hereby incorporated herein by reference.
10.25 Agreements between the Company and Europay
International S.A. ("Europay") consisting of: (i) Fraud
Study Agreement dated August 3, 1993, together with
appendices and exhibits thereto; (ii) Confidentiality
Agreement dated August 3, 1993; (iii) Nestor Fraud
Detection System User License dated September 21, 1994;
(iv) Source Code Addendum to Nestor Fraud Detection
System User License, dated September 22, 1994; and (v)
Memorandum of Understanding dated May 5, 1995, filed as
an Exhibit to the Company's Registration Statement on
Form S-2, Commission File No. 33-93548, is hereby
incorporated herein by reference.
10.26 Lease of executive offices of the Company, together
with the most recent rider thereto, filed as an Exhibit
to the Company's Registration Statement on Form S-2,
Commission File No. 33-93548, is hereby incorporated
herein by reference.
10.27 Non-Exclusive License Agreement between the Company and
International Business Machines Corporation, filed as
an Exhibit to the Company's Current Report on Form 8-K
dated January 30, 1996, is hereby incorporated by
reference.
10.28 Securities Purchase and Exchange Agreement between the
Company and Wand/Nestor Investments L.P., filed as an
Exhibit to the Company's Current Report on Form 8-K
dated January 30, 1996, is hereby incorporated by
reference.
10.29 Securities Purchase Agreement between the Company and
Wand/Nestor Investments L.P., filed as an Exhibit to
the Company's Current Report on Form 8-K dated March 7,
1996, is hereby incorporated by reference.
10.30 Asset Purchase Agreement and License Agreement between
the Company and National Computer Systems, Inc., filed
as an Exhibit to the Company's Current Report on Form 8-
K dated June 11, 1996, is hereby incorporated by
reference.
10.31 Prism Non-Exclusive License Agreement between the
Company and Applied Communications, Inc., filed as an
Exhibit to the Company's Current Report on Form 8-K
dated September 19, 1996, is hereby incorporated by
reference. Portions of the Exhibit omitted, pursuant
to a grant of confidential treatment.
21 Nestor IS, Inc., a wholly-owned subsidiary of Nestor,
Inc. incorporated January 1, 1997, doing business as
Nestor Intelligent Sensors.
21.1 Nestor Interactive, Inc. a wholly-owned subsidiary of
Nestor, Inc. incorporated January 1, 1997.
4.1 Nestor, Inc. 1997 Incentive Stock Option Plan, as
amended, filed as an Exhibit to the Company's
Registration Statement on Form S-8, filed May 16, 1997,
is hereby incorporated by reference.
10.32 License Agreement dated as of March 28, 1997, between
Nestor, Inc. and Total System Services, Inc. filed as
an Exhibit to the Company's Current report on Form 8-K
dated April 8, 1997, is hereby incorporated by
reference. Portions of the Exhibit omitted, pursuant
to a grant of confidential treatment.
10.33 Asset Acquisition Purchase Agreement dated March 31,
1997 among Nestor Interactive, Inc., Cyberiad Software,
Inc., Christopher L. Scofield and Jeffrey Pflum filed
as an Exhibit to the Company's Current Report on Form 8-
K dated April 10, 1997, is hereby incorporated by
reference.
10.34 Nestor, Inc. 1997 Incentive Stock Option Plan, as
amended, filed as an Exhibit to the Company's Current
Report on Form 8-K dated May 6, 1997 is hereby
incorporated by reference.
10.35 Amendment to the Prism Non-Exclusive License Agreement
dated as of April 18, 1997, between Nestor, Inc. and
Applied Communications, Inc. filed as an Exhibit to the
Company's Current Report on Form 8-K dated April 30,
1997 is hereby incorporated by reference. Portions of
the Exhibit omitted pursuant to a grant of confidential
treatment.