-2-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30,
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, RI 02906
(Address of principal executive offices) (Zip Code)
401-331-9640
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period than the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _________
Common stock, par value .01 per share: 9,330,937 shares
outstanding as of September 30, 1997
NESTOR, INC.
FORM 10Q - September 30, 1997
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30, 1997 and 1996
Consolidated Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART 2 OTHER INFORMATION
<TABLE>
Nestor, Inc.
Consolidated Statements of Operations
<CAPTION>
Nine Months Ending September 30,
Quarter Ending September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Software licensing $3,335,500 $2,104,487 $1,031,645 $ 183,783
Engineering services 1,370,455 1,726,134 468,389 424,178
Tangible product sales 193,534 122,738 92,310 32,906
Total revenues 4,899,489 3,953,359 1,592,344 640,867
Operating Expenses:
Engineering services 1,137,018 1,554,959 351,733 528,746
Tangible product sales 66,154 52,617 46,222 2,989
Research and development 1,151,218 437,351 401,713 109,926
Selling and marketing
expenses 1,596,874 1,042,221 556,450 190,883
General and adminis-
trative expenses 976,939 730,737 284,347 188,224
Total costs and
expenses 4,928,203 3,817,885 1,640,465 1,020,768
Income (loss) from
operations (28,714) 135,474 (48,121) (379,901)
Other income (expenses) 57,830 235,712 (13,838) 15,170
Income (loss) for the period
before income taxes 29,116 371,186 (61,959) (364,731)
Income taxes --- --- --- ---
Net Income (loss)
for the Period $ 29,116 $ 371,186 $ (61,959) $ (364,731)
Income (Loss) Per Share:
Net Income (Loss)
for the Period $ 29,116 $ 371,186 $ (61,959) $ (364,731)
Dividends accrued on
preferred stock 339,892 279,727 111,320 99,689
Income (Loss) Applicable
to Common Stock $ (310,776) $ 91,459 $(173,279) $ (464,420)
Income (Loss) Per Share:
Primary $ (0.03) $ 0.01 $ (0.02) $ (0.05)
Fully diluted $ (0.03) $ 0.01 $ (0.02) $ (0.05)
Shares Used in Computing
Income (Loss) Per Share:
Primary 9,205,998 11,917,485 9,336,312 8,534,326
Fully diluted 9,205,998 12,588,247 9,336,312 8,534,326
The notes to the financial statements are an integral part of
this statement.
</TABLE>
<PAGE>
<TABLE>
Nestor, Inc.
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1997 1996
Assets
Current assets:
<S> <C> <C)
Cash and cash equivalents $ 715,150 $ 774,457
Accounts receivable,
net of allowance for
doubtful accounts 752,076 1,009,149
Unbilled contract revenue 568,313 126,945
Deferred development costs --- 364,405
Other current assets 211,430 276,615
Total current assets 2,246,969 2,551,571
Long term portion of unbilled
contract revenue 400,000 ---
Property and equipment at cost -
net of accumulated depreciation 237,219 255,590
Intangible assets -
net of accumulated amortization 328,764 ---
Other assets 5,783 10,783
Total Assets $ 3,218,735 $ 2,817,944
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 782,559 $ 670,742
Other current liabilities 9,772 298,848
Deferred income 855,873 338,404
Total current liabilities 1,648,204 1,307,994
Noncurrent liabilities:
Long term obligations under capital leases 5,113 12,212
Total liabilities 1,653,317 1,320,206
Long term portion of deferred income --- 430,899
Redeemable preferred stock (see footnote) 5,725,603 5,398,908
Stockholders' deficit:
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series A - 0 shares at September 30, 1997
and 452,064 shares at December 31, 1996
(liquidation value $904,128 - $2.00 per share) --- 452,064
Series B - 1,475,000 shares at September 30,
1997 (liquidation value $1,475,000 -
$1.00 per share) and 1,635,000 shares at
December 31, 1996 (liquidation value
$1,635,000 - $1.00 per share) 1,475,000 1,635,000
Series D - 172,871 shares at
September 30, 1997 (liquidation
value $263,844 - $1.50 per share plus
accrued dividends)and 179,671 shares at
December 31, 1996 (liquidation value
$279,230 - $1.50 per share plus
accrued dividends) 263,844 279,230
Series C, E, F, G and H -
redeemable preferred stock (shown above)
Common Stock, $.01 par value, authorized
30,000,000 shares; issued and outstanding;
9,330,937 shares at September 30, 1997
and 8,916,141 shares at December 31, 1996 93,309 89,161
Warrants and options 497,363 417,500
Additional paid-in capital 12,613,851 11,927,644
Retained (deficit) (19,103,552) (19,132,668)
Total stockholders'deficit (4,160,185) (4,332,069)
Total Liabilities and Stockholders' Deficit $ 3,218,735 $ 2,817,944
The notes to the financial statements are an integral part of this
statement.
</TABLE>
<PAGE>
<TABLE>
Nestor, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Nine Months Ending
September 30,
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net income $ 29,116 $371,186
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 137,425 80,716
Loss on disposal of fixed assets --- 4,346
Expenses charged to operations relating
to options, warrants and
capital transactions 135,063 (31,073)
Gain on extinguishment of debt (100,000) ---
Changes in assets and liabilities:
Decrease in accounts receivable 257,073 346,057
(Increase) in unbilled
contract revenue (841,368) (121,971)
Decrease (increase)in deferred
development costs 364,405 (118,000)
Decrease (increase)in other assets 62,697 (151,364)
(Decrease) in accounts payable,
accrued expenses and other liabilities (187,781) (671,786)
Increase (decrease) in deferred income 86,570 (19,250)
Net cash used by operating activities (56,800) (311,139)
Cash flows from investing activities:
Purchase of property and equipment (51,283) (88,920)
Proceeds from the disposal of fixed assets --- 85,000
Net cash used by investing activities (51,283) (3,920)
Cash flows from financing activities:
Repayment of obligations under capital leases (7,099) (8,501)
Proceeds from issuance of common stock 55,875 251,685
Proceeds from issuance of preferred stock --- 1,366,000
Net cash provided by financing activities 48,776
1,609,184
Net change in cash and cash equivalents (59,307) 1,294,125
Cash and cash equivalents -
beginning of period 774,457 68,780
Cash and cash equivalents -
end of period $ 715,150 $1,362,905
Supplemental cash flows information
Interest paid $ 1,347 $ 2,902
Income taxes paid $ --- $ ---
The notes to the financial statements are an integral part of this
statement.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Financial statements:
In the opinion of management, all adjustments,
consisting only of normal recurring adjustments
necessary for a fair presentation of (a) the
consolidated statements of operations for the quarter
and nine months ended September 30, 1997 and 1996; (b)
the consolidated statements of cash flows for the nine
months ended September 30, 1997 and 1996; and (c) the
consolidated financial position at September 30, 1997
and December 31, 1996 have been made. The accompanying
quarterly results of operations and cash flows are not
necessarily indicative of the results expected for the
entire fiscal year.
The accompanying financial statements include the
accounts of Nestor, Inc., Nestor, IS, Inc. ("IS"), and
Nestor Interactive, Inc. ("Interactive"). IS and
Interactive were organized effective January 1, 1997 as
two wholly owned subsidiaries of Nestor, Inc. All
intercompany transactions and balances have been
eliminated.
Note 2 - Redeemable convertible preferred stock:
Series C, E, F, G and H: 4,846 shares at September 30,
1997 and December 31, 1996 (liquidation value $1,000.00
per share plus accrued dividends):
<TABLE>
<CAPTION>
9/30/97 12/31/96
<S> <C> <C>
Series E, par value $1.00 per
share, 1,444 shares
outstanding at September 30,
1997 and December 31, 1996.
$276,999 and $189,226 of
accumulated dividends at
September 30, 1997 and
December 31, 1996,
respectively. $ 1,720,999 $ 1,633,226
Series F, par value $1.00 per
share, 599 shares outstanding
at September 30, 1997 and
December 31, 1996. $96,549
and $51,313 of accumulated
dividends at September 30,
1997 and December 31, 1996,
respectively. $ 695,549 $ 650,313
Series G, par value $1.00 per
share, 777 shares outstanding
at September 30, 1997 and
December 31, 1996. $117,413
and $46,875 of accumulated
dividends at September 30,
1997 and December 31, 1996,
respectively. $ 894,413 $ 823,875
Series H, par value $1.00 per
share, 2,026 shares
outstanding at September 30,
1997 and December 31, 1996.
$388,642 and $265,494 of
accumulated dividends at
September 30, 1997 and
December 31, 1996,
respectively 2,414,642 2,291,494
TOTAL $ 5,725,603 $ 5,398,908
</TABLE>
Note 3: Income (Loss) per Common Share:
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share
("FAS 128"), which will be adopted on December 31,
1997. FAS 128 requires companies to change the method
currently used to compute earnings per share and to
restate all prior periods for comparability. Pursuant
to this Statement, companies will replace 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 will be replaced by
"diluted" EPS. Diluted EPS is computed similarly to
fully diluted EPS under the provision of APB Opinion
No. 15.
The pro forma effect of the adoption of FAS 128 is as
follows:
Nine Months Ending September 30,
1997 1996
Basic earnings (loss)
per share $ (0.03) $ 0.01
Diluted earnings (loss)
per share $ (0.03) $ 0.01
Note 4 - 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 quarter and nine months ended
September 30, 1997 was $65,753. Had the acquisition
taken place at the beginning of each respective period,
there would be no significant difference on a pro-forma
basis other than the amortization of the intangible
asset.
Note 5 - Termination of License Agreement:
In June 1997 the Company and Sligos terminated a
License Agreement dated October 26, 1990. Pursuant to
the termination agreement, the Company paid Sligos in
July 1997, $225,000 in full settlement of its
obligation to Sligos, which had been classified as a
current liability on the Company's balance sheet, and
of the repurchase from Sligos of 452,064 shares of
Company's Series A Preferred Stock. The Company
allocated $125,000 of the payment to the settlement of
its current liability to Sligos and consequently
recorded other income of $100,000 as a gain on the
cancellation of debt. 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 6 - Amendment of License Agreement:
On April 18, 1997, the Company amended its PRISM
License Agreement with Applied Communications, Inc.
("ACI") granting to ACI expanded rights to distribute
the Company's PRISM product line and revising the rate
of royalties payable to the Company on future income.
Pursuant to this amendment, the Company received in
April an initial, non-refundable license fee of
$2,000,000. In the nine months ended September 30,
1997, the Company recognized $1,512,500 of this fee as
revenue. The remaining $487,500 is recorded as
deferred income and will be recognized as revenues over
the remainder of calendar 1997.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Prospective Statements
The following discussion contains prospective statements
regarding Nestor, Inc., its business outlook and results of
operations that are subject to certain risks and uncertainties
and to events that could cause the Company's actual business,
prospects and results of operations to differ materially from
those that may be anticipated by, or inferred from, such
prospective statements. Factors that may affect the Company's
prospects include, without limitation: the Company's ability to
successfully develop new contracts for technology development;
the impact of competition on the Company's revenues or market
share; delays in the Company's introduction of new products; and
failure by the Company to keep pace with emerging technologies.
Readers are cautioned not to place undue reliance on these
prospective statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to
carefully review and consider the various disclosures made by the
Company in this report and in the Company's reports filed with
the Securities and Exchange Commission.
Liquidity and Capital Resources
Cash Position and Working Capital
The Company had cash and short term investments of approximately
$715,000 at September 30, 1997, as compared with $1,715,000 at
June 30, 1997, and $321,000 at March 31, 1997. At September 30,
1997, the Company had working capital of $599,000 as compared
with $601,000 at June 30, 1997.
Management believes that the Company's revenues will generate
sufficient liquidity, when combined with its liquid assets as at
September 30, 1997, to meet the Company's anticipated cash
requirements through the end of its fiscal year ending December
31, 1997.
The Company had a negative net worth of $4,160,000 at September
30, 1997, as compared with negative net worth of $4,011,000 at
June 30, 1997.
Deferred Income
Operations of the Company have been partly funded by prepayments
under engineering contracts and licenses of the Company's
technology. Such prepayments are recognized as revenue under the
percentage-of-completion method as engineering is completed or
delivery obligations are fulfilled. The Company bases its
estimate of the percentage of completion on the amount of labor
applied to a given project, compared with the estimated total
amount of labor required. The remainder of such prepaid revenue
is reflected on the Company's balance sheet as deferred income,
and is treated as a liability. Total deferred income was
$856,000 at September 30, 1997, as compared with $1,261,000 at
June 30, 1997.
On April 18, 1997, the Company entered into an amendment to the
PRISM License Agreement with Applied Communications, Inc. ("ACI")
granting to ACI expanded rights to distribute the Company's
PRISM product line and revising the rate of royalties payable to
the Company on future income. Pursuant to this amendment, the
Company received in April an initial, non-refundable license fee
of $2,000,000. In the nine months ended September 30, 1997, the
Company recognized $1,512,500 of this fee as revenue. The
remaining $487,500 is recorded as deferred income and will be
recognized as revenue over the remainder of calendar 1997.
In June 1997, the Company and Sligos 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 and never taken into income. (See
"Results of Operations" below.)
Future Commitments
During the quarter ended September 30, 1997, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $15,000. The Company has no
material commitment for capital expenditures although management
expects that the Company may make future commitments for the
purchase of additional computing and related equipment, for
development of hardware, for consulting and for promotional and
marketing expenses.
The Company has placed purchase orders totaling $877,500 with
Intel Corporation for a supply of the Ni1000 Recognition
Accelerator Chips. The Company expects to take delivery of
$195,000 of the chips during 1998; $292,500 after December 1998;
and $390,000 after December 1999.
The Company entered into an agreement on September 25, 1997, for
the modification of one of the components of the TrafficVision
product. Nestor agreed to pay Zeller Research, LTD $75,000 for
engineering, which is expected to be completed by the end of
1997, and to purchase 100 units of the modified component at a
total cost of up to $53,000.
Results of Operations
For the quarter ended September 30, 1997, the Company realized a
148% increase in revenues compared to the prior year and a 61%
increase in expenses resulting in an 87% decrease in the loss
from operations. For the nine months ended September 1997, the
Company realized a 24% increase in revenues compared to the prior
year and a 29% increase in expenses resulting in a 121% decrease
in income from operations.
In June 1997 the Company and Sligos terminated a License
Agreement dated October 26, 1990. Pursuant to the termination
agreement, the Company paid Sligos in July 1997, $225,000 in full
settlement of its obligation to Sligos, which had been classified
as a current liability on the Company's balance sheet, and of the
repurchase from Sligos of 452,064 shares of Company's Series A
Preferred Stock. In the quarter ended June 30, 1997, the Company
allocated $125,000 of the payment to the settlement of the
current liability to Sligos and recorded other income of $100,000
as a gain on the elimination of debt. 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.
On June 11, 1996, the Company entered into an exclusive License
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. Under the License Agreement, the Company received an
initial license fee, which was recognized as revenue in the
fiscal year ended June 1996, and will receive royalties on sales
of the products by NCS. Minimum annual royalties range from
$160,000 in the twelve months ended June 1997 to $350,000 in 2001
and beyond.
Revenues
The Company's revenues arise from licensing of the Company's
products and technology, from the sale of tangible products, and
from contract engineering services and are discussed separately
below.
During the quarter ended September 30, 1997, revenues increased
to $1,592,000 from $641,000 in the quarter ended September 30,
1996. For the nine months ended September 1997, revenues
increased to $4,899,000 from $3,953,000 in the year-earlier
period. Revenues in the current year include $105,000 of
royalties under the license agreement with NCS as compared with
$2,078,000 of revenues in the prior year period associated with
the ICR products that were licensed to NCS in June 1996.
The following tables compare revenues for the quarter and nine
months ended September 30, 1997 with revenues for the comparable
fiscal periods of the preceding year, including and excluding
revenues from the ICR operations transferred to NCS:
Quarter:
Total
Revenues
Total Total Year-to- Sept. 1996 Year-to-
Revenues Revenues year Excluding year
Sept. 1997 Sept. 1996 Change ICR Change
$1,592,000 $641,000 +148% $607,000 +162%
Year To Date:
Total
Revenues
Total Total Year-to- Sept. 1996 Year-to-
Revenues Revenues year Excluding year
Sept. 1997 Sept. 1996 Change ICR Change
$4,899,000 $3,953,000 +24% $1,875,000 +161%
Software Licensing
Software licensing revenues totaled $1,032,000 in the quarter
ending September 30, 1997, as compared with $184,000 in the same
quarter in the prior fiscal year. The increase in software
licensing revenues reflects the growth of licensing revenues in
the Company's PRISM product line, which accounts for all of the
Company's software licensing revenues in the third quarter. In
the corresponding quarter of the prior year, licensing revenues
relating to the PRISM product line totaled $115,000. For the
nine months ended September 1997, PRISM licensing revenues
totaled $3,229,000, including $480,000 of revenue relating to the
termination of the Sligos license; in the nine months ended
September 1996 PRISM licensing revenues totaled $135,000.
The Company recognized $0 and $105,000 of royalties in the
quarter and nine months ended September 30, 1997, respectively,
pursuant to its License Agreement with NCS. In the
corresponding periods of the prior fiscal year the Company
recognized revenues from the licensing of the ICR products of
$33,000 and $1,936,000, respectively, including end-user license
fees and an initial license fee paid by NCS to the Company.
Engineering Services
During the quarter ended September 30, 1997, revenues from
engineering contracts increased to $468,000 from $424,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 1997, engineering revenues decreased to
$1,370,000 from $1,726,000 in the year-earlier period. Prior-
year revenues included $0 and $142,000 of engineering revenues
relating to the ICR products in the quarter and nine months ended
September 30, 1996, respectively.
Revenues relating to the customer-funded modification of Nestor's
Fraud Detection System totaled $445,000 in the quarter ended
September 30, 1997, as compared with $240,000 in the comparable
period of the prior year. For the nine months ended September
1997, such revenues totaled $1,303,000, as compared with year-
earlier revenues totaling $1,090,000.
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 September 30, 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 September 30, 1997, approximately $643,000 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 quarter ended September 30, 1997, the Company
recognized revenues totaling $10,000 under its government
contracts. In the year-earlier period such revenues totaled
$184,000. For the nine months ended September 1997, the Company
recognized revenues totaling $53,000, as compared with $465,000
of such revenues in the year-earlier period.
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 $19,000 in the
quarter ended September 1997, as compared with $33,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 1997, such revenues totaled $108,000, as
compared with $120,000 in the year earlier period.
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 quarter ended September 1997,
initial commercial shipments for evaluation of TrafficVision
totaled $73,000. For the nine months ended September 1997, such
shipments of TrafficVision, including Beta versions, totaled
$85,000.
Operating Expenses
Total operating expenses - consisting of engineering, research
and development, selling and marketing, and general and
administrative expenses - amounted to $1,640,000 in the quarter
ended September 30, 1997, an increase of $621,000 over total
operating costs of $1,021,000 in the corresponding quarter of the
prior fiscal year. For the nine months ended September 1997,
total operating expenses were $4,928,000, an increase of
$1,110,000 from $3,818,000 of total operating expenses in the
year-earlier period.
Included in operating expenses for the first nine months of
fiscal 1997 is the recognition of $364,000 of costs relating to a
project to customize the Company's PRISM Fraud Detection System
for a customer. These costs were incurred during the six months
ended December 31, 1996, but were deferred into the first quarter
of fiscal 1997 because the terms of the agreement were not
finalized until March 1997. The Company accounted for the costs
in accordance with SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," which
provides that costs be deferred until delivery is made under the
terms of an enforceable agreement. The agreement was completed
and required deliveries were made in March 1997.
Included in the quarter and nine months ended September 30, 1996,
were $0 and $937,000, respectively, 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 Company's staff
assigned to development, sales, and support of the ICR products.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended September 30, 1997, the Company
incurred $825,000 for wages and consulting expense, as compared
with total wages and consulting fees of $629,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 30, 1997, wages and consulting costs
totaled $2,354,000, as compared with $2,157,000 in the year-
earlier period.
Engineering Services
Costs relating to engineering services totaled $352,000 in the
quarter ended September 30, 1997, as compared to $529,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 1997, engineering services costs totaled
$1,137,000 as compared with $1,555,000 in the year-earlier
period.
As a percentage of engineering-service revenues, these costs have
decreased in the quarter and nine months ended September 1997 as
compared with the year-earlier periods. The prior-year periods
include costs incurred on projects that had been expected to
conclude in the quarter ended June 30, 1996 but which continued
through the quarter ended September 30, 1996.
Research and Development
Research and development expenses totaled $402,000 in the quarter
ended September 30, 1997, as compared with $110,000 in the year-
earlier period. For the nine months ended September 1997, these
costs totaled $1,151,000, as compared with $437,000 in the
corresponding period of the prior fiscal 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 quarter and nine months ended September 30, 1996 totaled $0
and $295,000, respectively.
Selling and Marketing
Selling and marketing costs increased $365,000 to $556,000 in the
quarter ended September 30, 1997, from $191,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 1997, selling and marketing costs
increased to $1,597,000 from $1,042,000 in the corresponding
period of the prior fiscal year. Selling and marketing costs for
the nine months ended September 1997 include $79,000 of costs
associated with the PRISM development project that had been
deferred from the six months ended December 1996.
The increase in selling costs in the quarter and the nine-month
period 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 $351,000 and $1,065,000 in
the quarter and nine months ended September 1997, respectively,
as compared with $99,000 and $311,000 in the corresponding
periods of the prior fiscal year. Selling costs relating to the
Company's TrafficVision product and Ni1000 Development System
totaled $179,000 and $419,000 in the quarter and nine months
ended September 1997, respectively, as compared with $81,000 and
$167,000 in the same periods of the prior fiscal year. Selling
costs associated with InterSite, which the Company began to
develop in July 1996, totaled $26,000 and $114,000 in the quarter
and nine months ended September 30, 1997; in the comparable
quarter of 1996, initial selling costs totaled $10,000. Selling
and marketing costs relating to the ICR products totaled $0 and
$555,000 in the quarter and nine months ended September 30, 1996,
respectively.
General and Administrative
General and administrative expenses totaled $284,000 in the
September 1997 quarter, as compared with $188,000 in the same
quarter of the previous fiscal year. For the nine months ended
September 30, 1997, general and administrative costs totaled
$977,000, as compared with $731,000 in the year-earlier period.
General and administrative costs for the nine months ended
September 1997 include $76,000 of costs associated with the PRISM
development project that had been deferred from the six months
ended December 31, 1996.
Other Income (Expense)
Other expenses totaled $14,000 in the quarter ended September 30,
1997, as compared with other income of $15,000 in the
corresponding quarter of the prior fiscal year. For the nine
months ended September 1997, other income totaled $58,000, as
compared with other income of $236,000 in the year-earlier
period.
In June 1997, the Company recorded other income of $100,000 as a
gain on the elimination of debt 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 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 extended its contract with
JPL and made initial commercial deliveries in the September 1997
quarter. For the nine months ended September 30, 1997, expenses
of this group exceeded revenues by $859,000.
The Company began development in July 1996 of products for use in
internet and intranet environments. Costs associated with this
effort totaled $352,000 in the nine months ended September 30,
1997. In October 1997 Lycos, Inc., which hosts one of the most
active Web sites on-line, selected Nestor's InterSite to provide
intelligent personalization for Lycos' global Internet navigation
center.
Revenues relating to the Company's PRISM and Fraud Detection
System exceeded expenses by $2,051,000 in the nine months ended
September 30, 1997, including $480,000 of license revenue
relating to the termination of the License Agreement with Sligos.
Net Income
During the quarter ended September 30, 1997, the Company
generated a net loss of $62,000, as compared with a net loss of
$365,000 in the corresponding period of the prior fiscal year.
After allowance for preferred stock dividends of $111,000 and
$100,000 for the three months ended September 30, 1997 and 1996,
respectively, the quarterly net loss applicable to common stock
was $173,000 and $464,000, respectively.
For the nine months ended September 30, 1997, the Company
generated net income of $29,000, as compared with net income of
$371,000 in the year-earlier period. After allowance for
preferred stock dividends of $340,000 and $280,000 for the nine
months ended September 30, 1997 and 1996, respectively, the
Company experienced a net loss applicable to common stock of
$311,000 in 1997 and generated net income applicable to common
stock of $91,000 in 1996.
NESTOR, INC.
FORM 10-Q - September 30, 1997
Item 6 Exhibits and reports on Form 8-K
(a)Exhibits - None
FORM 10-Q
NESTOR, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NESTOR, INC.
(REGISTRANT)
DATE: November 14, 1997 By: /s/ Nigel P. Hebborn
Chief Financial Officer
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