-13-
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 June 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: 9,288,076 shares
outstanding as of June 30, 1997
NESTOR, INC.
FORM 10Q - June 30, 1997
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30, 1997 and 1996
Consolidated Balance Sheets
June 30, 1997 (Unaudited) and December 31, 1996
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 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>
Six Months Ending June 30, Qtr. Ending June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Software licensing $2,303,855 $1,923,679 $1,777,861 $ 1,548,299
Engineering services 902,066 1,301,958 207,741 754,011
Tangible product sales 101,224 86,856 81,167 36,130
Total revenues 3,307,145 3,312,493 2,066,769 2,338,440
Operating Expenses:
Engineering services 785,285 1,004,465 201,598 496,597
Tangible product sales 19,932 49,629 13,848 14,105
Research and development 749,505 333,414 473,696 203,639
Selling and marketing
expenses 1,040,424 867,096 577,697 485,884
General and administra-
tive expenses 692,592 542,513 337,675 287,433
Total costs and
expenses 3,287,738 2,797,117 1,604,514 1,487,658
Income from operations 19,407 515,376 462,255 850,782
Other income 71,668 220,541 92,977 218,269
Income for the period
before income taxes 91,075 735,917 555,232 1,069,051
Income taxes --- --- --- ---
Net Income for the
Period $ 91,075 $ 735,917 $ 555,232 $ 1,069,051
Income (Loss) Per Share:
Net Income for the
Period $ 91,075 $ 735,917 $ 555,232 $ 1,069,051
Dividends accrued on
preferred stock 228,572 180,038 125,410 96,509
Income (loss) Applicable
to Common Stock $ (137,497) $ 555,879 $ 429,822 $ 972,542
Income (Loss) Per Share:
Primary $ (0.02) $ 0.05 $ 0.03 $ 0.08
Fully diluted $ (0.02) $ 0.04 $ 0.03 $ 0.07
Shares Used in Computing
Income (Loss) Per Share:
Primary 9,140,141 11,801,624 12,689,847 12,237,272
Fully diluted 9,140,141 13,273,670 15,826,534 16,288,619
The notes to the financial statements are an integral part of
this statement.
</TABLE>
<TABLE>
Nestor, Inc.
Consolidated Balance Sheets
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,715,472 $ 774,457
Accounts receivable, net of
allowance for doubtful accounts 502,279 1,009,149
Unbilled contract revenue 238,398 126,945
Deferred development costs --- 364,405
Other current assets 263,646 276,615
Total current assets 2,719,795 2,551,571
Long term portion of unbilled
contract revenue 400,000 ---
Property and equipment at cost -
net of accumulated depreciation 246,449 255,590
Intangible assets - net of
accumulated amortization 361,640 ---
Other assets 5,783 10,783
Total assets $ 3,733,667 $ 2,817,944
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable
and accrued expenses $ 622,292 $ 670,742
Other current liabilities 234,772 298,848
Deferred income 1,261,227 338,404
Total current liabilities 2,118,291 1,307,994
Noncurrent liabilities:
Long term obligations
under capital leases 7,556 12,212
Total liabilities 2,125,847 1,320,206
Long term portion of
deferred income --- 430,899
Redeemable preferred stock
(see footnote) 5,618,822 5,398,908
Stockholders' deficit:
Preferred stock, $1.00 par value,
authorized 10,000,000 shares;
issued and outstanding:
Series A - 0 shares at June 30, 1997
and 452,064 shares at December 31,
1996 (liquidation value $904,128 -
$2.00 per share) --- 452,064
Series B - 1,525,000 shares at
June 30, 1997 (liquidation
value $1,525,000 - $1.00 per
share) and 1,635,000 shares at
December 31, 1996 (liquidation
value $1,635,000 - $1.00 per
share) 1,525,000 1,635,000
Series D - 172,871 shares at
June 30, 1997 (liquidation
value $259,306 - $1.50 per
share plus accrued dividends)
and 179,671 shares at Decem-
ber 31, 1996 (liquidation value
$279,230 - $1.50 per share plus
accrued dividends) 259,306 279,230
Series C, E, F, G and H - redeemable
preferred stock (shown above)
4,846 shares at June 30, 1997 and
December 31, 1996 (liquidation
value $1,000.00 per share plus
accrued dividends) --- ---
Common Stock, $.01 par value,
authorized 30,000,000 shares;
issued and outstanding;
9,288,076 shares at June 30,
1997 and 8,916,141 shares at
December 31, 1996 92,881 89,161
Warrants and options 470,742 417,500
Additional paid-in capital 12,682,662 11,927,644
Retained (deficit) (19,041,593) (19,132,668)
Total stockholders'deficit (4,011,002) (4,332,069)
Total Liabilities and
Stockholders' Deficit $ 3,733,667 $ 2,817,944
The notes to the financial statements are an integral part of
this statement.
</TABLE>
<TABLE>
Nestor, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Six Months Ending June,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 91,075 $ 735,917
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 80,658 55,510
Loss on disposal of fixed assets --- 4,346
Expenses charged to operations
relating to options, warrants
and capital transactions 108,442 (31,073)
Gain on extinguishment of debt (100,000) ---
Changes in assets and liabilities:
Decrease in accounts receivable 506,870 133,547
Decrease (increase) in unbilled
contract revenue (511,453) 120,648
Decrease in deferred development
costs 364,405 ---
Decrease (increase)in other
assets 19,391 (106,081)
(Decrease) in accounts payable,
accrued expenses and other
liabilities (123,018) (482,488)
Increase in deferred income 491,924 21,884
Net cash provided by operating
activities 928,294 452,210
Cash flows from investing activities:
Purchase of property and equipment (36,623) (53,253)
Proceeds from the disposal of
fixed assets --- 85,000
Net cash (used) provided by
investing activities (36,623) 31,747
Cash flows from financing activities:
Repayment of obligations under
capital leases (4,656) (4,930)
Proceeds from issuance of common
stock 54,000 99,510
Proceeds from issuance of preferred
stock --- 1,366,000
Net cash provided by
financing activities 49,344 1,460,580
Net change in cash and cash
equivalents 941,015 1,944,537
Cash and cash equivalents -
beginning of period 774,457 68,780
Cash and cash equivalents -
end of period $1,715,472 $ 2,013,317
Supplemental cash flows information
Interest paid $ 860 $ 94
Income taxes paid $ --- $ ---
The notes to the financial statements are an integral part of
this statement.
</TABLE>
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 six months ended June 30, 1997 and 1996; (b) the
consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996; and (c) the
consolidated financial position at June 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:
6/30/97 12/31/96
Series E, par value $1.00 per
share, 1,444 shares
outstanding at June 30, 1997
and December 31, 1996.
$247,230 and $189,226 of
accumulated dividends at June
30, 1997 and December 31,
1996, respectively. $1,691,230 $1,633,226
Series F, par value $1.00 per
share, 599 shares outstanding
at June 30, 1997 and December
31, 1996. $81,131 and $51,313
of accumulated dividends at
June 30, 1997 and December 31,
1996, respectively. 680,131 650,313
Series G, par value $1.00 per
share, 777 shares outstanding
at June 30, 1997 and December
31, 1996. $97,586 and $46,875
of accumulated dividends at
June 30, 1997 and December 31,
1996, respectively. 874,586 823,875
Series H, par value $1.00 per
share, 2,026 shares
outstanding at June 30, 1997
and December 31, 1996.
$346,875 and $265,494 of
accumulated dividends at June
30, 1997 and December 31,
1996, respectively 2,372,875 2,291,494
TOTAL: $5,618,822 $5,398,908
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:
Six Months Ending June 30,
1997 1996
Basic earnings (loss)
per share $ (0.02) $ 0.07
Diluted earnings (loss)
per share $ (0.02) $ 0.04
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 six months ended
June 30, 1997 was $32,877. 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 452,000 shares of
Company's Series A Preferred Stock. The Company
allocated $125,000 of the payment to the settlement of
its current liability to Sligos and consequently
recorded other income of $100,000 as a 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 quarter ended June 30, 1997, the
Company recognized $1,025,000 of this fee as revenue.
The remaining $975,000 is recorded as deferred income
and will be recognized as revenues over the remainder
of calendar 1997.
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
$1,715,000 at June 30, 1997, as compared with $320,000 at March
31, 1997, and $774,000 at December 31, 1996. At June 30, 1997,
the Company had working capital of $601,000 as compared with
$405,000 at March 31, 1997. The increase in cash from March 1997
to June 1997 is due, in large part, to an agreement the Company
signed in April which resulted in the receipt of a non-refundable
initial royalty of $2,000,000, which is described more fully
under the caption, "Deferred Income", below.
Management believes that the Company's revenues will generate
sufficient liquidity, when combined with its liquid assets as at
June 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 $4,011,000 at June 30,
1997, as compared with negative net worth of $4,480,000 at March
31, 1997. These net-worth figures do not include as equity the
Company's redeemable convertible preferred stock in the amount of
$5,618,822 at June 30, 1997 and $5,497,236 at March 31, 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
$1,261,000 at June 30, 1997, as compared with $772,000 at March
31, 1997.
The increase in deferred income from March 1997 to June 1997
results, primarily, from the net of two effects: the signing in
April 1997 of an amendment to the Company's PRISM license with
Applied Communications, Inc., which increased deferred income;
and the termination in June 1997 of the Company's license
agreement with Sligos, S.A., ("Sligos) which reduced deferred
income.
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. Of this fee, the Company recognized as revenues
$1,025,000 in the quarter ended June 30, 1997. The remaining
$975,000 was recorded as deferred income, and will be recognized
as revenues 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
$430,000 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 June 30, 1997, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $19,000. The Company has no
material commitments for capital expenditures although management
expects that the Company may make future commitments for the
purchase of additional computing and related equipment, for
development of hardware, for consulting and for promotional and
marketing expenses.
The Company has no material purchase commitments other than a
commitment to purchase from Intel Corporation a supply of Ni1000
Recognition Accelerator Chips. The Company placed a purchase
order in the amount of $195,000 with Intel in June 1996, and
expects to take delivery of this order during 1997.
In accordance with the Exclusive Marketing Agreement between
Nestor and Intel dated April 7, 1994, Intel has notified the
Company of its intention to phase out manufacturing of chips
based on the .8 micron geometry. Given the number of chips the
Company has in inventory together with the chips it has on order
and can still order, 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 Ni1000
chips. The Company has until October 16, 1997, to place an order
for additional Ni1000 chips.
Results of 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 452,000 shares of Company's Series A
Preferred Stock. The Company allocated $125,000 of the payment
to the settlement of its current liability to Sligos and
consequently recorded other income of $100,000 as a 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.
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.
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 ending June 1997 to $350,000 in
2001 and beyond.
During the quarter ended June 30, 1997, revenues decreased to
$2,066,000 from $2,338,000 in the quarter ended June 30, 1996.
Revenues in the year-earlier period included $1,584,000 of
revenues associated with the ICR products that were licensed to
NCS in June 1996. For the six months ended June 1997, revenues
were essentially equal to the prior year period ($3,307,000 in
1997 as compared to $3,312,000 in 1996); the prior-year period
included $2,044,000 of revenues associated with the ICR products
that were licensed to NCS.
For the quarter ended June 30, 1997, the Company realized a 12%
decrease in revenues compared to the prior year and an 8%
increase in expenses resulting in a 46% decrease in income from
operations. ICR revenues in the quarter ended June 30, 1996,
accounted for 68% of total revenues while related expenses
accounted for 32% of total expenses.
For the six months ended June 30, 1997, revenues equaled the
prior year's revenues while expenses increased 17% resulting in a
96% decrease in income from operations. ICR revenues in the six
month period ended June 1996 accounted for 62% of total revenues
while related expenses accounted for 33% of total expenses.
The following tables compare revenues for the quarter and six
months ended June 30, 1997 with revenues for the comparable
fiscal periods of the preceding year, including and excluding
revenues from the ICR operations transferred to NCS:
Total
Total Total Revenues
Revenues Revenues Year-to- Q/E 6/30/96 Year-to-
Q/E 6/30/97 Q/E 6/30/96 year Excluding year
Change ICR Change
$2,066,000 $2,338,000 -12% $755,000 +173%
Total
Total Total Revenues
Revenues Revenues Six Months
Six Months Six Months Year-to- Ended Year-to-
Ended Ended year 6/30/96 year
6/30/97 6/30/96 Change Excluding Change
ICR
$3,307,000 $3,312,000 0% $1,268,000 +161%
Software Licensing
Product-licensing revenues totaled $1,778,000 in the quarter
ending June 30, 1997, as compared with $1,548,000 in the same
quarter in the prior fiscal year. In the 1997 quarter, product-
licensing revenues consisted primarily of PRISM license fees,
whereas in the 1996 quarter, product-licensing revenues consisted
primarily of ICR license fees. Thus, the increase in software-
licensing revenues reflects the growth of licensing revenues in
the Company's PRISM product line. Such revenues totaled
$1,661,000, including $480,000 of revenue relating to the
termination of the PRISM license agreement with Sligos. In the
corresponding quarter of the prior year, licensing revenues
relating to the PRISM product line totaled $18,000. For the six
months ended June 1997, PRISM licensing revenues totaled
$2,180,000, including $480,000 of revenue relating to the
termination of the Sligos license; in the six months ended June
1996 PRISM licensing revenues totaled $19,000.
The Company recognized $116,000 and $123,000 of royalties in the
quarter and six months ended June 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
$1,529,000 and $1,903,000, respectively, including end-user
license fees and an initial license fee paid by NCS to the
Company.
Engineering Services
During the quarter ended June 30, 1997, revenues from engineering
contracts decreased to $208,000 from $754,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 1997, engineering revenues decreased to
$902,000 from $1,301,000 in the year-earlier period. Prior-year
revenues included $53,000 and $142,000 of engineering revenues
relating to the ICR products in the quarter and six months ended
June 30, 1996, respectively.
Revenues relating to the customer-funded modification of Nestor's
Fraud Detection System totaled $194,000 in the quarter ended June
30, 1997, as compared with $567,000 in the comparable period of
the prior year. For the six months ended June 1997, such
revenues totaled $858,000, as compared with year-earlier
revenues totaling $850,000.
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, in the amount of $1,630,000 was completed during the
quarter ended June 30, 1997. The second contract, signed August
26, 1993, is in the amount of $776,000; as of June 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 June 30, 1997, approximately $633,000 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 June 30, 1997, the Company recognized
revenues totaling $14,000 under its government contracts. In the
year-earlier period such revenues totaled $129,000. For the six
months ended June 1997, the Company recognized revenues totaling
$44,000, as compared with $281,000 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 $81,000 in the
quarter ended June 1997, as compared with $36,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 1997, such revenues totaled $90,000, as
compared with $86,000 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).
Operating Expenses
Total operating expenses - consisting of engineering, research
and development, selling and marketing, and general and
administrative expenses - amounted to $1,604,000 in the quarter
ended June 30, 1997, an increase of $117,000 over total operating
costs of $1,487,000 in the corresponding quarter of the prior
fiscal year. For the six months ended June 1997, total operating
expenses were $3,287,000, an increase of $490,000 from $2,797,000
of total operating expenses in the year-earlier period.
Included in operating expenses for the first quarter 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 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 six months ended June 30, 1996, were
approximately $479,000 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 June 30, 1997, the Company paid
$831,000 for wages and consulting, as compared with total wages
and consulting fees of $782,000 paid in the corresponding quarter
of the prior fiscal year. For the six months ended June 30,
1997, wages and consulting costs totaled $1,529,000, as compared
with $1,528,000 in the year-earlier period.
Engineering Services
Costs relating to engineering services totaled $201,000 in the
quarter ended June 30, 1997, as compared to $497,000 in the
corresponding quarter of the prior fiscal year. For the six
months ended June 1997, engineering services costs totaled
$785,000 as compared with $1,004,000 in the year-earlier period.
As a percentage of engineering service revenues, these costs have
grown in the quarter ended June 1997 as compared with the year-
earlier period reflecting additional costs incurred on projects
that had been expected to conclude in the quarter ended March 31,
1997.
Research and Development
Research and development expenses totaled $473,000 in the quarter
ended June 30, 1997, as compared with $203,000 in the year-
earlier period. For the six months ended June 1997, these costs
totaled $749,000, as compared with $333,000 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 six months ended June 30, 1996 totaled $174,000
and $295,000, respectively.
Selling and Marketing
Selling and marketing costs increased $92,000 to $577,000 in the
quarter ended June 30, 1997, from $485,000 in the corresponding
quarter of the prior fiscal year. For the six months ended June
1997, selling and marketing costs increased to $1,040,000 from
$867,000 in the corresponding period of the prior fiscal year.
Selling and marketing costs for the six months ended June 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 six-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 $388,000 and $714,000 in
the quarter and six months ended June 1997, respectively, as
compared with $115,000 and $211,000 in the corresponding periods
of the prior fiscal year. Selling costs relating to the
Company's TrafficVision product and Ni1000 Development System
totaled $144,000 and $240,000 in the quarter and six months ended
June 1997, respectively, as compared with $71,000 and $101,000 in
the same periods of the prior fiscal year. Selling costs
associated with InterSite, which the Company began to develop in
July 1996, totaled $45,000 and $87,000 in the quarter and six
months ended June 30, 1997. Selling and marketing costs relating
to the ICR products totaled $299,000 and $554,000 in the quarter
and six months ended June 30, 1996, respectively.
General and Administrative
General and administrative expenses totaled $337,000 in the June
1997 quarter, as compared with $287,000 in the same quarter of
the previous fiscal year. For the six months ended June 30,
1997, general and administrative costs totaled $692,000, as
compared with $542,000 in the year-earlier period. General and
administrative costs for the six months ended June 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
Other income totaled $93,000 in the quarter ended June 30, 1997,
as compared with $218,000 in the corresponding quarter of the
prior fiscal year. For the six months ended June 1997, other
income totaled $71,000, as compared with $220,000 in the year-
earlier period.
In June 1997, the Company recorded other income of $100,000 as a
gain on the cancellation 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 first quarter
in 1997. For the six months ended June 30, 1997, expenses of
this group exceeded revenues by $547,000.
The Company began development in July 1996 of products for use in
internet and intranet environments. Costs associated with this
effort totaled $224,000 in the six months ended June 30, 1997.
Revenues relating to the Company's PRISM and Fraud Detection
System exceeded expenses by $1,359,000 in the six months ended
June 30, 1997, including $480,000 of license revenue relating to
the termination of the License Agreement with Sligos.
Net Income
During the quarter ended June 30, 1997, the Company generated net
income of $555,000, as compared with net income of $1,069,000 in
the corresponding period of the prior fiscal year. After
allowance for preferred stock dividends of $125,000 and $96,000
for the three months ended June 30, 1997 and 1996, respectively,
the net income available for common stock was $430,000 and
973,000, respectively.
For the six months ended June 30, 1997, the Company generated net
income of $91,000, as compared with net income of $735,000 in the
year-earlier period. After allowance for preferred stock
dividends of $228,000 and $180,000 for the six months ended June
30, 1997 and 1996, respectively, the Company experienced a net
loss available for common stock of $137,000 in 1997 and generated
net income available for common stock of $555,000 in 1996.
NESTOR, INC.
FORM 10-Q - June 30, 1997
Item 6 Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K: On April 30, 1997, the
Corporation filed with the Securities and Exchange
Commission a current report on Form 8-K dated April
18, 1997.
(c) Reports on Form 8-K: On May 7, 1997, the
Corporation filed with the Securities and Exchange
Commission a current report on Form 8-K dated May 6,
1997.
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: August 14, 1997 By:/s/ Nigel P. Hebborn
Chief Financial Officer
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