-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NXU1e/D7Fj66kiPBHfO7K8aBaiWpcCKI06PRSCoeif4ekrPNobw/M004QKBxWB/6 HQnIg9AKQQOAZ3WrIgAPXg== 0000720851-97-000034.txt : 19971117 0000720851-97-000034.hdr.sgml : 19971117 ACCESSION NUMBER: 0000720851-97-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NESTOR INC CENTRAL INDEX KEY: 0000720851 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133163744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12965 FILM NUMBER: 97719368 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQ CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4013319640 MAIL ADDRESS: STREET 1: 1 RICHMOND SQUARE CITY: PROVIDENCE STATE: RI ZIP: 02906 10-Q 1 -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 Nestor, Inc. Consolidated Statements of Operations
Nine Months Ending September 30, Quarter Ending September 30, 1997 1996 1997 1996 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.
Nestor, Inc. Consolidated Balance Sheets
September 30, December 31, 1997 1996 Assets Current assets: Nestor, Inc. Consolidated Statements of Cash Flows
Nine Months Ending September 30, 1997 1996 Cash flows from operating activities: 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.
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):
9/30/97 12/31/96 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
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 EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 715,150 0 752,076 0 0 2,246,969 237,219 1,223,261 3,218,735 1,648,204 0 5,725,603 1,738,844 93,309 0 3,218,735 193,534 4,899,489 66,154 4,928,203 0 0 1,347 0 0 0 0 0 0 29,116 0 0
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