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, 1996
[X] 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: 8,669,841 shares
outstanding as of September 30, 1996
NESTOR, INC.
FORM 10Q - September 30, 1996
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1996 and 1995
Consolidated Balance Sheets (Unaudited)
September 30, 1996 and June 30, 1996
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 1996 and 1995
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
For the Three Months
Ended September 30,
1996 1995
Revenues:
Engineering services $ 635,178 $ 433,185
Software licensing 183,783 470,852
Tangible product sales 32,906 108,464
Total revenues 851,867 1,012,501
Operating Expenses:
Engineering services 602,735 329,345
Research and development 109,926 306,418
Selling and marketing 215,883 506,457
General and administrative 154,268 203,381
Related party consulting
and legal fee 55,956 43,200
Total operating expenses 1,138,768 1,388,801
Loss from operations (286,901) (376,300)
Other income (expense) - net 15,170 (49,209)
Loss for the period before
income taxes (271,731) (425,509)
Income taxes --- ---
Net Loss for the Period $ (271,731) $ (425,509)
Loss Per Share $ (0.03) $ (0.06)
Weighted Average Number of
Shares Outstanding 8,534,326 7,666,384
The notes to the financial statements are an integral part
of this statement.
Nestor, Inc.
Consolidated Balance Sheets
Assets Sept. 30, 1996 June 30, 1996
Current assets:
Cash and cash equivalents $ 1,362,905 $ 2,013,317
Accounts receivable, net
of allowance for doubtful
accounts 381,800 594,310
Unbilled contract revenue 736,555 282,936
Other current assets 276,021 230,738
Total current assets 2,757,281 3,121,301
Property and equipment at
cost - net of depreciation 230,249 219,787
Other assets 10,783 10,783
Total Assets $ 2,998,313 $ 3,351,871
Liabilities and Stockholders'Deficit
Current Liabilities:
Accounts payable and
accrued expenses $ 578,700 $ 768,411
Due to Sligos, S.A. 275,000 275,000
Deferred income 44,973 86,104
Other current liabilities 7,500 8,125
Total current liabilities 906,173 1,137,640
Noncurrent liabilities
Long term obligations under
capital leases 6,922 9,455
Total liabilities 913,095 1,147,095
Long term portion of deferred
income 430,896 430,899
Redeemable preferred stock
(see footnote) 5,302,352 5,207,538
Stockholders' deficit:
Preferred stock, $1.00 par
value, authorized
10,000,000 shares; issued
and outstanding:
Series A - 452,064 shares
at September 30, 1996 and
June 30, 1996 (liquida-
tion value $904,128 -
$2.00 per share) 452,064 452,064
Series B- 1,840,000
shares at September 30,
1996 (liquidation value
$1,840,000 - $1.00 per
share) and 2,075,000
shares at June 30, 1996,
(liquidation value
$2,075,000 - $1.00 per
share) 1,840,000 2,075,000
Series D - 184,671 shares
at September 30, 1996 and
(liquidation value
$281,882 - $1.50 per
share plus accrued divi-
dends) and 184,671 shares
at June 30, 1996 (liqui-
dation value $277,007 -
$1.50 per share plus
accrued dividends) 281,882 277,007
Series C, E, F, G and H
redeemable preferred
stock (shown above) 4,846
shares at Sept. 30, 1996
and June 30, 1996
(liquidation value $1,000
per share plus accrued
dividends) --- ---
Common stock, $.01 par
value authorized
30,000,000 shares issued
and outstanding:
8,669,841 shares at
September 30, 1996 and
8,280,941 shares at
June 30, 1996 86,698 82,809
Warrants and options 375,000 375,000
Additional paid-in capital 11,785,385 11,501,790
Retained (deficit) (18,469,059) (18,197,331)
Total stockholders'
deficit (3,648,030) (3,433,661)
Total Liabilities and
Stockholders' Deficit $ 2,998,313 $ 3,351,871
The notes to the financial statements are an integral part
of this statement.
Nestor, Inc.
Consolidated Statements of Cash Flows
Three Months
Ended September 30,
1996 1995
Cash flows from operating
activities:
Net (loss) $ (271,731) $ (425,509)
Adjustments to reconcile
net (loss) to net cash
provided by operating
activities:
Depreciation and
amortization 25,206 26,183
Changes in assets and
liabilities:
Decrease in accounts
receivable 212,510 140,113
(Increase) in unbilled
contract revenue (453,619) (196,331)
(Increase) in other
current assets (45,283) (15,170)
Increase (decrease) in
accounts payable and
accrued expenses (189,298) 50,903
Increase (decrease) in
deferred income (41,134) 69,984
Net cash (used) by
operating activities (763,349) (349,827)
Cash flows from investing
activities:
Purchase of property and
equipment (35,667) (13,698)
Net cash (used) by
investing activities (35,667) (13,698)
Cash flows from financing
activities:
Repayment of obligations
under capital leases (3,571) (942)
Proceeds from note payable --- 300,000
Rights offering expense --- (112,101)
Proceeds from issuance of
common stock 152,175 ---
Net cash provided by
financing activities 148,604 186,957
Net change in cash and cash
equivalents (650,412) (176,568)
Cash and cash equivalents -
beginning of period 2,013,317 452,588
Cash and cash equivalents -
end of period $ 1,362,905 $ 276,020
Supplemental cash flows
information:
Interest paid $ 2,792 $ 3,694
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 results of operations for the three months
ended September 30, 1996 and 1995; (b) the consolidated
statements of cash flows for the three months ended
September 30, 1996 and 1995; and(c) consolidated financial
position at September 30, 1996 have been made.
Note 2 - Research and development expenses:
Research and development expenses charged to operating
expenses have been reclassified in these financial
statements from Cost of Revenue and are presented in a
separate caption on the Statement of Income.
Note 3 - Stock-based compensation:
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards (FAS) No. 123, Accounting for Stock-Based
Compensation. FAS 123 was adopted by the Company as
required for its fiscal 1997 financial statements and
is not expected to have a material effect on the
Company's financial position or results of operations.
The Company will continue to measure compensation
expense for its stock-based employee compensation plans
using the Intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and will provide proforma disclosures of net
income and earnings per share as if the fair value-
based method prescribed by FAS 123 had been applied in
measuring compensation expense.
Note 4 - Redeemable convertible preferred stock:
The Company is required to redeem all of the following
series of convertible preferred stock on or before
August 1, 2004. Accordingly, this preferred stock
subject to mandatory redemption has been presented
separately outside of permanent stockholders' equity in
the accompanying financial statements.
9/30/96 6/30/96
Series E, par value $1.00 per share, $1,604,975 $1,577,213
1,444 shares outstanding at September
30, 1996 and June 30, 1996. $160,975
and $133,213 of accumulated dividends
at September 30, 1996 and June 30, 1996,
respectively.
Series F, par value $1.00 per share, 599 635,898 621,802
shares outstanding at September 30, 1996
and June 30, 1996. $36,898 and $22,802
of accumulated dividends at September 30,
1996 and June 30, 1996 respectively.
Series G, par value $1.00 per share, 777 809,623 795,619
shares outstanding at September 30, 1996
and June 30, 1996. $32,623 and $18,619
of accumulated dividends at September 30,
1996 and June 30, 1996, respectively.
Series H, par value $1.00 per share 2,251,856 2,212,904
2,026 shares outstanding at September 30,
1996 and June 30, 1996. $225,856 and
$186,904 of accumulated dividends at
September 30, 1996 and June 30, 1996,
respectively.
TOTAL: $5,302,352 $5,207,538
ITEM 2: Management's discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital resources
Cash Position and Working Capital
The Company had cash and short term investments of approximately
$1,363,000 at September 30, 1996, as compared with $2,013,000 at
June 30, 1996, and $515,000 at March 31, 1996. At September 30,
1996, the Company had working capital of $1,851,000 as compared
with $1,983,000 at June 30, 1996.
The Company had a negative net worth of $3,648,000 at September
30, 1996, as compared with negative net worth of $3,433,000 at
June 30, 1996.
Management believes that the Company's revenues will generate
sufficient liquidity, when combined with its liquid assets as at
September 30, 1996, to meet the company's anticipated cash
requirements through the end of its fiscal year ending June 30,
1997. If the Company does not realize revenues sufficient to
maintain its operation at the current level, management of the
Company would curtail certain of the Company's operations until
additional funds become available through investment or revenues.
Deferred Income
Operations of the Company have been partly funded by prepayments
under engineering contracts and licenses of the Company's
technology. Such prepayments are recognized as revenue under the
percentage-of-completion method as engineering is completed or
delivery obligations are fulfilled. The Company bases its
estimate of the percentage of completion on the amount of labor
applied to a given project, compared with the estimated total
amount of labor required. The remainder of such prepaid revenue
is reflected on the Company's balance sheet as deferred income,
and is treated as a liability. Total deferred income was
$475,000 at September 30, 1996, as compared with $517,000 at June
30, 1996.
Future commitments
During the quarter ended September 30, 1996, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $36,000. 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 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 Corporation in June 1996, and
expects to take delivery of this order during the third quarter
of the fiscal year that began on July 1, 1996.
Results of Operations
On June 11, 1996, the Company entered into an exclusive Licensing
Agreement with National Computer Systems, Inc. (NCS) transferring
the development, production, and marketing rights of the
Company's Intelligent Character Recognition (ICR) products to
NCS. 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
1997 to $350,000 in 2001 and beyond. Largely as a result of the
transfer of ICR operations to NCS, for the quarter ended
September 30, 1996, the Company realized a 16% decrease in
revenues compared to the prior year and an 18% decrease in
operating expenses, resulting in a 24% decrease in the operating
loss for the quarter. ICR revenues in the quarter ended
September 30, 1995, accounted for 44% of total revenues while
related expenses accounted for 43% of total operating expenses.
Revenues
The following table compares revenues for the quarter ended
September 30, 1996 with revenues for the comparable fiscal
quarter of the preceding year, including and excluding revenues
from ICR operations transferred to NCS:
Total
Total Total Year-to- Revenues Year-to-
Revenues Revenues year Q/E year
Q/E Q/E Change 9/30/95 Change
9/30/96 9/30/95 Excluding
ICR
$851,000 $1,012,000 -16% $570,000 +49%
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, 1996, revenues
decreased by $161,000 to $851,000 from $1,012,000 in the quarter
ended September 30, 1995. Revenues in the year-earlier period
included $442,000 of revenues associated with the ICR products
that were licensed to NCS in June 1996.
Engineering Services
During the quarter ended September 30, 1996, revenues from
engineering contracts increased $202,000 to $635,000 from
$433,000 in the corresponding quarter of the prior fiscal year.
Prior year revenues included $47,000 of engineering revenues
relating to the ICR products.
Revenues relating to customer-funded modifications of Nestor's
Fraud Detection System totaled $451,000, an increase of $95,000
over year-earlier revenues of $356,000.
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, is in the amount of $1,630,000; as of September 30,
1996, approximately $1,623,000 had been earned. The second
contract, signed August 26, 1993, is in the amount of $776,000;
as of September 30, 1996, approximately $773,000 had been earned.
On September 1, 1995, the Company signed a contract with the Jet
Propulsion Laboratory (JPL) to develop a prototype sensor system
designed for vehicular-traffic surveillance and detection. The
contract, valued at approximately $597,000, is expected to be
completed by the end of 1996. The terms of the DARPA and JPL
contracts call for delivery of prototype products, but do not
specify any subsequent purchasing or licensing provisions.
During the quarter ended September 30, 1996, the Company
recognized revenues totaling $184,000 under its government
contracts. In the year-earlier period such revenues totaled
$7,000.
Software Licensing
Product-licensing revenues totaled $184,000 in the quarter ended
September 30, 1996, as compared with $471,000 in the same quarter
of the prior year. The decrease in software licensing revenues
reflects, primarily, the absence of ICR licensing revenues: such
revenues totaled $375,000, or 80%, of total software licensing
revenues in the quarter ended September 30, 1995.
Subsequent to the signing of the Licensing Agreement with NCS in
June 1996, the Company will not receive ICR licensing fees but
expects to receive royalties from NCS on future sales of ICR
products by NCS. The minimum annual royalty for 1997 is
$160,000. (See Operating Expenses, below, for a discussion of
the effect on the Company's expenses of this licensing
arrangement.)
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 $33,000 in the
quarter ended September 30, 1996, as compared with $108,000 in
the corresponding quarter of the prior fiscal year. The Company
is currently developing its TrafficVision(TM) 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 $1,138,000 in the quarter
ended September 30, 1996, as compared with $1,487,000 in the
preceding quarter and $1,388,000 in the corresponding quarter of
the prior fiscal year.
Included in expenses for the quarter ended September 1995 are
approximately $591,000 of expenses attributable to the ICR
products, which were licensed to NCS in June 1996. Most of the
expenses associated with the ICR products are no longer incurred
by the Company as NCS hired most of the staff assigned to
development, sales, and support of the ICR products.
Labor costs continue to be the Company's single greatest expense
category. In the quarter ended September 30, 1996, the Company
paid $628,000 for wages and consulting fees, a decrease of
$177,000 from total wages and consulting fees of $805,000 paid in
the corresponding quarter of the prior fiscal year. The decrease
in labor costs reflects the decline in staffing primarily
attributable to the transfer of the ICR products group to NCS:
full-time employees totaled 34 at September 30, 1996, as compared
with 49 at September 30, 1995.
Engineering Services
Costs related to engineering services totaled $602,000 in the
quarter ended September 30, 1996, as compared to $329,000 in the
corresponding quarter of the prior fiscal year. As a percentage
of revenues, these costs increased from 76% last year to 95% this
year reflecting the growth in engineering revenues from the
Company's government contracts, where the Company's margins are
not as strong as they are for financial-services projects.
Research and Development
Research and development expenses totaled $110,000 in the quarter
ended September 30, 1996, as compared with $306,000 in the year-
earlier period. The decrease in such costs was due primarily to
the transfer of the ICR products to NCS: research and development
costs relating to the ICR products totaled $221,000 in the
quarter ended September 1995, while there were no such costs in
the quarter ended September 1996.
Selling and Marketing
The largest decrease in expenses was in selling and marketing.
In the quarter ended September 30, 1996, selling and marketing
expenses decreased $290,000 to $216,000 from $506,000 in the
corresponding quarter of the prior fiscal year. The decrease in
selling costs reflects the net of the absence of selling and
marketing costs associated with the ICR products in this year's
first quarter and an increase in selling costs associated with
the Prism and TrafficVision products. ICR selling costs in last
year's first quarter totaled $347,000.
General and Administrative
General and administrative expenses totaled $154,000 in the
quarter ended September 30, 1996, as compared with $203,000 in
the corresponding quarter of the prior fiscal year. The decrease
in costs from 1995 to 1996 is the net of numerous account
decreases and increases, with no single expense changing
materially.
Investment in Product Development and Marketing
Revenues relating to the Company's PRISM and Fraud Detection
System exceeded expenses by $87,000 in the quarter ended
September 30, 1996. The Company has installed its products at
Mellon Bank, GE Consumer Credit Financial Services, Banc One,
Europay International (an association of 700 banks in Europe),
and with a European financial-services company. In September
1996, the Company signed a license agreement with Applied
Communications, Inc. (ACI) enabling ACI to integrate Nestor's
products with certain products of ACI. ACI provides
authorization and transaction-processing software to nearly 500
financial institutions worldwide.
The largest investment made by the Company was in its Intelligent
Sensors Division, which is responsible for the development and
marketing of the TrafficVision products, an outgrowth of work
under the JPL contract. The Company expects to make required
deliveries to JPL in the quarter ending December 1996 and expects
commercial products will be available early in 1997. For the
quarter ended September 30, 1996, expenses of this group exceeded
revenues by $154,000.
The Company began development in July 1996 of products for use in
internet and intranet environments. Costs associated with this
effort totaled $73,000 in the quarter ended September 30, 1996.
Net Income Per Share
During the quarter ended September 30, 1996, the Company
experienced a loss of $271,000 or $.03 per share, as compared
with a loss of $425,000 or $.06 per share for the quarter ended
September 30, 1995. In the quarter ended June 30, 1996, the
Company realized a gain of $1,069,000 or $.14 per share, when
Nestor realized a license fee of $1,400,000 under the License
Agreement with NCS.
During the quarter ended September 30, 1996, there were
outstanding a weighted average of 8,534,326 shares of Common
Stock as compared with 7,666,384 during the corresponding quarter
of the previous year.
Nestor, Inc.
Form 10-Q -- September 30, 1996
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - 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, 1996 By: /s/Nigel P. Hebborn
Chief Financial Officer
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