-----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, KZ+iBo+zEqcoXxhDFeAPkuGBvseCGypKpF5TZ42QWDuK247fXzR6QPV4fe05bGO7 gRXJN92VUCprMKcvQkUrqg== 0000720851-96-000023.txt : 19961118 0000720851-96-000023.hdr.sgml : 19961118 ACCESSION NUMBER: 0000720851-96-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12965 FILM NUMBER: 96664105 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 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 EX-27 2
5 3-MOS JUN-30-1997 SEP-30-1996 2,013,317 0 594,310 0 0 3,121,301 1,326,050 1,106,263 3,351,871 1,137,640 0 5,207,538 2,804,071 82,809 0 3,351,871 257,845 5,461,580 169,183 5,488,840 131,250 0 51,574 12,690 0 0 0 0 0 12,690 0 0
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