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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, 2004
[ ] 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.)
400 Massasoit Avenue; Suite 200; East Providence, RI 02914
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(Address of principal executive offices) (Zip Code)
401-434-5522
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(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
-------------- ---------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Common stock, par value .01 per share: 18,108,868 shares
outstanding as of August 9, 2004
-1-
NESTOR, INC.
FORM 10 Q
June 30, 2004
INDEX
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Page Number
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
-------------------------------------
June 30, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
-----------------------------------------------------------
Quarters and six months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------
Six months ended June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
----------------------------------------------------
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK 13
ITEM 4 CONTROLS AND PROCEDURES 13
PART 2 OTHER INFORMATION 14
-2-
NESTOR, INC.
Condensed Consolidated Balance Sheets
-------------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
-------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,047,062 $ 5,410,123
Marketable equity securities 995,689 ---
Accounts receivable, net 755,721 521,872
Unbilled contract revenue 180,771 158,952
Inventory 931,412 442,298
Other current assets 183,889 75,791
------------- -------------
Total current assets 6,094,544 6,609,036
NONCURRENT ASSETS:
Capitalized system costs, net of accumulated depreciation 3,443,565 3,514,908
Property and equipment, net of accumulated depreciation 327,778 385,165
Goodwill 5,580,684 5,580,684
Patent development costs, net of accumulated amortization 172,906 175,216
Other long term assets 77,332 34,425
------------- -------------
TOTAL ASSETS $ 15,696,809 $ 16,299,434
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 757,500 $ 884,750
Accounts payable 615,190 468,289
Accrued employee compensation 342,364 386,652
Accrued liabilities 526,510 745,676
Leases payable 21,648 662,541
Deferred income 371,105 20,000
Restructuring reserve 9,386 146,897
------------- -------------
Total current liabilities 2,643,703 3,314,805
NONCURRENT LIABILITIES:
Long term note payable 697,500 1,030,000
Long term deferred income 82,072 ---
Long term leases payable 18,269 2,292,384
------------- -------------
Total liabilities 3,441,544 6,637,189
------------- -------------
Commitments and contingencies --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, authorized 10,000,000 shares;
issued and outstanding: Series B - 180,000 shares at
June 30, 2004 and 190,000 at December 31, 2003 180,000 190,000
Common stock, $.01 par value, authorized 30,000,000 shares;
issued and outstanding: 18,020,646 shares at June 30, 2004
and 13,997,238 shares at December 31, 2003 180,206 139,972
Warrants 1,381,223 1,377,251
Additional paid-in capital 59,770,491 49,230,803
Stock pending issuance --- 6,335,877
Accumulated deficit (49,256,655) (47,611,658)
-------------- --------------
Total stockholders' equity 12,255,265 9,662,245
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,696,809 $ 16,299,434
============= =============
THE UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
-3-
Nestor, Inc.
Condensed Consolidated Statements of Operations
-----------------------------------------------
(Unaudited)
Quarter Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Product royalties $ 3,124 $ 5,205 $ 27,674 $ 28,455
Product sales, lease and service fees 1,548,847 438,328 2,623,629 761,805
------------- ------------- ------------- -------------
Total revenues 1,551,971 443,533 2,651,303 790,260
------------- ------------- ------------- -------------
Operating expenses:
Cost of goods sold 952,157 403,934 1,587,348 732,338
Engineering and operations 825,143 626,191 1,591,065 1,219,451
Research and development 46,003 30,779 92,560 61,668
Selling and marketing 163,868 101,777 305,594 169,541
General and administrative 501,067 371,761 993,782 715,694
------------- ------------- ------------- -------------
Total operating expenses 2,488,238 1,534,442 4,570,349 2,898,692
------------- ------------- ------------- -------------
Loss from operations (936,267) (1,090,909) (1,919,046) (2,108,432)
Gain on debt extinguishment, net --- --- 508,124 ---
Contract termination reserve --- (125,000) --- (125,000)
Other income (expense) - net (183,745) 37,311 (234,075) 9,487
------------- ------------- ------------- -------------
Net loss $ (1,120,012) $ (1,178,598) $ (1,644,997) $ (2,223,945)
============= ============= ============= =============
Loss per Share:
Loss per share, basic and diluted $ (.06) $ (.08) $ (.09) $ (.19)
============== ============== ============== =============
Shares used in computing loss per share:
Basic and diluted 18,035,899 13,961,169 18,033,213 11,954,390
============= ============= ============= =============
THE UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
-4-
Nestor, Inc.
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
Six Months Ended June 30,
------------------------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (1,644,997) $ (2,223,945)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 878,521 351,267
Loss on disposal of fixed assets --- 5,291
Gain on extinguishment of debt (508,124) ---
Unrealized loss on marketable equity securities 163,009 ---
Dividends reinvested (15,457) ---
Expenses charged to operations relating to options,
warrants and capital transactions 53,242 53,242
Increase (decrease) in cash arising from
changes in assets and liabilities:
Accounts receivable, net (233,849) (144,078)
Unbilled contract revenue (21,819) 1,127
Inventory (496,834) (209,172)
Other assets (90,005) 120,167
Accounts payable and accrued expenses (88,320) (342,135)
Deferred income 433,177 ---
Restructuring reserve (137,511) (81,611)
-------------- --------------
Net cash used by operating activities (1,708,967) (2,469,847)
-------------- --------------
Cash flows from investing activities:
Investment in marketable equity securities (1,500,000) ---
Liquidation of marketable equity securities 356,759 ---
Investment in capitalized systems (677,530) (1,068,612)
Purchase of property and equipment (57,095) (31,819)
Patent developments costs (5,136) (24,803)
-------------- --------------
Net cash used by investing activities (1,883,002) (1,125,234)
-------------- --------------
Cash flows from financing activities:
Repayment of obligations under capital leases (2,260,471) (9,801)
Repayment of note payable (45,000) ---
Proceeds from note payable 98,028 ---
Proceeds from issuance of common stock - net 3,436,351 4,001,997
------------- -------------
Net cash provided by financing activities 1,228,908 3,992,196
------------- -------------
Net change in cash and cash equivalents (2,363,061) 397,115
Cash and cash equivalents - beginning of period 5,410,123 308,894
------------- -------------
Cash and cash equivalents - end of period $ 3,047,062 $ 706,009
============= =============
Supplemental cash flows information
Interest paid $ 46,735 $ 4,565
============= =============
Income taxes paid $ --- $ ---
============= =============
THE UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
-5-
Nestor, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2004
Note 1 - Nature of Operations:
A. Organization Nestor, Inc. (the "Company") was organized on March
21, 1983 in Delaware to develop and succeed to certain patent rights
and know-how which the Company acquired from its predecessor, Nestor
Associates, a limited partnership. Two wholly-owned subsidiaries,
Nestor Traffic Systems, Inc. ("NTS") and Nestor Interactive, Inc.
("Interactive"), were formed effective January 1, 1997. Effective
November 7, 1998, the Company ceased further investment in the
Interactive subsidiary. CrossingGuard, Inc., a wholly owned subsidiary
of NTS, was formed July 18, 2003. The Company's principal office is
located in East Providence, RI.
The Company's current focus is to offer customers products and
services to be utilized in intelligent traffic management
applications. Its leading product is its CrossingGuard video-based red
light enforcement system and services, sold and distributed
exclusively by NTS.
B. Liquidity and management's plans
The Company has incurred significant losses to date and at June 30,
2004 has an accumulated deficit. Management believes that the
significant financing obtained in 2003 and early 2004, the resulting
improved liquidity and current contracts with municipalities will
enable the Company to continue the development and upgrading of its
products and sustain operations through the end of 2004. There can be
no assurance, however, that the Company's operations will be sustained
or be profitable in the future, or that the Company's product
development and marketing efforts will be successful.
Note 2 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial results have been included. Operating results for the
quarter ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
There were no material unusual charges or credits to operations during
the recently completed fiscal quarter.
The balance sheet at December 31, 2003 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the audited consolidated financial
statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 2003.
Deferred income at December 31, 2003, and certain operating expenses
reported at June 30, 2003 have been reclassified to conform to the
2004 presentation. The reclassifications had no effect on results of
operations.
Marketable equity securities - The Company's marketable equity
securities consist of investments in closed-end insured municipal and
international bond funds. The securities are classified as "trading
securities" and accordingly are reported at fair value with unrealized
gains and losses included in other income (expense).
-6-
Deferred income - Certain customer contracts allow the Company to bill
and/or collect payment prior to the performance of services, resulting
in deferred revenue.
Loss per share - Loss per share is computed using the weighted average
number of shares of stock outstanding during the period. Diluted per
share computations are not presented since the effect would be
antidilutive.
Stock-based compensation - The Company measures compensation expense
relative to employee stock-based compensation plans using the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company applies the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS) No. 123,
"Accounting for Stock-based Compensation" and SFAS No. 148,
"Accounting for Stock-based Compensation - Transition and Disclosure".
Note 3 - Master Lease Agreement:
The State of Delaware Department of Transportation (DelDOT) executed a
Master Lease Agreement with NTS in February 2004 whereby lease
financing for equipment installed under this CrossingGuard contract
would be financed under lease terms offered by GE Capital Public
Finance, Inc. ("GE"). NTS received $240,000 from GE on behalf of
DelDOT under this sales-type lease on April 27, 2004 pursuant its
Assignment and Security Agreement with GE. NTS retains a first
priority interest in the equipment and assigned its interest in the
DelDOT lease and right to receive rental payments thereunder to GE.
Note 4 - Stock Options:
The Company applies the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and SFAS No. 148,
"Accounting for Stock-based Compensation - Transition and Disclosure".
Had compensation cost for the Company's stock options been determined
in accordance with the fair value-based method prescribed under SFAS
123, the Company's net loss and loss per share would have approximated
the following pro forma amounts:
Quarter Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $ (1,120,012) $ (1,178,598) $ (1,644,997) $ (2,223,945)
Add: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects (392,231) (14,598) (401,198) (28,095)
-------------- -------------- -------------- --------------
Pro forma net loss $ (1,512,243) $ (1,193,196) $ (2,046,195) $ (2,252,040)
Pro forma net loss per share:
Basic and diluted $ (.08) $ (.09) $ (.11) $ (.19)
The fair value of stock options used to compute pro forma net loss and
net loss per share disclosures was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 1.158; a
risk-fee interest rate of 1.6-6.8%; and an expected option holding
period of 8 years.
On June 24, 2004, the Company adopted the 2004 Stock Incentive Plan,
which provides for the grant of awards to employees, officers and
directors. Subject to adjustments for changes in the Company's common
stock and other events, the stock plan is authorized to grant up to
4,500,000 shares, either in the form of options to purchase Nestor
common stock or as restricted stock awards.
-7-
Note 5 - Litigation:
On July 13, 2004, the Company filed an additional lawsuit for patent
infringement against Redflex Traffic Systems, Inc. In addition, Nestor
notified Transol USA, Inc., that it will bring additional like claims
for patent infringement against Transol USA, Inc. Original
infringement claims against these Australian-based competitors were
filed by Nestor in November 2003, alleging infringement of Nestor's
U.S. Patent No. 6,188,329. The additional claims filed and asserted
allege infringement of U.S. Patent No. 6,754,663, issued to Nestor on
June 22, 2004. The claims against Redflex are pending in US District
Court, District of Rhode Island. The original claims against Transol
are pending in US District Court, Central District of California. The
Company cannot give assurance that we will be successful in either
action.
-8-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PROSPECTIVE STATEMENTS
The following discussion includes "forward-looking statements" within the
meaning of Section 21E of the Securities and Exchange Act of 1934, and is
subject to the safe harbor created by that section. Forward-looking statements
give our current expectations or forecasts of future events. All statements,
other than statements of historical facts, included or incorporated in this
report regarding our strategy, future operations, financial position, future
revenues, projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. Factors that
could cause results to differ materially from those projected in the
forward-looking statements are set forth in this section and in Exhibit 99.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
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 other reports filed with the Securities and
Exchange Commission.
The Company's expense levels are based in part on its product development
efforts and its expectations regarding future revenues and in the short term are
generally fixed. Therefore, the Company may be unable to adjust its spending in
a timely manner to compensate for any unexpected revenue shortfall. As a result,
if anticipated revenues in any quarter do not occur or are delayed, the
Company's operating results for the quarter would be disproportionately
affected. Operating results also may fluctuate due to factors such as the demand
for the Company's products, product life cycles, the development, introduction
and acceptance of new products and product enhancements by the Company or its
competitors, changes in the mix of distribution channels through which the
Company's products are offered, changes in the level of operating expenses,
customer order deferrals in anticipation of new products, competitive conditions
in the industry and economic conditions generally or in various industry
segments.
The Company's quarterly revenues and operating results have varied significantly
in the past due to the timing of new customer contracts and approaches
installed, and the Company expects such fluctuations to continue for the
foreseeable future. Accordingly, the Company believes that period-to-period
comparisons of its financial results should not be relied upon as an indication
of the Company's future performance. No assurance can be given that the Company
will be able to achieve or maintain profitability on a quarterly or annual basis
in the future.
EXECUTIVE SUMMARY
The Company primarily operates through Nestor Traffic Systems, Inc. (NTS), a
wholly owned subsidiary. Its leading product is its CrossingGuard video-based
red light enforcement system and services. CrossingGuard is marketed,
maintained, and distributed through direct sales to states and municipalities in
the United States.
-9-
The following is a summary of key performance measurements monitored by
management:
Quarter Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Financial:
Revenue $ 1,552,000 $ 444,000 $ 2,651,000 $ 790,000
Loss from operations 936,000 1,091,000 1,919,000 2,108,000
Net loss 1,120,000 1,179,000 1,645,000 2,224,000
Additional investment in
capitalized systems 431,000 532,000 678,000 1,069,000
Cash and marketable equity securities 4,043,000 706,000
Working capital (deficit) 3,451,000 (705,000)
Number of CrossingGuard Approaches:
Installed and operational 95 60
Planned under existing contracts 140 75
------------- --------------
Total installed and planned 235 135
* At end of period.
Management considers following goals to be of highest importance to the Company
in 2004: o Aggressively market CrossingGuard to states and municipalities o
Identify and develop strategic relationships to jointly offer related products
and services o Improve technology and performance to maximize revenue per
approach o Vigorously defend our patented technology from infringement
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Nestor, Inc.'s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions (see Note 2 to the Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003). The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Unbilled contract revenue
- -------------------------
Unbilled contract revenue represents revenue earned by the Company in advance of
being billable under customer contract terms. Under the terms of some current
contracts, the Company cannot bill the municipality until the court has
collected the citation fine. Management records unbilled contract revenue in
these situations at a net amount, based upon a historical pattern of collections
by the courts for the municipalities. The pattern of collections on these
citations is continually reviewed and updated by management.
Revenue Recognition
- -------------------
Revenue is derived mainly from the lease of products which incorporate NTS's
software and the delivery of services based upon such products. Product license
and service fees include software licenses and processing service fees tied to
citations issued to red-light violators. NTS provides equipment (either under
direct sales or lease agreements), postcontract customer processing and support
services, and engineering services. In arrangements that include multiple
elements, some of which include software, the total arrangement fee is allocated
among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence. Management
-10-
estimates the percentage of citations that are expected to be collectible and
recognizes revenue accordingly. To the extent these estimates are not accurate,
the Company's operating results may be significantly and negatively affected.
Long Term Asset Impairment
- --------------------------
In assessing the recoverability of the Company's long term assets, management
must make assumptions regarding estimated future cash flows, contract renewal
options and other factors to determine the fair value. If these estimates change
in the future, the Company may be required to record impairment charges that
were not previously recorded.
LIQUIDITY AND CAPITAL RESOURCES
Cash Position and Working Capital
- ---------------------------------
The Company had consolidated cash, cash equivalents and marketable equity
securities totaling $4,043,000 at June 30, 2004 as compared with $5,410,000 at
December 31, 2003. At June 30, 2004, the Company had working capital of
$3,451,000 as compared with $3,294,000 at December 31, 2003.
The Company's net worth at June 30, 2004 was $12,255,000, as compared with a net
worth of $9,662,000 at December 31, 2003. The increase in net worth is primarily
the result of private placement equity transactions and conversion of the Laurus
2003 Note, both in January 2004, offset by the net operating loss reported for
the period.
The Company continues to seek additional sources of equity and debt to be
prepared for the development of new growth opportunities.
Future Commitments
- ------------------
For the six months ended June 30, 2004, the Company invested $678,000 in
capitalized systems, $178,000 in system costs expensed under sales-type lease
accounting for Delaware approaches, and $80,000 in pre-construction mobilization
(system) costs for Baltimore, as compared to $1,069,000, $0, and $0 in the same
period last year. Management expects that NTS will make future commitments for
systems related to its CrossingGuard contracts.
RESULTS OF OPERATIONS
For the quarter ended June 30, 2004, the Company realized consolidated revenues
totaling $1,552,000 and expenses of $2,488,000, which resulted in a consolidated
operating loss for the quarter of $936,000. The Company reported a consolidated
net loss of $1,120,000 for the current quarter after recording $184,000 of other
expenses. In the corresponding quarter of the prior year, consolidated revenues
and expenses totaled $443,000 and $1,534,000, respectively, resulting in a
consolidated operating loss of $1,091,000; and after a contract termination
reserve of $125,000 and other income of $37,000, the Company reported a net loss
of $1,179,000. For the six-month period ended June 30, 2004, the Company
realized consolidated revenues totaling $2,651,000 and expenses of $4,570,000,
which resulted in a consolidated operating loss for the six-month period of
$1,919,000. The Company reported a consolidated net loss of $1,645,000 for the
six-month period after gain on extinguishment of debt of $508,000 and other net
expenses of $234,000. In the corresponding six-month period of the prior year,
consolidated revenues and expenses totaled $790,000 and $2,898,000,
respectively, producing a loss from operations of $2,108,000, and after contract
termination reserve of $125,000 other net income of $9,000, the Company reported
a net loss of $2,224,000.
Revenues
- --------
During the quarter ended June 30, 2004, consolidated revenues increased
$1,109,000 (250%) to $1,552,000 from $443,000 in the quarter ended June 30,
2003. This increase is attributable to the installed approach base increasing
more than 50% between the two quarters, the commencement of revenues under our
agreement with ACS for the City of Baltimore and $240,000 recorded under
-11-
sales-type lease accounting for Delaware approaches installed during the current
quarter. During the six months ended June 30, 2004, consolidated revenues
increased 236% to $2,651,000 from $790,000 in the prior year.
Operating Expenses
- ------------------
Total operating expenses amounted to $2,488,000 in the quarter ended June 30,
2004, an increase of $954,000 (62%) from total operating costs of $1,534,000 in
the corresponding quarter of the prior year. Operating expenses totaled
$4,570,000 in the six-month period ended June 30, 2004, an increase of
$1,672,000 (58%) from the $2,898,000 reported for the corresponding period of
the prior year. The 2004 operating expenses reflect higher costs required to
support the substantial growth of installed approaches and patent lawsuit
defense expenses, which began in the fourth quarter of 2003.
Cost of Goods Sold
- ------------------
Cost of goods sold (CGS) totaled $952,000 in the quarter ended June 30, 2004 as
compared to $404,000 in the prior year quarter. CGS totaled $1,587,000 in the
six-month period ended June 30, 2004 as compared to $732,000 reported for the
corresponding period of the prior year. The 2004 CGS reflects higher
amortization and direct support costs resulting from the increase in installed
approaches, costs associated with ACS revenue recognized in the current quarter
and the cost of Delaware systems installed under sales-type lease accounting.
Engineering and Operations
- --------------------------
Costs related to engineering and operations totaled $825,000 in the quarter
ended June 30, 2004, as compared to $626,000 in the corresponding quarter of the
prior year. During the six-months ended June 30, 2004, engineering costs were
$1,591,000 as compared to $1,219,000 in the prior year. These costs include the
salaries of field and office personnel as well as operating expenses related to
product design, delivery, configuration, maintenance and service. This expense
increased in 2004, as there were more customers and installations to support.
Research and Development
- ------------------------
Research and development expenses totaled $46,000 in the quarter ended June 30,
2004, as compared with $31,000 in the year-earlier period. During the six-months
ended June 30, 2004, research and development costs were $93,000 as compared to
$62,000 in the prior year. The cost increase is directly attributable to
materials purchased in support of research activities.
Selling and Marketing
- ---------------------
Selling and marketing costs totaled $164,000 in the quarter ended June 30, 2004,
as compared with $102,000 in the corresponding quarter of the prior year. During
the six-months ended June 30, 2004, selling and marketing costs were $306,000 as
compared to $170,000 in the prior year. The increase reflects a more aggressive
marketing effort, including the use of consultants in targeted areas.
General and Administrative
- --------------------------
General and administrative expenses totaled $501,000 in the quarter ended June
30, 2004, as compared with $372,000 in the corresponding quarter of the prior
year. The $129,000 increase over last year substantially related to ongoing
patent infringement legal expenses, which amounted to $107,000 during the
current quarter. General and administrative expenses totaled $994,000 in the
six-month period ended June 30, 2004, as compared to $716,000 in the
corresponding period of the prior year. The $278,000 (39%) increase over last
year again substantially reflects costs of ongoing patent infringement legal
expenses, which were $216,000 for the six months ending June 30, 2004.
-12-
Contract Termination Reserve
- ----------------------------
A significant customer contract in the Rail line of business may be terminated
by the customer prior to its completion as a result of the Company's 2002
reorganization and decision to focus on CrossingGuard systems and services. The
Company accrued $125,000 of estimated contract termination fees for the quarter
ended June 30, 2003.
Other Expense - Net
- -------------------
Other expenses totaled $184,000 in the quarter ended June 30, 2004, as compared
with other income of $37,000 in the corresponding quarter of the prior year, an
increase of $221,000 (597%). The higher current year quarter includes an
unrealized loss of $152,000 on marketable equity security positions and $20,000
of interest expense on the Laurus note. The prior year quarter includes $64,000
of other income as a result of a favorable settlement in a vendor dispute. Other
expenses were $234,000 in the six-month period ended June 30, 2004, as compared
to other income of $9,000 in the corresponding period of the prior year. The
current year includes an unrealized loss on marketable equity securities of
$163,000 and Laurus note interest expense of $37,000.
Loss Per Share
- --------------
During the quarter ended June 30, 2004, the Company reported a net loss of
$1,120,000, or ($.06) per share as compared with a net loss of $1,179,000, or
($.08) per share in the corresponding period of the prior year. During the
quarter ended June 30, 2004, there were outstanding 18,036,000 basic and diluted
shares of common stock as compared with 13,961,000 basic and diluted shares
during the corresponding quarter of the previous year. During the six months
ended June 30, 2004, the Company reported a net loss of $1,645,000 and ($.09)
per share as compared with a net loss of $2,224,000, or ($.19) per share in the
corresponding period of the prior year. During the six months ended June 30,
2004, there were outstanding 18,033,000 basic and diluted shares of common stock
as compared with 11,954,000 basic and diluted shares during the corresponding
period of the previous year. The increase in the outstanding shares reflects the
additional shares issued in January 2004 relating to the Laurus and Silver Star
note conversions and the private placement equity transactions.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's marketable equity securities (primarily insured municipal and
international bond funds), valued at $996,000 at June 30, 2004, are exposed to
market risk due to changes in U.S. interest rates and fluctuations in foreign
currency exchange rates. The primary objective of the Company's investment
activities is the preservation of principal while maximizing investment income.
The Company's exposure to this risk is moderately high in the short-term,
although the risk may be able to be managed if the securities are not required
to be sold when a loss will be realized. The securities are classified as
"trading securities" and accordingly are reported at fair value with unrealized
gains and losses included in other income (expense).
The Company also has a convertible note payable at prime plus 1.25% through its
January 2006 maturity. Management assesses the exposure to this risk as
immaterial.
ITEM 4: CONTROLS AND PROCEDURES
Nestor, Inc. management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e) as of June 30, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 2004, the Company's disclosure controls and procedures were
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. No change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART 2: OTHER INFORMATION
NESTOR, INC.
FORM 10 Q - June 30, 2004
Item 1: Legal Proceedings
On July 13, 2004, the Company filed an additional lawsuit for patent
infringement against Redflex Traffic Systems, Inc. In addition, Nestor
notified Transol USA, Inc., that it will bring additional like claims
for patent infringement against Transol USA, Inc. Original
infringement claims against these Australian-based competitors were
filed by Nestor in November 2003, alleging infringement of Nestor's
U.S. Patent No. 6,188,329. The additional claims filed and asserted
allege infringement of U.S. Patent No. 6,754,663, issued to Nestor on
June 22, 2004. The claims against Redflex are pending in US District
Court, District of Rhode Island. The original claims against Transol
are pending in US District Court, Central District of California. The
Company cannot give assurance that we will be successful in either
action.
Item 2: Changes in Securities - none
Item 3: Defaults on Senior Securities - None
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant's annual meeting of stockholders was held on June 24,
2004. The matters voted upon at such meeting and the number of shares
cast for or against are as follows:
1. The stockholders elected the following directors to serve for a
term of one year: George L. Ball, James S. Bennett, Albert H.
Cox, Jr., Wililam B. Danzell, Terry E. Fields, Robert G.
Flanders, Jr., William J. Gilbane, Jr., David N. Jordan, Donald
R. Sweitzer by the following votes.
For Withheld
--- --------
George L. Ball 15,073,748 790,027
James S. Bennett 15,858,435 5,340
Albert H. Cox, Jr. 15,858,435 5,340
William B. Danzell 15,149,035 714,740
Terry E. Fields 15,858,435 5,340
Robert G. Flanders, Jr. 15,858,435 5,340
William J. Gilbane, Jr. 15,858,435 5,340
David N. Jordan 15,149,035 714,740
Donald R. Sweitzer 15,858,435 5,340
No abstentions or broker non-votes were recorded on the election
of directors.
2. Approve proposal to amend the Company's Certificate of
Incorporation to increase the number of shares of Common Stock,
par value $.01 per share, that the Company has authority to issue
to from Twenty Million (20,000,000) shares to Thirty Million
(30,000,000) shares.
For: 15,736,033 Against: 124,346
Abstain: 3,396 Broker Non-votes: 0
3. Approve the 2004 Stock Incentive Plan and reserve 4,500,000
shares for issuance under the plan.
For: 12,209,486 Against: 220,446
Abstain: 7,521 Broker Non-votes: 3,426,322
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4. Ratify the appointment of Carlin, Charron & Rosen, LLP as
independent auditors of the Company for 2004.
For: 15,828,887 Against: 11,960
Abstain: 22,928 Broker Non-votes: 0
Item 5: Other Information - None
Item 6: Exhibits and reports on Form 8-K
(b) Exhibits
Exhibit Number Description
-------------- -----------
31.1 Certification of principal executive officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended
31.2 Certification of principal financial officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended
32 Statement Pursuant to 18 U.S.C.ss.1350
(c) Reports on Form 8-K
On June 8, 2004, the Corporation filed with the Securities and
Exchange Commission a current report on Form 8-K under items 5 and 7
reporting the announcement of first quarter results, appointment of
new chief financial officer and call-in number to listen to annual
meeting of shareholders, which is hereby incorporated by reference.
On June 30, 2004, the Corporation filed with the Securities and
Exchange Commission a current report on Form 8-K under items 5 and 7
reporting the increase in authorized capital, increase in number of
directors, election of new directors and adoption of 2004 stock
incentive plan, which is hereby incorporated by reference.
On July 23, 2004, the Corporation filed with the Securities and
Exchange Commission a current report on Form 8-K under items 5 and 7
reporting the clarification of CEO's statements, which is hereby
incorporated by reference.
-15-
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)
By: /s/ William B. Danzell
--------------------------------------
William B. Danzell
President and Chief Executive Officer
DATE: August 13, 2004 By: /s/ Claire M. Iacobucci
--------------------------------------
Claire M. Iacobucci
Treasurer and Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
31.1 Certification of principal executive officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended
31.2 Certification of principal financial officer
pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as amended
32 Statement Pursuant to 18 U.S.C.ss.1350
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