SOURCE: Nestor, Inc.

April 02, 2007 10:58 ET

Nestor, Inc. Reports 2006 Fourth Quarter and Year End Financial Results

Report Shows Annual Recurring Lease and Service Fee Revenues Are Up 35% From 2005, Fourth Quarter Revenues Increased by 48% From Same Time Last Year

PROVIDENCE, RI -- (MARKET WIRE) -- April 2, 2007 -- Nestor, Inc. (NASDAQ: NEST), a leading provider of video-based traffic safety solutions and services, is pleased to release fourth quarter and 2006 year-end statements, reporting an increase in both fourth quarter and year-end revenues over the same periods in 2005. Total revenues for the three-month period ending December 31, 2006 increased 48% to $2,349,000 from $1,589,000 in the fourth quarter of 2005. Excluding one-time product sales recorded in 2005 of $1,758,000, our recurring lease and service fee revenues increased 35%, to $8,087,000, in the twelve months ended December 31, 2006 as compared to the prior year. This growth reflects the continued increase in installed systems, with 222 installed CrossingGuard units and 11 installed PoliScan units generating revenues at December 31, 2006 as compared to 171 installed CrossingGuard units and 4 installed PoliScan units at December 31, 2005.

Modified EBITDA for the quarter and twelve months ended December 31, 2006 was a loss of $1,370,000 and $6,055,000, respectively, and compared to a loss of $2,021,000 and $6,879,000 in the comparable 2005 periods. The improvement in Modified EBITDA for the fourth quarter reflects the growth in recurring revenues being realized, offset in part by increased operational costs.

We calculate Modified EBITDA by first calculating EBITDA, which we define as net income before interest expense, debt restructuring or debt extinguishment costs (if any during the relevant measurement period), provision for income taxes, and depreciation and amortization. Then we exclude derivative instrument income or expense, debt discount expense, share-based compensation expense, and asset impairment charges. These measures eliminate the effect of financing transactions that we enter into on an irregular basis based on capital needs and market opportunities, and these measures provide us with a means to track internally generated cash from which we can fund our interest expense and our growth. In comparing Modified EBITDA from year to year, we also ignore the effect of what we consider non-recurring events unrelated to our core business operations to arrive at what we define as Modified EBITDA. Because Modified EBITDA is a non-GAAP financial measure, we include in the table at the end of this press release reconciliations of Modified EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States. We present Modified EBITDA because we believe it provides useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements, and that it provides an overall evaluation of our financial condition. In addition, Modified EBITDA is defined in certain financial covenants under our 7% Senior Secured Convertible Notes and may be used to adjust the interest rate on those notes at July 1, 2007 and January 1, 2009 and determine whether the holders of those notes have a redemption right at May 25, 2009.

Modified EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles in the United States or as a measure of our profitability or our liquidity.

The Company reported a GAAP net loss for the quarter ended December 31, 2006 of $2,643,000, as compared to a net loss of $1,269,000 in the fourth quarter of 2005. Net loss reported for the twelve months ended December 31, 2006 was $7,491,000, as compared to a net loss of $6,764,000 in 2005. The net loss reported in 2006 contained significant non-cash adjustments, including the effect of adopting the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," which established accounting for equity instruments exchanged for employee services. The Company expensed a non-cash charge of $612,000 for share-based compensation in the fourth quarter of 2006, and $2,506,000 for the twelve months ended December 31, 2006. No charges for share-based compensation were recorded in 2005. In addition, the Company expensed a non-cash charge of $2,191,000 and $2,366,000 for asset impairment charges in the fourth quarter and full year of 2006, respectively. No charges for asset impairment charges were recorded in 2005. In the fourth quarter of 2006, non-cash derivative instrument income was $6,829,000 as compared to income of $4,531,000 in the fourth quarter of 2005. For the twelve months ended December 31, non-cash derivative instrument income was $16,940,000 in 2006 and $7,780,000 in 2005. Also, amortization of debt discount expense was $3,984,000 and $8,664,000 for the quarter and twelve months ended December 31, 2006 as compared to $2,338,000 and $4,054,000 in the comparable 2005 periods.

We had cash and cash equivalents and marketable securities of approximately $3.0 million at December 31, 2006, versus $1.3 million at year-end 2005. We had working capital of approximately $3.4 million at December 31, 2006, versus a deficit of $2.1 million at year-end 2005. In May 2006, the Company raised $26.4 million in Senior Convertible Debt, net of expenses, and, after using $10.9 million for the retirement of prior debt, realized a net $15.5 million for ongoing operations. In the seven months after the closing, Nestor invested approximately $5.3 million in red light and speed capitalized systems. Approximately $3 million was used to support operating expenses and working capital, and $5.7 million was repaid to the Senior Notes at year-end. Nestor's revenues are generated over the life of the customer contract after investment of the capitalized system, and the recent investment in capital systems will continue to generate revenue expansion in 2007. More details regarding our results for 2006 and the fourth quarter of 2006 may be found in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2007.

During December 2006 and January 2007, the Company reorganized its operational structure to align its expense categories to budgeted revenue levels generated from current business. Management expects to report operating cash expense levels of below $1 million per month in the first quarter of 2007, and to maintain those levels into the following quarters. Based on existing contracts, revenues are expected to grow from first quarter 2006 levels by approximately 30%, and grow to above $1 million per month by the third quarter. Modified EBITDA is expected to improve substantially in the first quarter of 2007 and reach positive results by the third quarter.

William Danzell, Chief Executive Officer of Nestor, Inc., stated, "The delivery of new and expanded red light programs in cities such as Los Angeles and Baltimore, together with our new automated speed enforcement business positively impact our near term revenue growth. We have also implemented cost reduction and containment policies that will assist us in achieving our near term objective of reaching positive EBITDA. Using increased revenues and new capital, we hope to fund the Company's expansion into the rapidly growing automated enforcement market. We believe that our products and service lead the industry in quality and effectiveness."

Nestor Traffic Systems provides automated traffic enforcement solutions to state and municipal governments. Nestor Traffic Systems is the exclusive North American distributor for the Vitronic PoliScanSpeed™ scanning LiDAR, capable of tracking multiple vehicles in multiple lanes simultaneously. An industry first, the scanning LIDAR mobile speed enforcement system is an innovative solution for digital speed detection and image recording. The scanning capability of the PoliScanSpeed™ system minimizes the ambiguity and measuring errors associated with conventional photo speed enforcement systems. Our CrossingGuard® red light enforcement system uses patented multiple, time-synchronized videos to capture comprehensive evidence of red light and speed violations. In addition, CrossingGuard® offers customers a unique Collision Avoidance™ safety feature that can help prevent intersection collisions. CrossingGuard® is a registered trademark of Nestor Traffic Systems, Inc. PoliScanSpeed™ is a trademark of Vitronic. For more information, call (401) 274-5658 or visit www.nestor.com.

Statements in this press release about future expectations, plans and prospects for Nestor, including statements containing the words "expects," "will," and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We may not meet the expectations disclosed in our forward-looking statements and investors should not place undue reliance on those statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, including: market acceptance of our products, competition, legal and legislative challenges to automated traffic enforcement, and other factors discussed in Risk Factors in our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the SEC. Investors are advised to read Nestor's Annual Report, quarterly reports on Form 10-Q and current reports on Form 8-K filed after our most recent annual or quarterly report. The forward-looking statements in this letter represent our current views and we disclaim any obligation to update these forward-looking statements.

The table below is a reconciliation of modified EBITDA to net income for the three and twelve-month periods ended December 31:

                         Three Months Ended        Twelve Months Ended
                               Dec. 31,                   Dec. 31,
                    --------------------------  --------------------------
                        2006          2005          2006          2005
                    ------------  ------------  ------------  ------------
GAAP net income
 (loss)             $ (2,643,000) $ (1,269,000) $ (7,491,000) $ (6,764,000)
Interest expense,
 net of interest
 income                  506,000       850,000     1,865,000     1,213,000
Income tax expense           ---           ---           ---           ---
Depreciation and
 amortization            809,000       591,000     2,975,000     2,398,000
                    ------------  ------------  ------------  ------------
EBITDA              $ (1,328,000) $    172,000  $ (2,651,000) $ (3,153,000)
Derivative
 instrument
 (income) expense     (6,829,000)   (4,531,000)  (16,940,000)   (7,780,000)
Debt discount
 expense               3,984,000     2,338,000     8,664,000     4,054,000
Stock-based
 compensation
 expense                 612,000           ---     2,506,000           ---
Asset impairment
 charge                2,191,000           ---     2,366,000           ---
                    ------------  ------------  ------------  ------------
Modified EBITDA     $ (1,370,000) $ (2,021,000) $ (6,055,000) $ (6,879,000)
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