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, 1999
[ ] 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: 17,499,327 shares
outstanding as of June 30, 1999
NESTOR, INC.
FORM 10 Q
June 30, 1999
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations (Unaudited)
Quarters and six months ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition
Item 3 Quantitative and Qualitative Disclosure
of Market Risk
PART 2 OTHER INFORMATION
<TABLE>
Nestor, Inc.
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, 1999 Dec. 31, 1998
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,040,492 $ 1,175,183
Accounts receivable, net of
allowance for doubtful accounts 594,242 512,748
Unbilled contract revenue 668,893 118,209
Inventory 485,558 231,613
Other current assets 161,701 98,348
Total current assets 3,950,886 2,136,101
Noncurrent assets:
Property and equipment at cost -
net of accumulated depreciation 371,037 368,525
Deferred development costs 68,000 80,000
Other assets 5,783 6,963
Total Assets $ 4,395,706 $ 2,591,589
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and
other current liabilities $ 1,236,168 $ 1,150,604
Deferred income 286,966 434,036
Total current liabilities 1,523,134 1,584,640
Noncurrent liabilities:
Long term obligations under
capital leases 10,768 22,618
Total liabilities 1,533,902 1,607,258
Minority interest 493,514 ---
Stockholders' equity:
Preferred Stock Series B, $1.00
par value, authorized
10,000,000 shares; Issued
and outstanding 345,000 shares
at June 30, 1999 and 365,000
shares at December 31, 1998
(liquidation value $1.00
per share) 345,000 365,000
Common Stock, $.01 par value,
authorized 30,000,000 shares;
Issued and outstanding 17,499,327
shares at June 30, 1999
and 17,479,327 shares at
December 31, 1998 174,993 174,793
Warrants and options 683,709 630,467
Additional paid-in capital 25,976,114 24,504,556
Retained deficit (24,811,526) (24,690,485)
Total stockholders' equity 2,368,290 984,331
Total Liabilities and
Stockholders' Equity $ 4,395,706 $ 2,591,589
The Notes to the Condensed Consolidated Financial Statements are
an integral part of this statement.
</TABLE>
<TABLE>
Nestor, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 806,412 $ 342,898 $ 2,004,937 $ 886,739
Engineering services 490,688 158,096 696,640 466,404
Tangible product sales 8,730 49,677 45,420 129,343
Total revenues 1,305,830 550,671 2,746,997 1,482,486
Operating expenses:
Engineering services 485,257 381,665 800,472 820,859
Tangible product sales 1,436 15,699 12,189 50,005
Research and development 390,052 477,670 888,771 921,778
Selling and marketing expenses 435,776 520,127 879,401 940,212
General and administrative
expenses 334,807 327,507 655,697 623,279
Total operating expenses 1,647,328 1,722,668 3,236,530 3,356,133
Loss from operations (341,498) (1,171,997) (489,533) (1,873,647)
Other income (expense) (13,181) 2,583 (36,237) (27,100)
Loss for the period before
income taxes (benefit) and
minority interest (354,679) (1,169,414) (525,770) (1,900,747)
Income taxes (benefit) --- (7,500) --- ---
Loss before
minority interest (354,679) (1,161,914) (525,770) (1,900,747)
Minority interest in
loss of subsidiary 216,997 --- 404,728 ---
Net loss for the period $ (137,682) $(1,161,914) $ (121,042) $ (1,900,747)
Loss per share:
Net loss for the period $ (137,682) $(1,161,914) $ (121,042) $ (1,900,747)
Dividends accrued
on preferred stock --- 37,596 --- 151,397
Loss applicable to common stock $ (137,682) $(1,199,510) $ (121,042) $ (2,052,144)
Loss per share:
Basic and diluted $ (0.01) $ (0.07) $ (0.01) $ (0.16)
Shares used in computing
loss per share:
Basic and diluted 17,844,327 16,642,040 17,844,327 13,040,514
The Notes to the Condensed Consolidated Financial Statements are an integral
part of this statement.
</TABLE>
<TABLE>
Nestor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (121,042) $ (1,900,747)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 75,042 120,979
Expenses charged to operations relating to options,
warrants and capital transactions 53,242 53,241
Minority interest in loss of subsidiary (404,728) ---
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (81,494) 39,632
(Increase) decrease in unbilled contract revenue (550,684) 94,578
Decrease in deferred development costs --- 12,495
(Increase) decrease in inventory (253,945) 26,394
Increase in other assets (62,173) (63,513)
Increase in accounts payable
and other current liabilities 97,424 13,827
(Decrease) in deferred income (147,070) (72,462)
Net cash used by operating activities (1,395,428) (1,675,576)
Cash flows from investing activities:
Purchase of property and equipment (65,554) (94,086)
Net cash used by investing activities (65,554) (94,086)
Cash flows from financing activities:
Repayment of obligations under capital leases (23,709) (17,468)
Proceeds from line of credit --- 250,000
Repayment of line of credit --- (250,000)
Proceeds from issuance of common stock - net --- 4,977,676
Proceeds for issuance of common stock by subsidiary 2,350,000 ---
Payment of dividends on preferred stock --- (69,070)
Redemption of Preferred Series D stock --- (41,424)
Net cash provided by financing activities 2,326,291 4,849,714
Net change in cash and cash equivalents 865,309 3,080,052
Cash and cash equivalents - beginning of period 1,175,183 386,639
Cash and cash equivalents - end of period $ 2,040,492 $ 3,466,691
Supplemental cash flows information
Interest paid $ 7,446 $ 13,489
Income taxes paid $ --- $ 37,500
The Notes to the Condensed Consolidated Financial Statements are an integral
part of this statement.
</TABLE>
Nestor, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note 1 - 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 accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six
month periods ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the year ended December
31, 1999.
The balance sheet at December 31, 1998 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, 1998.
The accompanying financial statements include the accounts of
Nestor, Inc., Nestor Traffic Systems, Inc. ("NTS"), and Nestor
Interactive, Inc. ("Interactive"). NTS and Interactive were
organized effective January 1, 1997 as two wholly owned
subsidiaries of Nestor, Inc. On March 25, 1999, NTS sold a 37.5%
common stock interest to a group of private investors. The
subsidiaries are consolidated in the accompanying financial
statements. All intercompany transactions and balances have been
eliminated.
Note 2 - Segment Information:
Description of reportable segments. Nestor, Inc. has three
reportable segments: Financial Solutions, Traffic Systems and
Internet products. While the Company always differentiated these
segments internally, on January 1, 1997 the latter two were
separated from Nestor, Inc. into distinct subsidiaries (see Note
1), leaving Financial Solutions within the parent company. The
reportable segments are each managed separately because they
design, develop, market and support different products. The
Financial Solutions Division produces and sells credit and debit
card fraud detection products and database marketing products to
financial institutions and processors of financial data. The
Traffic Systems segment provides remote traffic management
products, mainly to municipalities and government transportation
agencies. The Company's Internet segment was engaged in the
development of an internet commerce solution through November
1998 when further investment was suspended.
<TABLE>
<CAPTION (Note 1)
Financial Traffic All
Solutions Systems Internet Other Totals
(In Thousands)
<S> <C> <C> <C> <C> <C>
Quarter Ended
June 30, 1999:
Revenues $ 1,260 $ 34 $ --- $ 12 $ 1,306
Segment profit (loss) 240 (579) --- (16) (355)
Minority interest --- 217 --- --- 217
Segment net profit (loss) 240 (362) --- (16) (138)
Segment assets 1,997 1,854 --- 545 4,396
Quarter Ended
June 30, 1998:
Revenues $ 434 $ 65 $ 41 $ 11 $ 551
Segment profit (loss) (396) (478) (309) 14 (1,169)
Six Months Ended
June 30, 1999:
Revenues $ 2,618 $ 101 $ --- $ 28 $ 2,747
Segment profit (loss) 576 (1,079) --- (23) (526)
Minority interest --- 405 --- --- 405
Segment net profit (loss) 576 (674) --- (23) (121)
Six Months Ended
June 30, 1998:
Revenues $ 1,205 $ 208 $ 41 $ 28 $ 1,482
Segment profit (loss) (382) (779) (742) 2 (1,901)
</TABLE>
Note 3 - Inventories:
June 30, 1999December 31, 1998
(In Thousands)
Work in Progress $ 169 $ 118
Finished Goods 317 114
$ 486 $ 232
Note 4 - Litigation.
On October 6, 1998, HNC Software Corp. (HNC), a significant
competitor of the Company in the field of Financial Services,
obtained a patent titled "Fraud Detection Using Predictive
Modeling" and began advising prospective customers of the Company
of the patent. Upon review of the patent and consideration of
prior actions taken by HNC, the Company initiated a lawsuit
against HNC in the United States District Court in Providence, RI
on November 25, 1998 alleging violation of Sections 1 and 2 of
the Sherman Act (antitrust), violation of the Rhode Island
Antitrust Act, patent invalidity, and infringement of one of
Nestor's patents. The suit seeks various damages, including lost
profits and treble damages. On June 15, 1999, HNC answered the
lawsuit denying the allegations, bringing a counterclaim alleging
infringement of the above described patent by the Company, and
seeking a declaration of invalidity and unenforceability of one
of the Company's patents. On the same day, HNC brought suit in
San Diego, CA against Applied Communications, Inc. (ACI) and its
parent alleging various causes of action including patent
infringement of the above described patent by the Company's PRISM
product which ACI markets. ACI has requested that the Company
provide indemnification against some of the claims in the suit
pursuant to an agreement between ACI and the Company.
Costs associated with the suit are being expensed as incurred.
No estimate of the outcome of this suit, the counterclaim, or the
ACI suit can currently be made.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Prospective Statements
The following discussion contains prospective statements
regarding Nestor, Inc. and its subsidiaries, its business outlook
and results of operations that are subject to certain risks and
uncertainties and to events that could cause the Company's actual
business, prospects and results of operations to differ
materially from those that may be anticipated by, or inferred
from, such prospective statements. Factors that may affect the
Company's prospects include, without limitation: the Company's
ability to successfully develop new contracts for technology
development; the impact of competition on the Company's revenues
or market share; delays in the Company's introduction of new
products; and failure by the Company to keep pace with emerging
technologies.
The Company's quarterly revenues and operating results have
varied significantly in the past and may do so in the future. A
significant portion of the Company's business has been derived
from individually substantial licenses, and the timing of such
licenses has caused material fluctuations in the Company's
operating results. In addition, because the Company provides
certain of its products to customers under licenses with no
significant continuing obligations, it recognizes the majority of
its revenue upon the delivery of the software and acceptance by
the customer. Thus, revenues derived by the Company may be more
likely to be recognized in irregular patterns that may result in
quarterly variations in the Company's revenues.
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 expects quarterly 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.
Readers are cautioned not to place undue reliance on these
prospective statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to
carefully review and consider the various disclosures made by the
Company in this report and in the Company's reports filed with
the Securities and Exchange Commission.
Results of Operations
For the quarter ended June 30, 1999, the Company realized
consolidated revenues totaling $1,306,000 and expenses of
$1,661,000, which resulted in a consolidated operating loss for
the quarter of $355,000 before taxes and minority interests.
During the quarter, Nestor, Inc. realized an operating profit of
$224,000 and Nestor Traffic Systems, Inc., the Company's 62.5%
owned subsidiary (NTS), experienced an operating loss of
$579,000. The Company reported a consolidated net loss of
$138,000 for the current quarter after allowance for minority
interest in the net loss of NTS of $217,000. In the
corresponding quarter of the prior year, consolidated revenues
and expenses totaled $551,000 and $1,720,000, respectively,
producing a loss from operations of $1,169,000.
For the first half of 1999, the Company realized consolidated
revenues totaling $2,747,000 and expenses of $3,273,000, which
resulted in a consolidated operating loss of $526,000 before
taxes and minority interest. During the six month period,
Nestor, Inc. realized an operating profit of $553,000 and NTS
experienced an operating loss of $1,079,000. The Company
reported a consolidated net loss of $121,000 after allowance for
minority interest in the net loss of NTS of $405,000. In the
corresponding six months of the prior year, consolidated revenues
and expenses totaled $1,482,000 and $3,383,000, respectively,
producing a loss from operations of $1,901,000.
Revenues
The Company's revenues arise from licensing of the Company's
products and technology, from contract engineering and modeling
services, and from the sale of tangible products. During the
quarter ended June 30, 1999, consolidated revenues increased 137%
to $1,306,000 from $551,000 in the quarter ended June 30, 1998.
During the six months ended June 30, 1999, consolidated revenues
increased 85% to $2,747,000 from $1,482,000 in the respective
prior year period.
Software Licensing
Total product-licensing revenues were $806,000 in the quarter
ended June 30, 1999, a 135% increase over $343,000 reported in
the same quarter of the prior year. Software licensing revenues
from the Company's Financial Services Division totaled $795,000
in the first quarter of 1999, as compared with $331,000 in the
corresponding quarter of the prior year.
Total product-licensing revenues were $2,005,000 in the first
half of 1999, a 126% increase over $887,000 reported in the prior
year. Software licensing revenues from the Company's Financial
Services Division totaled $1,977,000 in the first half of 1999,
as compared with $857,000 in the prior year.
The increase in revenues from the prior-year is attributable to
seven new PRISM licenses delivered in the year, primarily through
Applied Communications, Inc. and CSK, our marketing partners.
This compares to three new PRISM licenses in the comparable 1998
period. In addition, monthly license fees that are generally
based upon volume levels increased 60% to $663,000 in 1999.
Engineering Services
During the quarter ended June 30, 1999, revenues from engineering
contracts increased 210% to $491,000 from $158,000 in the
corresponding quarter of the prior year. Revenues in the second
quarter of 1999 relating to customer-funded modifications,
modeling, and installations of the Company's Financial Services
Division products totaled $466,000, as compared with year-earlier
revenues of $103,000.
For the first half of 1999, revenues from engineering contracts
increased 49% to $697,000 from $466,000 in the corresponding
period in 1998. Revenues in the first half of 1999 relating to
customer-funded modifications, modeling, and installations of the
Company's Financial Services Division products totaled $641,000,
as compared with year-earlier revenues of $348,000.
The increase in engineering revenues is primarily the result of
additional installation and modeling fees associated with the
substantial increase in new licenses installed during 1999 as
discussed above.
Sales of Tangible Products
The tangible products currently sold by the Company's NTS
subsidiary 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 $9,000 in the quarter ended June 30, 1999, as
compared with $25,000 in the corresponding quarter of the prior
year. Year to date Ni1000 revenues totaled $32,000 and $57,000
in 1999 and 1998, respectively. The Company no longer actively
markets this product line.
The Company, through its NTS subsidiary, is continuing
development of the TrafficVision and CrossingGuard products,
which incorporate the Ni1000 Recognition Accelerator Chip.
During the quarters ended June 30, 1999 and 1998, Traffic System
tangible product revenues totaled $0 and $25,000, respectively.
Year to date revenues totaled $13,000 and $73,000 in 1999 and
1998, respectively. Current year efforts to complete development
of the CrossingGuard product have negatively impacted sales and
deliveries of TrafficVision product. This effect of the
development effort on revenues is expected to ease in the next
six months.
Operating Expenses
Total operating expenses amounted to $1,647,000 in the quarter
ended June 30, 1999, a decrease of $76,000 from total operating
costs of $1,723,000 in the corresponding quarter of the prior
year. Year to date operating expenses totaled $3,237,000 and
$3,356,000 in 1999 and 1998, respectively.
Engineering Services
Costs related to engineering services totaled $485,000 in the
quarter ended June 30, 1999, as compared to $382,000 in the
corresponding quarter of the prior year and reflect the
associated increase in revenues in the respective periods. As a
percentage of engineering revenues, these costs improved
substantially from 241% last year to 99% this year.
For the first half of 1999, costs related to engineering
services totaled $800,000 as compared to $821,000 in the
corresponding period of the prior year. As a percentage of
engineering revenues, these costs improved substantially from
176% last year to 115% this year.
The increase in engineering expense in the quarter is primarily
the result of a shift in engineering time from Research and
Development to Engineering to support the increase in new
business in 1999 (see Research and Development below). The
improvement in expenses as a percentage of revenue is due to
greater efficiencies resulting from the increased business and
backlog, including an increase in custom modeling contracts which
generate higher engineering expense to revenue margins.
Research and Development
Research and development expenses totaled $390,000 in the quarter
ended June 30, 1999, as compared with $478,000 in the year-
earlier period. For the first half of 1999, research and
development expenses totaled $889,000 as compared to $922,000 in
the first half of the prior year.
Effective November 7, 1998, the Company had ceased further
research and development investment in the InterSite product and
terminated all employees and consultants related to that effort.
Marketing and development of the InterSite product has been
transferred to the Company's Financial Solutions Division.
Research and development expenses totalled $211,000 and $478,000
for InterSite efforts in the second quarter and first half of
1998, respectively, and there was no such expense in 1999. This
has been offset by increased research and development staffing in
both the Financial Services Division of Nestor, Inc. and in the
NTS subsidiary.
Selling and Marketing
Selling and marketing costs totaled $436,000 in the quarter ended
June 30, 1999, as compared with $520,000 of such costs in the
corresponding quarter of the prior year. For the first half of
1999, selling and marketing expenses totaled $879,000 as compared
to $940,000 in the first half of the prior year.
The decrease is the result of the suspension of further marketing
efforts in the InterSite product line which incurred $68,000 and
$153,000 of such expenses in the second quarter and first half of
1998, respectively. The reduction has been offset, in part, by
increased marketing efforts by the Company's NTS subsidiary.
General and Administrative
General and administrative expenses totaled $335,000 in the
quarter ended June 30, 1999, as compared with $328,000 in the
corresponding quarter of the prior year. For the first half of
1999, general and administrative expenses totaled $656,000 as
compared to $623,000 in the first half of the prior year.
Net Loss Per Share
During the quarter ended June 30, 1999, the Company experienced a
net loss of $138,000 as compared with a net loss of $1,162,000 in
the corresponding period of the prior year. The net loss
applicable to common stock was $138,000, or ($.01) per share in
the quarter ended June 30, 1999. In the year-earlier period,
after allowance for preferred stock dividends of $38,000, the
Company incurred a net loss available for common stock of
$1,200,000, or ($.07) per share.
During the quarter ended June 30, 1999, there were outstanding
basic and diluted 17,844,000 shares of common stock as compared
with 16,642,000 shares during the corresponding quarter of the
previous year.
During the six months ended June 30, 1999, the Company realized a
net loss of $121,000 as compared with a net loss of $1,901,000 in
the corresponding period of the prior year. The net loss
applicable to common stock was $121,000, or ($.01) per share in
the six months ended June 30, 1999. In the year-earlier period,
after allowance for preferred stock dividends of $151,000, the
Company generated a net loss available for common stock of
$2,052,000, or ($.16) per share.
During the six months ended June 30, 1999, there were outstanding
basic and diluted 17,844,000 shares of common stock as compared
with 13,041,000 shares during the corresponding period of the
previous year.
Liquidity and Capital Resources
Cash Position and Working Capital
The Company had consolidated cash and cash equivalents of
approximately $2,040,000 at June 30, 1999, as compared with
$2,588,000 at March 31, 1999, and $1,175,000 at December 31,
1998. At June 30, 1999, the Company had working capital of
$2,428,000 as compared with working capital of $551,000 at
December 31, 1998. Cash and cash equivalents of $1,400,000 and
working capital of $1,560,000 were provided by the Company's
62.5% owned subsidiary, NTS.
The Company's net worth at June 30, 1999 was $2,368,000, as
compared with a net worth of $984,000 at December 31, 1998. The
increase in net worth results primarily from the sale of newly
issued common stock by a subsidiary of the Company, as more fully
described below. The investment contributed $1,469,000 to the
Company's net worth, net of the minority interest, in 1999.
On March 25, 1999, Nestor Traffic Systems, Inc., a subsidiary of
the Company, sold a 37.5% common stock interest to a private
group of investors for $2,350,000 in cash and issued an option to
purchase an additional 17.5% of its common stock for $1,750,000.
The investor group includes three officers of the Company and the
subsidiary, who in the aggregate contributed $600,000 of the
initial cash invested on the same basis as third-party investors.
The option expires on January 31, 2000. The proceeds will be
used by the subsidiary to fund traffic-system product development
and marketing efforts in 1999. In addition, to the extent that
facility and administrative services of the Company are used by
the subsidiary, reimbursement of allocated costs will be
provided. The subsidiary has an exclusive license from the
Company to apply the Company's proprietary technologies in the
area of traffic-management systems. The license provides for
royalties to the Company of 5% of related revenues, net of direct
cost of third party goods and services sold, in 2000 and 10% in
2001 and beyond. The capital invested in the subsidiary will be
used to fund the expenses of Traffic Systems incurred after
January 1, 1999, which were funded by the Company in previous
years.
On March 24, 1999, the Company entered into a $1,000,000 Line of
Credit agreement with Transaction Systems Architects, Inc.
("TSAI"). The loan is secured by the royalty stream and other
fees produced by the Company's license agreements with Financial
Solutions Division customers. Principal payments are due in
twelve equal monthly installments beginning March 1, 2001.
Interest on the loan is equal to the effective prime interest
rate plus 1%. The line may be reduced to $500,000 if the
Company's equity becomes negative or increased up to $4,000,000
if certain financial requirements are attained. At June 30, 1999
there were no borrowings against this line of credit.
Management believes that the Company's liquid assets, backlog and
available line of credit at June 30, 1999, are sufficient to meet
the Company's anticipated cash requirements through the year
ending December 31, 1999.
Backlog
As of June 30, 1999, December 31, 1998 and June 30, 1998, the
Company had revenue backlogs of $3,028,000, $2,578,000, and
$1,284,000, respectively, in software license, engineering fees,
and other product and service fees. The increase in 1999 is due
primarily to new PRISM licenses contracted by our reseller
Applied Communications, Inc. (ACI) coupled with increasing
monthly license fees from installed PRISM licenses. The Company
includes in its revenue backlog all fees specified in contracts
which have been executed by the Company to the extent that the
Company contemplates recognition of the related revenue within
one year. There can be no assurance that the contracts included
in revenue backlog will actually generate the specified revenues
or that the actual revenues will be generated within the one year
period.
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
$287,000 at June 30, 1999 as compared with $434,000 at December
31, 1998.
Future commitments
During the quarter ended June 30, 1999, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $55,000. 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
consulting and for promotional and marketing expenses.
Year 2000
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Management has initiated a Company-wide program to assess the
Company's internal-use computer systems and applications, as well
as the Company's product offerings for the year 2000 readiness.
The Company expects to incur internal staff costs as well as
other expenses related to system enhancements and product
modifications for the year 2000. As the Company's internal-use
computer systems and products have been principally designed and
developed within the past ten years, the Company expects that
they are currently year 2000 compliant. However, the Company has
not yet completed its testing and analysis. The total cost to be
incurred by the Company for all year 2000 related projects is not
expected to have a material impact on the future results of
operations. Because the Company's business is based on the
licensing of application software, the Company's business would
be adversely impacted if its products or its internal systems
experience problems associated with the century change. This
issue also potentially affects the software programs and systems
used by the Company in its operations. See the Company's Annual
Report on Form 10-K for a further discussion of the Company's
Year 2000 efforts.
ITEM 3: Quantitative and Qualitative Disclosure of Market Risk
The Company has no material exposure to market rate risk.
NESTOR, INC.
FORM 10 Q
June 30, 1999
Item 1: Legal Proceedings.
On October 6, 1998, HNC Software Corp. (HNC), a significant
competitor of the Company in the field of Financial Services,
obtained a patent titled "Fraud Detection Using Predictive
Modeling" and began advising prospective customers of the Company
of the patent. Upon review of the patent and consideration of
prior actions taken by HNC, the Company initiated a lawsuit
against HNC in the United States District Court in Providence, RI
on November 25, 1998 alleging violation of Sections 1 and 2 of
the Sherman Act (antitrust), violation of the Rhode Island
Antitrust Act, patent invalidity, and infringement of one of
Nestor's patents. The suit seeks various damages, including lost
profits and treble damages. On June 15, 1999, HNC answered the
lawsuit denying the allegations, bringing a counterclaim alleging
infringement of the above described patent by the Company, and
seeking a declaration of invalidity and unenforceability of one
of the Company's patents. On the same day, HNC brought suit in
San Diego, CA against Applied Communications, Inc. (ACI) and its
parent alleging various causes of action including patent
infringement of the above described patent by the Company's PRISM
product which ACI markets. ACI has requested that the Company
provide indemnification against some of the claims in the suit
pursuant to an agreement between ACI and the Company.
Costs associated with the suit are being expensed as incurred.
No estimate of the outcome of this suit, the counterclaim, or the
ACI suit can currently be made.
Item 2: Changes in Securities
Item 3: Defaults on Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
The Registrant's annual meeting of stockholders was held on May
12, 1999. Each matter voted upon at such meeting and the number
of shares cast for, against or withheld, and abstained are as
follows:
1.Election of Directors
For Withheld
Sam Albert 15,871,996 184,001
Leon Cooper 15,871,996 184,001
Charles Elbaum 15,871,996 184,001
David Fox 15,871,996 184,001
John Guinan 15,871,996 184,001
Jeffrey Harvey 15,871,996 184,001
Thomas Hill 15,871,996 184,001
Herbert Meeker 15,871,996 184,001
Bruce Schnitzer 15,871,996 184,001
2. Ratification of Appointment of Ernst & Young, LLP as
Independent Auditors for 1999
For: 15,954,079
Against: 20,868
Withheld: 81,050
Item 5: Other Information
Item 6: Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) On April 23, 1999, the Company filed with the Securities and
Exchange Commission a current report on Form 8-K dated March
25, 1999.
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: August 13, 1999 By: /s/Nigel P. Hebborn
Chief Financial Officer
(Principal Accounting Officer)
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