-12-
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, 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 September 30, 1999
NESTOR, INC.
FORM 10 Q
September 30, 1999
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations (Unaudited)
Quarters and nine months ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 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>
September 30, 1999 December 31, 1998
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,271,158 $ 1,175,183
Accounts receivable, net of
allowance for doubtful accounts 370,767 512,748
Unbilled contract revenue 1,007,304 118,209
Inventory 510,710 231,613
Other current assets 150,605 98,348
Total current assets 3,310,544 2,136,101
Noncurrent assets:
Property and equipment at cost -
net of accumulated depreciation 379,861 368,525
Deferred development costs 62,000 80,000
Other assets 6,283 6,963
Total Assets $ 3,758,688 $ 2,591,589
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other
current liabilities $ 1,192,094 $ 1,150,604
Deferred income 299,511 434,036
Total current liabilities 1,491,605 1,584,640
Noncurrent liabilities:
Long term obligations
under capital leases 8,386 22,618
Total liabilities 1,499,991 1,607,258
Minority interest 255,691 ---
Stockholders' equity:
Preferred Stock Series B, $1.00
par value, authorized
10,000,000 shares;
Issued and outstanding 345,000
shares at September 30, 1999
and 365,000 shares at Dec. 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 September 30, 1999
and 17,479,327 shares at
December 31, 1998 174,993 174,793
Warrants and options 710,330 630,467
Additional paid-in capital 25,976,114 24,504,556
Retained deficit (25,203,431) (24,690,485)
Total stockholders' equity 2,003,006 984,331
Total Liabilities and
Stockholders' Equity $ 3,758,688 $ 2,591,589
The Notes to the Condensed Consolidated Financial Statements are
an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
Nestor, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 930,735 $ 343,104 $ 2,935,672 $ 1,229,843
Engineering services 231,962 159,230 928,602 625,634
Tangible product sales 9,297 --- 54,717 129,343
Total revenues 1,171,994 502,334 3,918,991 1,984,820
Operating expenses:
Engineering services 447,224 280,475 1,247,696 1,101,334
Tangible product sales 16,834 --- 29,023 50,005
Research and development 399,696 666,757 1,288,467 1,588,535
Selling and marketing expenses 519,486 406,499 1,398,887 1,346,711
General and administrative expenses 408,549 331,534 1,064,246 954,813
Total operating expenses 1,791,789 1,685,265 5,028,319 5,041,398
Loss from operations (619,795) (1,182,931) (1,109,328) (3,056,578)
Other income (expense) (9,932) 10,855 (46,169) (16,245)
Loss for the period before income taxes
(benefit) and minority interest (629,727) (1,172,076) (1,155,497) (3,072,823)
Income taxes (benefit) --- --- --- ---
Loss before minority interest (629,727) (1,172,076) (1,155,497) (3,072,823)
Minority interest in loss of subsidiary 237,823 --- 642,551 ---
Net loss for the period $ (391,904) $ (1,172,076) $ (512,946) $(3,072,823)
Loss per share:
Net loss for the period $ (391,904) $ (1,172,076) $ (512,946) $(3,072,823)
Dividends accrued on preferred stock --- --- --- 151,397
Loss applicable to common stock $ (391,904) $ (1,172,076) $ (512,946) $(3,224,220)
Loss per share:
Basic and diluted $ (0.02) $ (0.07) $ (0.03) $ (0.22)
Shares used in computing
loss per share:
Basic and diluted 17,844,327 17,441,206 17,844,327 14,507,411
The Notes to the Condensed Consolidated Financial Statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
Nestor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (512,946) $ (3,072,823)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 114,820 231,447
Expenses charged to operations relating to options,
warrants and capital transactions 79,863 79,863
Minority interest in loss of subsidiary (642,551) ---
Changes in assets and liabilities:
Decrease in accounts receivable 141,981 218,359
(Increase) in unbilled contract revenue (889,095) (66,075)
(Increase) decrease in inventory (279,097) 3,327
(Increase) in other assets (51,577) (13,274)
Increase in accounts payable
and other current liabilities 57,296 90,173
(Decrease) in deferred income (134,525) (154,762)
Net cash used by operating activities (2,115,831) (2,683,765)
Cash flows from investing activities:
Purchase of property and equipment (108,157) (112,096)
Net cash used by investing activities (108,157) (112,096)
Cash flows from financing activities:
Repayment of obligations under capital leases (30,037) (34,520)
Proceeds from line of credit --- 250,000
Repayment of line of credit --- (250,000)
Proceeds from issuance of common stock - net 2,350,000 4,972,249
Payment of dividends on preferred stock --- (69,070)
Redemption of Preferred Series D stock --- (41,424)
Net cash provided by financing activities 2,319,963 4,827,235
Net change in cash and cash equivalents 95,975 2,031,374
Cash and cash equivalents - beginning of period 1,175,183 386,639
Cash and cash equivalents - end of period $ 1,271,158 $ 2,418,013
Supplemental cash flows information
Interest paid $ 10,300 $ 17,221
Income taxes paid $ --- $ 37,500
The Notes to the Condensed Consolidated Financial Statements are an integral
part of this statement.
</TABLE>
<PAGE>
Nestor, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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 nine month periods ended September 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. Concurrently, NTS issued
an option for an additional 17.5% interest; such option
expires January 31, 2000. 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
September 30, 1999:
Revenues $ 1,135 $ 31 $ --- $ 6 $ 1,172
Segment profit (loss) 21 (634) --- (17) (630)
Minority interest --- 238 --- --- 238
Segment net profit (loss) 21 (396) --- (17) (392)
Segment assets 2,048 1,180 --- 531 3,759
Quarter Ended
September 30, 1998:
Revenues $ 480 $ 12 $ --- $ 10 $ 502
Segment profit (loss) (404) (510) (279) 21 (1,172)
Nine Months Ended
September 30, 1999:
Revenues $ 3,753 $ 132 $ --- $ 34 $ 3,919
Segment profit (loss) 598 (1,713) --- (40) (1,155)
Minority interest --- 642 --- --- 642
Segment net profit (loss) 598 (1,071) --- (40) (513)
Nine Months Ended
September 30, 1998:
Revenues $ 1,685 $ 220 $ 41 $ 39 $ 1,985
Segment profit (loss) (787) (1,289) (1,021) 24 (3,073)
</TABLE>
<PAGE>
Note 3 - Inventories:
Sept. 30, 1999 Dec. 31, 1998
(In Thousands)
Work in Progress $ 204 $ 118
Finished Goods 307 114
$ 511 $ 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.
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 September 30, 1999, the Company realized
consolidated revenues totaling $1,172,000 and expenses of
$1,802,000, which resulted in a consolidated operating loss for
the quarter of $630,000 before taxes and minority interests.
During the quarter, Nestor, Inc. realized an operating profit of
$4,000 and Nestor Traffic Systems, Inc., the Company's 62.5%
owned subsidiary (NTS), experienced an operating loss of
$634,000. The Company reported a consolidated net loss of
$392,000 for the current quarter after allowance for minority
interest in the net loss of NTS of $238,000. In the
corresponding quarter of the prior year, consolidated revenues
and expenses totaled $502,000 and $1,674,000, respectively,
producing a loss from operations of $1,172,000.
For the nine month period in 1999, the Company realized
consolidated revenues totaling $3,919,000 and expenses of
$5,074,000, which resulted in a consolidated operating loss of
$1,155,000 before taxes and minority interest. During the nine
month period, Nestor, Inc. realized an operating profit of
$558,000 and NTS experienced an operating loss of $1,713,000.
The Company reported a consolidated net loss of $513,000 after
allowance for minority interest in the net loss of NTS of
$642,000. In the corresponding prior year period, consolidated
revenues and expenses totaled $1,985,000 and $5,058,000,
respectively, producing a loss from operations of $3,073,000.
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 September 30, 1999, consolidated revenues increased
133% to $1,172,000 from $502,000 in the quarter ended September
30, 1998. During the nine months ended September 30, 1999,
consolidated revenues increased 97% to $3,919,000 from $1,985,000
in the respective prior year period.
Software Licensing
Total product-licensing revenues were $931,000 in the quarter
ended September 30, 1999, a 171% increase over $343,000 reported
in the same quarter of the prior year. Software licensing
revenues from the Company's Financial Services Division totaled
$925,000 in the third quarter of 1999, as compared with $332,000
in the corresponding quarter of the prior year.
Total product-licensing revenues were $2,936,000 in the nine
months in 1999, a 139% increase over $1,230,000 reported in the
prior year. Software licensing revenues from the Company's
Financial Services Division totaled $2,902,000 in the nine months
in 1999, as compared with $1,189,000 in the prior year.
The increase in revenues from the prior-year is attributable to
twelve 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 38% to
$1,028,000 in 1999.
Engineering Services
During the quarter ended September 30, 1999, revenues from
engineering contracts increased 46% to $232,000 from $159,000 in
the corresponding quarter of the prior year. Revenues in the
third quarter of 1999 relating to customer-funded modifications,
modeling, and installations of the Company's Financial Services
Division products totaled $210,000, as compared with year-earlier
revenues of $148,000.
For the nine month period in 1999, revenues from engineering
contracts increased 48% to $929,000 from $626,000 in the
corresponding period in 1998. Year-to-date 1999 revenues
relating to customer-funded modifications, modeling, and
installations of the Company's Financial Services Division
products totaled $846,000, as compared with year-earlier revenues
of $496,000.
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 September 30, 1999, as
compared with none in the corresponding quarter of the prior
year. Year to date Ni1000 revenues totaled $41,000 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 September 30, 1999 and 1998, Traffic
System tangible product revenues totaled $3,000 and none,
respectively. Year to date revenues totaled $16,000 and $73,000
in 1999 and 1998, respectively. Current year efforts to complete
development of the CrossingGuard product have delayed sales and
deliveries of TrafficVision product.
Operating Expenses
Total operating expenses amounted to $1,792,000 in the quarter
ended September 30, 1999, an increase of $107,000 from total
operating costs of $1,685,000 in the corresponding quarter of the
prior year. Year to date operating expenses totaled $5,028,000
and $5,041,000 in 1999 and 1998, respectively.
Engineering Services
Costs related to engineering services totaled $447,000 in the
quarter ended September 30, 1999, as compared to $280,000 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 increased from
176% last year to 193% this year.
Year-to-date 1999 costs related to engineering services totaled
$1,248,000 as compared to $1,101,000 in the corresponding period
of the prior year. As a percentage of engineering revenues,
these costs improved substantially from 176% last year to 134%
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 that
generate higher engineering expense to revenue margins.
Research and Development
Research and development expenses totaled $400,000 in the quarter
ended September 30, 1999, as compared with $667,000 in the year-
earlier period. For the nine months in 1999, research and
development expenses totaled $1,288,000 as compared to $1,589,000
in the nine months in 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 totaled $197,000 and $674,000
for InterSite efforts in the third quarter and nine months in
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 $519,000 in the quarter ended
September 30, 1999, as compared with $406,000 of such costs in
the corresponding quarter of the prior year. For the nine months
in 1999, selling and marketing expenses totaled $1,399,000 as
compared to $1,347,000 in the year-earlier period.
The increase reflects additional marketing efforts by both the
Financial Solutions Division and the Company's NTS subsidiary.
The increase has been offset, in part, by the suspension of
further marketing efforts in the InterSite product line which
incurred $26,000 and $179,000 of such expenses in the third
quarter and nine months in 1998, respectively.
General and Administrative
General and administrative expenses totaled $409,000 in the
quarter ended September 30, 1999, as compared with $332,000 in
the corresponding quarter of the prior year. For the nine months
in 1999, general and administrative expenses totaled $1,064,000
as compared to $955,000 in the year-earlier period.
Net Loss Per Share
During the quarter ended September 30, 1999, the Company
experienced a net loss of $392,000, or $.02 per share as compared
with a net loss of $1,172,000, or $.07 per share in the
corresponding period of the prior year. During the quarter ended
September 30, 1999, there were outstanding basic and diluted
17,844,000 shares of common stock as compared with 17,441,000
shares during the corresponding quarter of the previous year.
During the nine months ended September 30, 1999, the Company
realized a net loss of $513,000 as compared with a net loss of
$3,073,000 in the corresponding period of the prior year. The
net loss applicable to common stock was $513,000, or $.03 per
share in the nine months ended September 30, 1999. In the year-
earlier period, after allowance for preferred stock dividends of
$151,000, the Company generated a net loss applicable to common
stock of $3,224,000, or $.22 per share. During the nine months
ended September 30, 1999, there were outstanding basic and
diluted 17,844,000 shares of common stock as compared with
14,507,000 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 $1,271,000 at September 30, 1999, as compared with
$2,040,000 at June 30, 1999, and $1,175,000 at December 31, 1998.
At September 30, 1999, the Company had working capital of
$1,819,000 as compared with working capital of $551,000 at
December 31, 1998. Cash and cash equivalents of $656,000 and
working capital of $918,000 were provided by the Company's 62.5%
owned subsidiary, NTS.
The Company's net worth at September 30, 1999 was $2,003,000, 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 are being
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. NTS is currently attempting to raise additional capital
to support its financing needs for product development and
production.
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 September 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 September 30, 1999, are sufficient to
meet the Company's anticipated cash requirements through the year
ending December 31, 1999.
Backlog
As of September 30, 1999, December 31, 1998 and September 30,
1998, the Company had revenue backlogs of $3,521,000, $2,578,000,
and $2,302,000, respectively, in software license, engineering
fees, and other product and service fees. The increase in 1999
is due primarily to two new NTS licenses - one for CrossingGuard
and the other Rail CrossingGuard, coupled with increasing PRISM
engineering projects and monthly license fees. The Company
includes in its revenue backlog all fees specified in contracts
that 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
$300,000 at September 30, 1999 as compared with $434,000 at
December 31, 1998.
Future commitments
During the quarter ended September 30, 1999, the Company acquired
additional property and equipment (primarily computing and
related equipment) at a cost of $43,000. 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. 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 completed 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.
Internal staff costs were incurred as well as other expenses
related to system enhancements and product modifications for the
year 2000. Such costs and expenses did not have a material
impact on the results of operations. As the Company's internal-
use computer systems and products have been principally designed
and developed within the past ten years, the Company found that
many programs were already year 2000 compliant. The Company has
made upgrades available for products that were not year 2000
ready. 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
September 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
Item 5: Other Information
Item 6: Exhibits and reports on Form 8-K
(a)Exhibits - None
(b)The Company did not file any reports on Form 8-K
during the three months ended September 30, 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: November 12, 1999 By: /S/ Nigel P. Hebborn
Chief Financial Officer
(Principal Accounting Officer)
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