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, 2000
[ ] 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: 17,678,449 shares
outstanding as of September 30, 2000
<PAGE>
NESTOR, INC.
FORM 10 Q
September 30, 2000
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations (Unaudited)
Quarters and nine months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and 1999
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
<PAGE>
<TABLE>
Nestor, Inc.
Condensed Consolidated Balance Sheets
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited) (Note 1)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 71,408 $ 1,048,802
Accounts receivable - net 625,710 984,318
Unbilled contract revenue 1,170,143 1,200,484
Due from affiliate 310,588 320,459
Other current assets 180,519 161,809
Total current assets 2,358,368 3,715,872
Noncurrent assets:
Long term unbilled contract revenue 2,040,922 1,965,532
Investment in affiliate 395,927 710,690
Property and equipment - net 198,425 269,917
Deferred development costs - net 38,000 56,000
Patent development costs 70,324 55,894
Total Assets $ 5,101,966 $ 6,773,905
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other current liabilities $ 1,308,924 $ 1,133,398
Deferred income 1,204,333 1,371,217
Total current liabilities 2,513,257 2,504,615
Noncurrent liabilities:
Long term deferred income 2,040,922 1,965,532
Total liabilities 4,554,179 4,470,147
Stockholders' equity:
Preferred Stock Series B, $1.00
par value, authorized 10,000,000
shares; Issued and outstanding
235,000 shares at Sept. 30, 2000
and 345,000 shares at Dec. 31, 1999
(liquidation value $1.00 per share) 235,000 345,000
Common Stock, $.01 par value,
authorized 30,000,000 shares;
Issued and outstanding 17,678,449
shares at Sept. 30, 2000 and
17,499,327 shares at Dec. 31, 1999 176,784 174,993
Warrants and options 816,813 736,951
Additional paid-in capital 27,462,110 26,574,123
Retained deficit (28,142,920) (25,527,309)
Total stockholders' equity 547,787 2,303,758
Total Liabilities and Stockholders' Equity $ 5,101,966 $ 6,773,905
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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 312,264 $ 930,735 $ 1,777,463 $ 2,935,672
Engineering services 256,381 210,236 1,021,639 851,286
Total revenues 568,645 1,140,971 2,799,102 3,786,958
Operating expenses:
Engineering services 259,873 257,069 778,251 758,436
Research and development 325,579 174,236 999,556 581,359
Selling and marketing expenses 406,861 354,645 1,268,579 992,888
General and administrative expenses 350,111 328,185 1,276,468 823,154
Total operating expenses 1,342,424 1,114,135 4,322,854 3,155,837
Income (loss) from operations (773,779) 26,836 (1,523,752) 631,121
Other expense (25,373) (22,369) (76,079) (73,148)
Income (loss) for the period before
income taxes (benefit) and investment loss (799,152) 4,467 (1,599,831) 557,973
Income taxes (benefit) --- --- --- ---
Loss from investment in affiliate (275,435) (396,371) (1,015,780) (1,070,919)
Net loss for the period $ (1,074,587) $ (391,904) $ (2,615,611) $ (512,946)
Loss per share, basic and diluted $ (0.06) $ (0.02) $ (0.15) $ (0.03)
Basic and diluted shares 17,913,449 17,844,327 17,895,430 17,844,327
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>
Nine Months Ended September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,615,611) $ (512,946)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 89,492 88,678
Loss from investment in affiliate 1,015,780 1,070,919
Expenses charged to operations relating to
options, warrants and capital transactions 79,863 79,863
Changes in assets and liabilities:
Decrease in accounts receivable 358,608 215,638
(Increase) in unbilled contract revenue (45,049) (2,192,658)
(Increase) in other assets (18,710) (217,782)
Increase in accounts payable and other
current liabilities 187,096 156,819
Increase (decrease) in deferred income (91,494) 1,165,346
Net cash used by operating activities (1,040,025) (146,123)
Cash flows from investing activities:
Payments from (advances to) affiliate - net 9,871 (324,931)
Purchase of property and equipment --- (58,920)
Patent development costs ______(14,430) ---
Net cash used by investing activities (4,559) (383,851)
Cash flows from financing activities:
Repayment of obligations under capital leases (11,572) (30,037)
Proceeds from issuance of common stock 78,762 ---
Net cash provided (used) by financing activities 67,190 (30,037)
Net change in cash and cash equivalents (977,394) (560,011)
Cash and cash equivalents - beginning of period 1,048,802 1,175,183
Cash and cash equivalents - end of period $ 71,408 $ 615,172
Supplemental cash flows information
Interest paid $ 4,920 $ 10,300
Income taxes paid $ --- $ ---
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)
September 30, 2000
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 quarter and nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2000.
The balance sheet at December 31, 1999 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,
1999.
Nestor, Inc. organized two wholly-owned subsidiaries, Nestor Traffic Systems,
Inc. ("NTS") and Nestor Interactive, Inc. ("Interactive") effective January
1, 1997. On March 25 and November 30, 1999, NTS sold in the aggregate a
58.1% common-stock interest to a private group of investors. As a result of
these transactions, the Company changed from consolidation to equity
accounting for its interest in NTS for the year ended December 31, 1999. On
June 23, 2000, NTS sold an additional 20.9% common-stock interest to private
investors for approximately $2,025,000. This transaction increased the
Stockholder Equity of the Company by $701,016, representing its 34.62% equity
ownership of the new NTS equity. Effective November 7, 1998, the Company
ceased further investment in the Interactive subsidiary. Any future
marketing or development of Interactive's product has been transferred to
Nestor, Inc. All intercompany transactions and balances have been eliminated.
The following unaudited information presents summarized results for the
quarter and nine months ended September 30, 1999, as previously reported and
as presented in the accompanying condensed financial statements to reflect
the equity method of accounting for NTS.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999 ____
As Previously As Previously
Reported Reclassified Reported Reclassified
<S> <C> <C> <C> <C>
Total revenues $ 1,171,994 $ 1,140,971 $ 3,918,991 $ 3,786,958
Income (loss) from operations (619,795) 26,836 (1,109,328) 631,121
Minority interest 237,823 --- 642,551 ---
Loss from investment in affiliate --- (396,371) --- (1,070,919)
Net loss (391,904) (391,904) (512,946) (512,946)
</TABLE>
Presented below is summarized NTS financial information at September 30,
2000, December 31, 1999 and for the quarter and nine months ended September
30, 2000 and 1999:
Sept. 30, 2000 December 31, 1999
Current assets $ 1,572,867 $ 2,215,602
Noncurrent assets 266,632 295,958
Current liabilities 695,864 723,781
Stockholders' equity 1,143,636 1,697,779
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
2000 1999 2000 1999
Total revenues $ 269,482 $ 31,024 $ 652,700 $ 132,034
Operating expenses 1,083,228 678,893 3,267,451 1,873,786
Net loss 795,595 634,129 2,579,030 1,713,470
NTS is a development stage company, focusing activities primarily on raising
capital, research and development, establishing supply and production
processes, and sales and marketing. Accordingly, NTS's continuation as a
going concern is dependent on its ability to raise additional capital and
generate sufficient revenue to support future operations.
Note 2 - 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 Nestor's patents (infringement claims withdrawn January
10, 2000). 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 the Company's marketing partner, Applied Communications, Inc. (ACI)
and ACI's parent alleging various causes of action including patent
infringement of the above described patent by the Company's PRISM product
which ACI markets. In April 2000, HNC, ACI and its parent agreed to dismiss
the California lawsuit. ACI has requested that the Company provide
indemnification for approximately $900,000 of its legal counsel costs
pursuant to the PRISM license agreement between ACI and the Company. The
Company is disputing the indemnification claim.
On July 21, 2000, HNC filed a motion with the court to voluntarily dismiss
its patent infringement counterclaim against Nestor. Nestor has not opposed
the dismissal of the infringement claims. However, HNC has also requested
the District Court to dismiss Nestor's claim that the HNC patent is invalid.
HNC's request is based upon a covenant not to sue Nestor, that HNC has filed
with the Rhode Island federal court hearing this matter. HNC has claimed
that this covenant not to sue removes any legal threat to Nestor for past or
present patent infringement and, thus, makes Nestor's claim moot. Nestor has
opposed HNC's motion, in part. Notwithstanding any action by the court on
HNC's motion, Nestor's other claims alleging antitrust violations and fraud
on the patent office should continue as scheduled.
Costs associated with the suit are being expensed as incurred. Although the
Company believes that it will prevail, there can be no assurance as to the
outcome of this suit, the counterclaim, or the ACI indemnity claim. Any
conclusion of this litigation or indemnity claim in a manner adverse to the
Company may have an adverse effect on its future financial condition and
results of operations.
Note 3 - Liquidity and Capital Resources:
Management believes that the Company's liquid assets, backlog and available
line of credit at September 30, 2000 are sufficient to meet the Company's
anticipated cash requirements through December 31, 2000 but not beyond. The
Company must raise additional capital to maintain current operations and
continue as a going concern. There can be no assurance that the Company can
raise such additional capital on terms acceptable to the Company and an
investor or financial institution. Accordingly, management is evaluating and
pursuing options to increase liquidity of the Company which may include, but
are not limited to, raising additional capital, selling assets, and/or
reducing operating expenses.
ITEM 2: 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 raise additional
capital, 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, including Exhibit 99.1 to the Company's December 31,
1999 Form 10-K.
Results of Operations
For the quarter ended September 30, 2000, the Company realized consolidated
revenues totaling $568,000 and expenses of $1,342,000, which resulted in a
consolidated operating loss for the quarter of $774,000. The Company
reported a consolidated net loss of $1,075,000 for the current quarter after
allowance for a $275,000 loss from investment in affiliate, Nestor Traffic
Systems, Inc. (a 35% owned affiliate). In the corresponding quarter of the
prior year, consolidated revenues and expenses totaled $1,141,000 and
$1,114,000, respectively, producing income from operations of $27,000 and a
net loss of $392,000 after allowance for loss from investment in affiliate of
$396,000.
For the nine month period ended September 30, 2000, the Company realized
consolidated revenues totaling $2,799,000 and expenses of $4,323,000, which
resulted in a consolidated operating loss of $1,524,000. The Company
reported a consolidated net loss of $2,616,000 for the nine month period
after allowance for the loss from investment in affiliate of $1,016,000. In
the corresponding period of the prior year, consolidated revenues and
expenses totaled $3,787,000 and $3,156,000, respectively, producing income
from operations of $631,000 and a net loss of $513,000 after allowance for
the loss from investment in affiliate of $1,071,000.
Revenues
The Company's revenues arise from licensing of the Company's products and
technology, and from contract engineering and modeling services. During the
quarter ended September 30, 2000, consolidated revenues decreased 50% to
$568,000 from $1,141,000 in the quarter ended September 30, 1999. During the
nine month period ended September 30, 2000, consolidated revenues decreased
26% to $2,799,000 from $3,787,000 in the quarter ended September 30, 1999.
Software Licensing Revenues
Total product-licensing revenues were $312,000 in the quarter ended September
30, 2000, a 66% decrease from $931,000 reported in the same quarter of the
prior year.
The decrease in software license revenues in the quarter is attributable to a
continued softness in initial license fees realized from the Company's direct
sales efforts and those of its distributor network. There were five licenses
realized in the prior year quarter and none in the current year quarter,
although two licenses were signed near quarter end and not delivered in the
current quarter. Further affecting quarter comparability is a reduction in
monthly license fees of four customers whose licenses were sold by the
Company or terminated by the customer, offset slightly by three new customers
who went live with PRISM during the quarter generating new monthly license
fee revenues.
Total product-licensing revenues were $1,777,000 in the nine month period
ended September 30, 2000, a 39% decrease over $2,936,000 reported in the same
period of the prior year.
The decrease in software license revenues from the prior year is attributable
to the experience in the quarter discussed above offset in part by a one-time
fee of $226,800 received from Europay International upon the expiration of
their license on June 1, 2000. The Company realized twelve new PRISM
licenses in the first nine months of 1999 versus nine new PRISM licenses in
2000. However, the average initial license fee realized from these licenses
decreased substantially in 2000, from approximately $157,000 in 1999 versus
$70,000 in 2000. The reasons for the decrease in average initial license
fees realized includes: two licenses were for PRISM eFraud which were granted
for minimal initial fees in exchange for larger volume-based monthly fees
expected in the future, and initial license discounts were granted to two
customers that licensed multiple versions of PRISM at the same time. As of
September 30, 2000, the Company has thirteen customers that are expected to
begin producing monthly license fees in the coming year.
Engineering Service Revenues
During the quarter ended September 30, 2000, revenues from engineering
services increased 22% to $256,000 from $210,000 in the corresponding quarter
of the prior year. The increase in engineering revenues is primarily related
to additional custom model development work.
During the nine months ended September 30, 2000, revenues from engineering
services increased 20% to $1,022,000 from $851,000 in the corresponding
period of the prior year. The increase in engineering revenues is primarily
the result of additional project management, customization and, in
particular, custom modeling fees associated with the overall increase in new
licenses during 1999 and 2000.
Operating Expenses
Operating expenses totaled $1,342,000 in the quarter ended September 30,
2000, an increase of $228,000 (20%) from total operating costs of $1,114,000
in the corresponding quarter of the prior year. Operating expenses totaled
$4,323,000 in the nine month period ended September 30, 2000, an increase of
$1,167,000 (37%) from total operating costs of $3,156,000 in the
corresponding period of the prior year.
Engineering Services
Costs related to engineering services totaled $260,000 in the quarter ended
September 30, 2000, as compared to $257,000 in the corresponding quarter of
the prior year.
Costs related to engineering services totaled $778,000 in the nine month
period ended September 30, 2000, as compared to $758,000 in the corresponding
period of the prior year. Engineering costs have remained stable despite the
increase in engineering services revenue during the period.
Research and Development
Research and development expenses totaled $326,000 in the quarter ended
September 30, 2000, as compared with $174,000 in the prior year period.
Research and development expenses totaled $1,000,000 in the nine month period
ended September 30, 2000, as compared with $581,000 in the corresponding
period or the prior year. Increases in 2000 relate primarily to efforts in
three areas, (i) PRISM 5.4 release modifications including work to enable the
ePRISM internet fraud-detection application, (ii) modification of PRISM code
for Money Laundering and NT-based scoring applications, and (iii) the update
and integration of the Company's CampaignOne and InterSite products into
eCLIPSE for enterprise-wide customer relationship management applications.
Selling and Marketing
Selling and marketing costs totaled $407,000 in the quarter ended September
30, 2000, as compared with $355,000 in the corresponding quarter of the prior
year, an increase of 15%. Selling and marketing costs totaled $1,269,000 in
the nine month period ended September 30, 2000, as compared with $993,000 in
the corresponding period of the prior year, an increase of 28%. The increase
reflects additional marketing efforts by the Company including the addition
of a marketing support assistant and increased domestic and international
travel costs.
General and Administrative
General and administrative expenses totaled $350,000 in the quarter ended
September 30, 2000, as compared with $328,000 in the corresponding quarter of
the prior year, representing an increase of 7%.
General and administrative expenses totaled $1,276,000 in the nine month
period ended September 30, 2000, as compared with $823,000 in the
corresponding period of the prior year, representing an increase of 55%. The
increase reflects a $357,000 increase in legal expenses primarily related to
increased activity regarding the Nestor vs. HNC Software lawsuit. Also
contributing to the increase were the addition of one administrative person
and increased public relations fees.
Loss from Investment in Affiliate
During March and November 1999, the Company's subsidiary NTS sold, in the
aggregate, common stock interests totaling 58% of its equity. As a result,
the Company's interest in NTS has been accounted for under the equity method
of accounting since 1999. Additionally, on June 23, 2000, NTS sold an
additional common stock interest to third parties reducing the Company's
ownership position in NTS to 35%. In connection with this equity sale, the
Company increased the equity value of its NTS investment and additional paid-
in capital by $701,000.
The Company recorded a loss of $275,000 from the Company's portion of the
operating results of NTS in the quarter ended September 30, 2000,
representing 35% of the affiliate's net loss in the quarter of $796,000. In
the quarter ended September 30, 1999, the Company reported a loss from
investment in affiliate of $396,000 representing 62.5% of NTS's actual net
loss in the prior year quarter of $634,000.
During the nine months ended September 30, 2000, the Company recorded a loss
from NTS operations of $1,016,000, representing 42% of NTS's net loss through
June 2000 and 35% for the last quarter. In the nine month period ended
September 30, 1999, the Company reported a loss from investment in affiliate
of $1,071,000, representing 62.5% of NTS's actual net loss in the prior year
period.
Net Loss Per Share
During the quarter ended September 30, 2000, the Company experienced a net
loss of $1,075,000, or $.06 per share as compared with a net loss of
$392,000, or $.02 per share in the corresponding period of the prior year.
During the quarter ended September 30, 2000, there were outstanding basic and
diluted 17,913,000 shares of common stock as compared with 17,844,000 shares
during the corresponding quarter of the previous year.
During the nine month period ended September 30, 2000, the Company
experienced a net loss of $2,616,000, or $.15 per share as compared with a
net loss of $513,000, or $.03 per share in the corresponding period of the
prior year. During the nine month period ended September 30, 2000, there were
outstanding basic and diluted 17,895,000 shares of common stock as compared
with 17,844,000 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
$71,000 at September 30, 2000, as compared with $1,049,000 at December 31,
1999 and $72,000 at June 30, 2000. At September 30, 2000, the Company had a
working capital shortfall of $155,000 as compared with working capital of
$1,211,000 and $592,000 at December 31, 1999 and June 30, 2000, respectively.
The decrease in working capital results primarily from the loss from
operations reported in the current period.
The Company's net worth at September 30, 2000 was $548,000, as compared with
a net worth of $2,304,000 and $1,594,000 at December 31, 1999 and June 30,
2000, respectively. The decrease in net worth results primarily from net
loss reported in the current period offset in part by the Company's equitable
portion of the new equity raised by its minority-owned affiliate recorded in
additional paid-in capital during the period.
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. On November 1, 2000, the Company drew $145,000 in its first
advance against the line of credit. In view of current revenue and cash flow
trends, the Company anticipates that additional borrowings will be required
to meet working capital requirements.
Management believes that the Company's liquid assets, backlog and available
line of credit at September 30, 2000 are sufficient to meet the Company's
anticipated cash requirements through December 31, 2000 but not beyond. The
Company must raise additional capital to maintain current operations and
continue as a going concern. There can be no assurance that the Company can
raise such additional capital on terms acceptable to the Company and an
investor or financial institution. Accordingly, management is evaluating and
pursuing options to increase liquidity of the Company which may include, but
are not limited to, raising additional capital, selling assets, and/or
reducing operating expenses. However, as more fully described under the
headline "Prospective Statements," operating results and resultant cash flows
may vary significantly.
Backlog
As of September 30, 2000, December 31, 1999 and September 30, 1999, the
Company had revenue backlogs of $3,291,000, $2,751,000, and $2,116,000,
respectively, in software license, engineering fees, and other product and
service fees. The Company includes in its revenue backlog all fees specified
in contracts that have been executed by the Company and its distributors 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.
Additionally, most of the Company's licenses provide for a minimum monthly
license fee over the term of the respective license. The Company defers
recognition of theses license fees over the license term. Total deferred
income was $3,245,000 at September 30, 2000 as compared with $3,337,000 at
December 31, 1999.
Future commitments
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.
ITEM 3: Quantitative and Qualitative Disclosure of Market Risk
Management assesses their exposure to these risks as immaterial.
Part 2: Other Information
NESTOR, INC.
FORM 10 Q - September 30, 2000
Item 1: Legal Proceedings
On October 6, 1998, HNC Software Corp. ("HNC"), a significant competitor of
the Company's 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 Nestor's patents (infringement claims withdrawn January
10, 2000). 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 the Company's marketing partner, Applied Communications, Inc. (ACI)
and ACI's parent alleging various causes of action including patent
infringement of the above described patent by the Company's PRISM product
which ACI markets. In April 2000, HNC, ACI and its parent agreed to dismiss
the lawsuit. ACI has requested that the Company provide indemnification for
approximately $900,000 of its legal counsel costs pursuant the PRISM license
agreement between ACI and the Company. The Company is disputing the
indemnification claim.
On July 21, 2000, HNC filed a motion with the court to voluntarily dismiss
its patent infringement counterclaim against Nestor. Nestor has not opposed
the dismissal of the infringement claims. However, HNC has also requested
the District Court to dismiss Nestor's claim that the HNC patent is invalid.
HNC's request is based upon a covenant not to sue Nestor, that HNC has filed
with the Rhode Island federal court hearing this matter. HNC has claimed
that this covenant not to sue removes any legal threat to Nestor for past or
present patent infringement and, thus, makes Nestor's claim moot. Nestor has
opposed HNC's motion, in part. Notwithstanding any action by the court on
HNC's motion, Nestor's other claims alleging antitrust violations and fraud
on the patent office should continue as scheduled.
Costs associated with the suit are being expensed as incurred. Although the
Company believes that it will prevail, there can be no assurance as to the
outcome of this suit, the counterclaim, or the ACI indemnity claim. Any
conclusion of this litigation or indemnity claim in a manner adverse to the
Company may have an adverse effect on its future financial condition and
results of operations.
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
nine months ended September 30, 2000.
FORM 10-Q
NESTOR, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NESTOR, INC.
(REGISTRANT)
DATE: November 14, 2000 By: /s/Nigel P. Hebborn
Chief Financial Officer
Principal Accounting Officer
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
