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, 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: 17,676,949 shares
outstanding as of June 30, 2000
NESTOR, INC.
FORM 10 Q
June 30, 2000
INDEX
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations (Unaudited)
Quarters and six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 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
<TABLE>
Nestor, Inc.
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited) (Note 1)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,196 $ 1,048,802
Accounts receivable, net of
allowance for doubtful accounts 1,305,976 984,318
Unbilled contract revenue 1,130,429 1,200,484
Due from affiliate 367,872 320,459
Other current assets 171,064 161,809
Total current assets 3,047,537 3,715,872
Noncurrent assets:
Long term unbilled contract revenue 2,154,215 1,965,532
Investment in affiliate 671,361 710,690
Property and equipment - net 221,560 269,917
Deferred development costs - net 44,000 56,000
Patent development costs 65,092 55,894
Total Assets $ 6,203,765 $ 6,773,905
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other
current liabilities $ 1,233,983 $ 1,133,398
Deferred income 1,221,313 1,371,217
Total current liabilities 2,455,296 2,504,615
Noncurrent liabilities:
Long term deferred income 2,154,215 1,965,532
Total liabilities 4,609,511 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 June 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 17,676,949
shares at June 30, 2000 and
17,499,327 shares at Dec. 31, 1999 176,769 174,993
Warrants and options 790,193 736,951
Additional paid-in capital 27,460,625 26,574,123
Retained deficit (27,068,333) (25,527,309)
Total stockholders' equity 1,594,254 2,303,758
Total Liabilities and
Stockholders' Equity $ 6,203,765 $ 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 June 30, Six Months Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 641,543 $ 806,411 $ 1,465,199 $ 2,004,937
Engineering services 389,615 465,588 765,258 641,050
Total revenues 1,031,158 1,272,099 2,230,457 2,645,987
Operating expenses:
Engineering services 229,996 293,034 518,378 501,367
Research and development 346,383 156,344 673,977 407,123
Selling and marketing
expenses 485,529 316,574 861,718 638,243
General and administrative
expenses 395,453 254,442 926,357 494,969
Total operating expenses 1,457,361 1,020,394 2,980,430 2,041,702
Income (loss) from operations (426,203) 251,705 (749,973) 604,285
Other expense (27,050) (27,723) (50,706) (50,779)
Income (loss) for the period
before income taxes
(benefit) and investment loss (453,253) 223,982 (800,679) 553,506
Income taxes (benefit) --- --- --- ---
Loss from investment in affiliate (350,167) (361,664) (740,345) (674,548)
Net loss for the period $ (803,420) $ (137,682) $(1,541,024) (121,042)
Loss per share, basic and diluted $ (0.04) $ (0.01) $ (0.09) $ (0.01)
Basic and diluted shares 17,909,811 17,844,327 17,886,421 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>
Six Months Ended June 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,541,024) $ (121,042)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 60,357 58,581
Loss from investment in affiliate 740,345 674,548
Expenses charged to operations
relating to options, warrants
and capital transactions 53,242 53,242
Changes in assets and liabilities:
(Increase) in accounts receivable (321,658) (81,494)
(Increase) in unbilled contract
revenue (118,628) (1,279,658)
(Increase) in other assets (9,255) (244,133)
Increase in accounts payable
and other current liabilities 107,891 167,669
Increase in deferred income 38,779 619,671
Net cash used by operating activities (989,951) (152,616)
Cash flows from investing activities:
Advances to affiliate - net (47,413) (335,530)
Purchase of property and equipment --- (22,391)
Patent development costs (9,198) ---
Net cash used by investing
activities (56,611) (357,921)
Cash flows from financing activities:
Repayment of obligations under
capital leases (7,306) (23,709)
Proceeds from issuance of common stock 77,262 ---
Net cash provided (used)
by financing activities 69,956 (23,709)
Net change in cash and cash equivalents (976,606) (534,246)
Cash and cash equivalents -
beginning of period 1,048,802 1,175,183
Cash and cash equivalents -
end of period $ 72,196 $ 640,937
Supplemental cash flows information
Interest paid $ 3,533 $ 7,435
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)
June 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 six
months ended June 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 quarterly
results for the quarter and six months ended June 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 Six Months Ended
June 30, 1999 June 30, 1999
As Previously As Previously
Reported Reclassified Reported Reclassified
<S> <C> <C> <C> <C>
Total revenues $ 1,305,830 $ 1,272,099 $ 2,746,997 $ 2,645,987
Income (loss) from
operations (341,498) 251,705 (489,533) 604,285
Minority interest 216,997 --- 404,728 ---
Loss from investment
in affiliate --- (361,664) --- (674,548)
Net loss (137,682) (137,682) (121,042) (121,042)
</TABLE>
Presented below is summarized NTS financial information at June
30, 2000, December 31, 1999 and for the quarter and six months
ended June 30, 2000 and 1999:
June 30, 2000 December 31, 1999
Current assets $ 2,471,900 $ 2,125,602
Noncurrent assets 258,457 295,958
Current liabilities 791,127 723,781
Stockholders' equity 1,939,231 1,697,779
Qtr. Ended 6/30, Six Months Ended 6/30
2000 1999 2000 1999
Total revenues $ 206,980 $ 33,730 $ 383,218 $ 101,010
Operating
expenses 1,062,163 626,998 2,184,223 1,194,893
Net loss 851,332 578,726 1,783,435 1,079,341
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 uncertain subject to
their 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
against some of its legal counsel costs pursuant to the PRISM
license agreement between ACI and the Company.
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 as moot.
HNC's claim of mootness is based upon its sworn representations
to the court that it will not sue Nestor for past or current
infringement of the patent. Nestor has filed a partial objection
to this part of HNC's motion. Nestor has requested the court to
require HNC to expand the scope of HNC's representation not to
enforce the patent. 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 in a
manner adverse to the Company may have an adverse effect on its
future financial condition and results of operations.
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 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 June 30, 2000, the Company realized
consolidated revenues totaling $1,031,000 and expenses of
$1,457,000, which resulted in a consolidated operating loss for
the quarter of $426,000 before taxes and a loss from investment
in affiliate. The Company reported a consolidated net loss of
$803,000 for the current quarter after allowance for the loss
from investment in affiliate, Nestor Traffic Systems, Inc. (a 35%
owned affiliate), of $350,000. In the corresponding quarter of
the prior year, consolidated revenues and expenses totaled
$1,272,000 and $1,020,000, respectively, producing income from
operations of $252,000, and after allowance for loss from
investment in affiliate in the amount of $362,000, the Company
reported a net loss of $138,000.
For the six month period ended June 30, 2000, the Company
realized consolidated revenues totaling $2,230,000 and expenses
of $2,980,000, which resulted in a consolidated operating loss of
$750,000 before taxes and loss from investment in affiliate. The
Company reported a consolidated net loss of $1,541,000 for the
six month period after allowance for the loss from investment in
affiliate of $740,000. In the corresponding period of the prior
year, consolidated revenues and expenses totaled $2,646,000 and
$2,042,000, respectively, producing income from operations of
$604,000, and after allowance for the net loss from investment in
affiliate of $675,000, the Company reported a net loss of
$121,000.
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 June 30, 2000,
consolidated revenues decreased 19% to $1,031,000 from $1,272,000
in the quarter ended June 30, 1999. The decrease results
primarily from a reduction in new licenses realized in the
quarter and associated billable engineering services on such new
licenses. During the six month period ended June 30, 2000,
consolidated revenues decreased 16% to $2,230,000 from $2,646,000
in the quarter ended June 30, 1999.
Software Licensing Revenues
Total product-licensing revenues were $642,000 in the quarter
ended June 30, 2000, a 20% decrease from $806,000 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 distributor network. This was offset
in part by increased recurring revenue streams from the PRISM
product line as three new customers went live with the product in
the quarter generating new monthly license fee revenues and a one-
time fee of $226,800 received from Europay International upon the
expiration of their license on June 1, 2000.
Total product-licensing revenues were $1,465,000 in the six month
period ended June 30, 2000, a 27% decrease over $2,005,000
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.
The Company realized seven new PRISM licenses in the first six
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 $185,000 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, and initial
license discounts were granted to two customers that license
multiple versions of PRISM at the same time. As of June 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 June 30, 2000, revenues from engineering
services decreased 16% to $390,000 from $466,000 in the
corresponding quarter of the prior year. The decrease in
engineering revenues is primarily the result of significant
engineering fees realized during the delivery of our initial
eCLIPSE license in 1999. Engineering efforts for subsequent
deliveries of products is much lower.
During the six months ended June 30, 2000, revenues from
engineering services increased 19% to $765,000 from $641,000 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 $1,457,000 in the quarter ended June
30, 2000, an increase of $436,000 (43%) from total operating
costs of $1,020,000 in the corresponding quarter of the prior
year. Operating expenses totaled $2,980,000 in the six month
period ended June 30, 2000, an increase of $939,000 (46%) from
total operating costs of $2,042,000 in the corresponding period
of the prior year.
Engineering Services
Costs related to engineering services totaled $230,000 in the
quarter ended June 30, 2000, as compared to $293,000 in the
corresponding quarter of the prior year, a decrease of 22%, and
reflect the associated decrease in engineering services revenue
in the respective periods.
Costs related to engineering services totaled $518,000 in the six
month period ended June 30, 2000, as compared to $501,000 in the
corresponding period of the prior year and reflect the increase
in engineering services revenue in the respective periods.
Overall, engineering and modeling personnel increased in 2000 to
support the growth in new licenses and accompanying modeling
efforts.
Research and Development
Research and development expenses totaled $346,000 in the quarter
ended June 30, 2000, as compared with $156,000 in the year-
earlier period. Research and development expenses totaled
$674,000 in the six month period ended June 30, 2000, as compared
with $407,000 in the year-earlier six-month period. 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 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 $486,000 in the quarter ended
June 30, 2000, as compared with $317,000 in the corresponding
quarter of the prior year, an increase of 53%. Selling and
marketing costs totaled $862,000 in the six month period ended
June 30, 2000, as compared with $638,000 in the corresponding
period of the prior year, an increase of 35%. The increase
reflects additional marketing efforts by the Company including a
net addition of two salesmen and one support staff to the sales
and marketing staff. Given the historically longer sales cycles
associated with the Company's product lines, the Company expects
these efforts to begin generating returns by the fourth quarter
of 2000.
General and Administrative
General and administrative expenses totaled $395,000 in the
quarter ended June 30, 2000, as compared with $254,000 in the
corresponding quarter of the prior year, representing an increase
of 56%. The increase reflects a $121,000 increase in legal
expenses primarily related to increased activity regarding the
Nestor vs. HNC Software lawsuit (See Part 2, Item I of this Form
10-Q).
General and administrative expenses totaled $926,000 in the six
month period ended June 30, 2000, as compared with $495,000 in
the corresponding period of the prior year, representing an
increase of 87%. The increase reflects a $331,000 increase in
legal expenses primarily related to increased activity regarding
the Nestor vs. HNC Software lawsuit. Other increases include
three additional administrative staff 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 interests in NTS have
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%.
As a result of the Company's equity accounting for NTS, the
Company realized an increase in the equity value of the NTS
holdings of $701,000 related to the June 2000 NTS equity sale,
and recorded a corresponding increase to Additional Paid in
Capital. In the Statement of Operations, the Company recorded a
loss of $350,000 from the Company's portion of the operating
results of NTS in the quarter ended June 30, 2000 as Loss from
Investment in Affiliate, representing 42% of the affiliate's net
loss in the quarter of $851,000. In the quarter ended June 30,
1999, the Company reported a Loss from Investment in Affiliate of
$362,000 representing 62.5% of NTS's actual net loss in the prior
year quarter of $579,000.
During the six month period ended June 30, 2000, the Company
reported the equity transaction discussed above as an increase to
Additional Paid in Capital. In the Statement of Operations, the
Company recorded a loss from NTS operations of $740,000,
representing 42% of NTS's net loss for the six months ended June
30, 2000. In the six month period ended June 30, 1999, the
Company reported a net loss from investment in affiliate of
$675,000 representing 62.5% of NTS's actual net loss in the prior
year period of $1,079,000.
Net Loss Per Share
During the quarter ended June 30, 2000, the Company experienced a
net loss of $803,000, or $.04 per share as compared with a net
loss of $138,000, or $.01 per share in the corresponding period
of the prior year. During the quarter ended June 30, 2000, there
were outstanding basic and diluted 17,909,000 shares of common
stock as compared with 17,844,000 shares during the corresponding
quarter of the previous year.
During the six month period ended June 30, 2000, the Company
experienced a net loss of $1,541,000, or $.09 per share as
compared with a net loss of $121,000, or $.01 per share in the
corresponding period of the prior year. During the six month
period ended June 30, 2000, there were outstanding basic and
diluted 17,886,000 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 $72,000 at June 30, 2000, as compared with
$1,049,000 at December 31, 1999 and $477,000 at March 31, 2000.
At June 30, 2000, the Company had working capital of $592,000 as
compared with working capital of $1,211,000 and $969,000 at
December 31, 1999 and March 31, 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 June 30, 2000 was $1,594,000, as
compared with a net worth of $2,304,000 and $1,651,000 at
December 31, 1999 and March 31, 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 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 streams 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. There have been
no borrowings against this line of credit as of June 30, 2000.
Management believes that the Company's liquid assets, backlog and
available line of credit at June 30, 2000 are sufficient to meet
the Company's anticipated cash requirements through the year
ending December 31, 2000. However, as more fully described under
the headline "Prospective Statements," operating results and the
resultant cash flows may vary significantly. Accordingly,
management is reviewing the recent trends in cash flow and
working capital and is developing contingency plans to protect
the liquidity of the Company which may include, but are not
limited to, raising additional capital, selling assets, and/or
reducing operating expenses.
Backlog
As of June 30, 2000, December 31, 1999 and June 30, 1999, the
Company had revenue backlogs of $2,955,000, $2,751,000, and
$2,101,000, 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 $3,376,000 at June 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.
NESTOR, INC.
FORM 10 Q - June 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 against some
of its legal counsel costs pursuant the PRISM license agreement
between ACI and the Company.
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 as moot.
HNC's claim of mootness is based upon its sworn representations
to the court that it will not sue Nestor for past or current
infringement of the patent. Nestor has filed a partial objection
to this part of HNC's motion. Nestor has requested the court to
require HNC to expand the scope of HNC's representation not to
enforce the patent. 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 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
The Registrant's annual meeting of stockholders was held on May
24, 2000. 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 Against
Sam Albert 16,089,561 6,150
Thomas Boje 16,089,561 6,150
Leon Cooper 16,089,561 6,150
Charles Elbaum 16,089,561 6,150
David Fox 16,089,561 6,150
Jeffrey Harvey 16,089,561 6,150
Thomas Hill 16,089,561 6,150
Herbert Meeker 16,089,561 6,150
Bruce Schnitzer 16,089,561 6,150
2.Ratification of Appointment of Ernst & Young, LLP as
Independent Auditors for 2000
For: 16,062,861 Against: 25,500 Withheld: 7,350
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 six months ended
June 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: August 14, 2000 /S/ Nigel P. Hebborn
Chief Financial Officer
Principal Accounting Officer)
