-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZgj1hBEvBWeIY1Pu0SHot7al3useZg70A66a7S83IuJTTZWiRqVGo/TNlsT1d7i Zahy7hYa4QVXkXiG7EAMqA== 0000720851-99-000021.txt : 19991115 0000720851-99-000021.hdr.sgml : 19991115 ACCESSION NUMBER: 0000720851-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NESTOR INC CENTRAL INDEX KEY: 0000720851 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133163744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12965 FILM NUMBER: 99748662 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQ CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4013319640 MAIL ADDRESS: STREET 1: 1 RICHMOND SQUARE CITY: PROVIDENCE STATE: RI ZIP: 02906 10-Q 1 -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 Nestor, Inc. Condensed Consolidated Balance Sheets
September 30, 1999 December 31, 1998 (Unaudited) (Note 1) 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.
Nestor, Inc. Condensed Consolidated Statements of Operations (Unaudited)
Quarter Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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.
Nestor, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999 1998 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.
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.
(Note 1) Financial Traffic All Solutions Systems Internet Other Totals (In Thousands) 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)
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) EX-27 2
5 9-MOS DEC-31-1999 SEP-30-1999 1,271,158 0 370,767 0 510,710 1,157,909 379,861 0 3,758,688 1,491,605 0 0 345,000 174,993 0 3,758,688 54,717 3,918,991 29,023 5,028,319 46,169 0 0 0 0 0 0 0 0 (512,946) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----