Fraud Software Maker Feeling Pinch

Inc., a provider of neural network software for detecting credit card fraud. The Providence, R.I., company's share price has sunk below $1. Revenues and income are also off, to the delight of the competition, most notably HNC Software Inc. of San Diego. Nestor sharesclosed Wednesday at 68.75 cents, down from a 52-week high of $3.125 on April 29. The 17.5 million outstanding shares are thinly traded and not followed by Wall Street analysts. "I wish I could identify what the activity was about," said Carolyn Beaudry, a Nestor spokeswoman, referring to the downturn in the stock. "Obviously we'd like to see it at a higher value," she said, but "it is certainly not a panic situation." Third-quarter revenues were $502,000, down 68% from the comparable 1997 quarter. The net loss rose to $1.17 million, from $62,000. The larger, better-funded HNC reported third-quarter 1998 revenues of $47.8 million, up 59% year-to-year. Net income rose 19%, to $6.1 million. HNC's stock was trading Wednesday at $38.6875, up 25 cents. Nestor, which was formed in 1983, has cited year-2000 issues and mergers and acquisitions in the banking industry as hindrances, but there are other problems. HNC was awarded a patent on Oct. 6 that triggered an alarm. Nestor decided the newly patented methodology was already covered under its own 1988 patent, and it filed an infringement claim against HNC on Nov. 25. Nestor added allegations that HNC uses illegal and predatory competitive practices. HNC spokeswoman Patricia Campbell said her company is not fazed by the lawsuit. "We do not think there is any merit in the allegations, and we will defend our patent," she said. "HNC is clearly the dominant vendor," said Richard Zandi, an analyst at Salomon Smith Barney. "The lawsuit by Nestor, a very tiny competitor, is an act of desperation in my opinion," he said. Mr. Zandi, who covers HNC, said 92% of the nation's largest MasterCard and Visa issuers use its software, compared with just a handful - including Bank One Corp., BankAmerica Corp., and Mellon Bank Corp.-that use Nestor's Prism product. He said it is not uncommon to find only one or two prevalent technology vendors in niche markets such as credit card fraud detection. One positive for Nestor, Mr. Zandi said, is that Transaction Systems Architects Inc. of Omaha is a major user of its software. Transaction Systems, an owner of several companies in the transaction processing area, pumped $5 million of equity into Nestor last April, for a 10% stake. Nestor has also sought to diversify the uses of its artificial intelligence technology. In October it unveiled CampaignOne, a software product that tracks customer behavior. Banks can use it to tailor marketing campaigns. In December, Nestor was awarded a contract by the Rhode Island Department of Transportation to provide a software-enhanced video system that monitors traffic on roadways. The deal will produce $775,000 in revenue, which Nestor would record in the latter half of 1999. "We are making progress with our transportation products and our Prism products," Ms. Beaudry said.