10-Q 1 q1_01.txt Q1_01 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 March 31, 2001 [ ] 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: 17,689,449 shares outstanding as of March 31, 2001 1 NESTOR, INC. FORM 10 Q March 31, 2001 INDEX -------------------------------------------------------------------------------- Page Number ------ PART 1 FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets 3 ------------------------------------- March 31, 2001 (Unaudited) and December 31, 2000 Condensed Consolidated Statements of Operations (Unaudited) 4 ----------------------------------------------------------- Quarters ended March 31, 2001 and 2000 Condensed Consolidated Statements of Cash Flows (Unaudited) 5 ----------------------------------------------------------- Quarters ended March 31, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 6 ---------------------------------------------------- Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Item 3 Quantitative and Qualitative Disclosure of Market Risk 11 PART 2 OTHER INFORMATION 12 2 Nestor, Inc. Condensed Consolidated Balance Sheets
March 31, 2001 December 31, 2000 -------------- ----------------- (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 594,582 $ 150,035 Accounts receivable - net 906,682 693,555 Unbilled contract revenue 825,907 1,260,884 Due from affiliate --- 322,952 Other current assets 43,134 91,042 ------------ ------------ Total current assets 2,370,305 2,518,468 Noncurrent assets: Long term unbilled contract revenue 753,148 2,036,896 Investment in affiliate --- 81,100 Property and equipment - net 160,680 177,377 Deferred development costs - net 26,000 32,000 Deferred merger costs 146,388 --- Patent development costs 97,835 76,862 ------------ ------------ Total Assets $ 3,554,356 $ 4,922,703 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Line of credit $ 384,788 $ 419,769 Accounts payable and other current liabilities 858,441 992,458 Deferred income 544,986 1,306,016 ------------ ------------ Total current liabilities 1,788,215 2,718,243 Noncurrent liabilities: Long term deferred income 753,148 2,036,896 ------------ ------------ Total liabilities 2,541,363 4,755,139 Stockholders' equity: Preferred Stock Series B, $1.00 par value, authorized 10,000,000 shares; Issued and outstanding 235,000 shares at March 31, 2001 and December 31, 2000 (liquidation value $1.00 per share) 235,000 235,000 Common Stock, $.01 par value, authorized 30,000,000 shares; Issued and outstanding 17,689,449 shares at March 31, 2001 and 17,688,449 shares at December 31, 2000 176,894 176,884 Warrants and options 870,055 843,434 Additional paid-in capital 27,434,870 27,434,129 Retained deficit (27,703,826) (28,521,883) ------------ ------------ Total stockholders' equity 1,012,993 167,564 ------------ ------------ Total Liabilities and Stockholders' Equity $ 3,554,356 $ 4,922,703 ============ ============ The Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
3 Nestor, Inc. Condensed Consolidated Statements of Operations (Unaudited) Quarter Ended March 31, ----------------------- 2001 2000 ---- ---- Revenues: Software licensing $ 1,635,242 $ 823,656 Engineering services 69,564 375,643 ------------ ------------ Total revenues 1,704,806 1,199,299 ------------ ------------ Operating expenses: Engineering services 66,745 288,382 Research and development 283,111 327,594 Selling and marketing expenses 306,566 376,189 General and administrative expenses 114,125 530,904 ------------ ------------ Total operating expenses 770,547 1,523,069 ------------ ------------ Income (loss) from operations 934,259 (323,770) Other expense (35,102) (23,656) ------------ ------------ Income (loss) for the period before before income taxes (benefit) and investment loss 899,157 (347,426) Income taxes (benefit) --- --- Loss from investment in affiliate (81,100) (390,178) ------------ ------------ Net income (loss) for the period $ 818,057 $ (737,604) ============ ============ Income (loss) per share, basic and diluted $ 0.05 $ (0.04) ============ ============ Basic shares 17,923,782 17,863,031 Net effect of dilutive shares -- based on the treasury stock method: Warrants 122,096 --- Stock options 51,377 --- ------------ ------------ Diluted shares 18,097,255 17,863,031 ============ ============ The Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4 Nestor, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Quarter Ended March 31, ----------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income (loss) $ 818,057 $ (737,604) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 22,895 30,179 Loss from investment in affiliate 81,100 390,178 Expenses charged to operations relating to options, warrants and capital transactions 26,621 26,621 Changes in assets and liabilities: (Increase) in accounts receivable (213,127) (400,177) (Increase) decrease in unbilled contract revenue (206,606) 55,581 Decrease (increase) in other assets 47,908 (41,094) Increase (decrease) in accounts payable and other current liabilities (128,212) 136,260 (Decrease) in deferred income (119,447) (77,240) ------------ ------------ Net cash provided (used) by operating activities 329,189 (617,296) ------------ ------------ Cash flows from investing activities: Payments from (advances to) affiliate - net 322,952 (117) Patent development costs (21,171) (9,198) Deferred merger costs (146,388) --- ------------ ------------ Net cash provided (used) by investing activities 155,393 (9,315) ------------ ------------ Cash flows from financing activities: Repayment of obligations under capital leases (5,805) (3,039) Repayment of line of credit (34,981) --- Proceeds from issuance of common stock 750 57,758 ------------ ------------ Net cash provided (used) by financing activities (40,036) 54,719 ------------ ------------ Net change in cash and cash equivalents 444,546 (571,892) Cash and cash equivalents - beginning of period 150,036 1,048,802 ------------ ------------ Cash and cash equivalents - end of period $ 594,582 $ 476,910 ============ ============ Supplemental cash flows information Interest paid $ 11,057 $ 2,116 ============ ============ Income taxes paid $ --- $ --- ============ ============ Significant non-cash transactions are described in Note 4. The Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
5 Nestor, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 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 ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 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, 2000. Nestor, Inc. organized two wholly-owned subsidiaries, Nestor Traffic Systems, Inc. ("NTS") and Nestor Interactive, Inc. ("Interactive") effective January 1, 1997. 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. In 1999, NTS sold in the aggregate a 58.1% common-stock interest to a private group of investors. In June 2000, NTS sold additional shares of its common stock to private investors, bringing the Company's ownership of NTS to 34.62%. As discussed in Note 3, in January 2001, an agreement in principle was reached to combine the Company and NTS by merging NTS into a wholly-owned subsidiary of the Company, with Nestor, Inc., in effect, becoming the surviving entity. All intercompany transactions and balances have been eliminated. Presented below is summarized NTS financial information at March 31, 2001, December 31, 2000 and for the quarters ended March 31, 2001 and 2000: March 31, 2001 December 31, 2000 -------------- ----------------- Current assets $ 2,586,000 $ 466,000 Noncurrent assets 876,000 694,000 Convertible note payable (Note 3) 4,000,000 --- Other current liabilities 476,000 925,000 Stockholders' equity (deficit) (1,014,000) 234,000 Quarter Ended March 31, ----------------------- 2001 2000 ---- ---- Total revenues $ 173,000 $ 176,000 Operating expenses 1,385,000 1,122,000 Net loss 1,248,000 932,000 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 (See Note 3) and generate sufficient revenue to support future operations. 6 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). 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 to the PRISM license agreement between ACI and the Company. The Company is disputing the indemnification claim and therefore, no accrual has been established. The Company and HNC reached a mutually agreeable settlement on January 16, 2001, the terms of which are confidential. All claims have been dismissed. Costs associated with the suit have been expensed as incurred. Note 3 - Merger and Secured Note Agreement: In January 2001, an agreement in principle was reached to combine the Company and Nestor Traffic Systems, Inc., by merging NTS into a wholly-owned subsidiary of the Company, with Nestor, Inc. in effect becoming the surviving entity. The combination is subject to certain conditions including a fairness opinion of the transaction by a qualified investment company and approval by the shareholders of both companies. On January 9, 2001, the Company and NTS entered into a secured note agreement with NTS Investors, LLC (an independent investment group ("Group")). The Group loaned NTS $4,000,000 as of February 1, 2001 with principal and interest at 8% due on December 31, 2001. The note contains various covenants including restrictions on the use of proceeds and payments to Nestor, Inc. It is secured by NTS assets. Upon consummation of the combination contemplated above, the Group will convert the note to equity and increase its total investment to $8,000,000 in exchange for approximately 33.34% of Nestor, Inc. common stock, the current NTS shareholders will receive approximately 31% of Nestor, Inc. common stock and current Nestor, Inc. shareholders would then own approximately 35.66%. If the combination is not consummated on or before December 31, 2001, the Group may elect on or before January 31, 2002 to convert the note into NTS common stock for up to a 25% fully diluted equity interest and acquire up to an additional 25% fully diluted equity interest in NTS for an additional $4,000,000. In the event that the combination is completed, the Group will receive a warrant to acquire additional common stock at the time and same price at which currently outstanding warrants of Nestor, Inc. are exercised so as to maintain their initial ownership interest percentage. In addition, the Group will receive an option to acquire up to 1,000,000 shares of the Company's common stock at $1.28 per share for three years as dilution protection against both the Company's and NTS's converted employee stock options outstanding at closing. 7 Note 4 - New ACI License Agreement: On February 1, 2001, the Company entered into a license agreement with ACI pursuant to which ACI was granted a worldwide, perpetual, non-revocable, non-transferable and non-exclusive license in the field of use of fraud detection (including money laundering detection) in electronic payments. ACI may brand, customize, and extend the software products covered by the license agreement as well as use the software programs as a development platform to develop new functional and new end-user products or applications subject to the terms and conditions of the license. In return, ACI is fully responsible and liable for the provision of services to its licensees. Nestor, Inc. had previously provided support, maintenance and enhancements for these products. This agreement replaces the April 28, 1998 license agreement with ACI. Under the new agreement, ACI has agreed to pay a one-time license fee of $1,104,000 for source code license rights to the software products and, in addition, an ongoing royalty fee of 15% with a first year minimum of approximately $475,000. The license granted to ACI is for products that constituted a significant portion of the Company's gross revenues. During the quarter ended March 31, 2001, the Company recorded the one-time initial license fee of $1,104,000 in connection with this source code license. Future ACI revenues are expected to decrease significantly due to the termination of the previous ACI contract that provided a 40% monthly license fee, as well as additional engineering revenues. Future expenses relating to these revenues will also decrease because ACI has hired thirteen employees from Nestor, Inc., effective February 1, 2001 and is reimbursing the Company $13,000 per month for up to six months for the continued use of Nestor, Inc. facilities and equipment prior to their office relocation. Unbilled contract revenue and deferred income under the prior agreement were replaced by the new royalty amounts during the quarter to reflect the 15% royalty rate under the new agreement. During the quarter ended March 31, 2001, the Company recorded a non-cash reduction of $3,037,000 and a non-cash increase of $1,111,000 in unbilled contract revenue and deferred income related to these agreements. 8 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, 2000 Form 10-K. Results of Operations For the quarter ended March 31, 2001, the Company realized consolidated revenues totaling $1,705,000 and expenses of $771,000, which resulted in consolidated operating income for the quarter of $934,000. The Company reported consolidated net income of $818,000 for the current quarter after allowance for a $81,000 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 $1,199,000 and $1,523,000, respectively, producing a loss from operations of $324,000; and after allowance for loss from investment in affiliate of $390,000, the Company reported a net loss of $738,000. 9 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 March 31, 2001, consolidated revenues increased 42% to $1,705,000 from $1,199,000 in the quarter ended March 31, 2000. Software Licensing Total product-licensing revenues were $1,635,000 in the quarter ended March 31, 2001, a 98% increase over $824,000 reported in the same quarter of the prior year. The increase in revenues from the prior-year is attributable to the $1,104,000 source code license realized from ACI and related royalties, offset in part by the decrease in monthly software license fees received from ACI as a result of the termination of the former ACI agreement effective February 1, 2001. Engineering Services During the quarter ended March 31, 2001, revenues from engineering contracts decreased 81% to $70,000 from $376,000 in the corresponding quarter of the prior year. Engineering revenues decreased since installation, customization, and modeling services are no longer provided to ACI customers under the new ACI agreement. See related decrease in engineering and research and development expenses discussed below. Operating Expenses ------------------ Total operating expenses amounted to $771,000 in the quarter ended March 31, 2001, a decrease of $752,000 (49%) from total operating costs of $1,523,000 in the corresponding quarter of the prior year. The primary reasons for the decrease include the transfer of personnel to ACI effective February 1, 2001 and the settlement of HNC litigation in January 2001 with the elimination of associated legal expenses. Engineering Services Costs related to engineering services totaled $67,000 in the quarter ended March 31, 2001, as compared to $288,000 in the corresponding quarter of the prior year and reflect the associated decrease in revenues in the respective periods. The decrease, coupled with the decrease in research and development expenses reflects the decrease in expenses associated with the ACI arrangement. Research and Development Research and development expenses totaled $283,000 in the quarter ended March 31, 2001, as compared with $328,000 in the year-earlier period. See Engineering Services above for explanation. Selling and Marketing Selling and marketing costs totaled $307,000 in the quarter ended March 31, 2001, as compared with $376,000 in the corresponding quarter of the prior year, a decrease of 18%. The decrease reflects primarily the non-recurrence of an unusual bad debt expense in the fiscal 2000 quarter. General and Administrative General and administrative expenses totaled $114,000 in the quarter ended March 31, 2001, as compared with $531,000 in the corresponding quarter of the prior year, representing a decrease of 78%. The decrease reflects a net $353,000 decrease in legal expenses primarily related to the settlement of the Nestor vs. HNC Software lawsuit in January 2001. Other increases include savings from the reduction in direct advertising and related expenses in the quarter. 10 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. In June 2001, NTS sold additional common stock equity reducing the Company's equity position in the affiliate to 34.6%. As a result, the Company's interests in NTS during fiscal 2000 and 2001 are accounted for under the equity method of accounting. The Company reported a loss from investment in NTS of $81,000 in the quarter ended March 31, 2001, representing 35% of NTS's actual net loss in the quarter of $1,248,000 limited to the carrying value of its investment in NTS. In the quarter ended March 31, 2000, the Company reported a loss from investment in affiliate of $390,000 representing 42% of NTS's actual net loss in the prior year quarter of $932,000. Net Loss Per Share During the quarter ended March 31, 2001, the Company reported net income of $818,000, or $.05 per share as compared with a net loss of $738,000, or $.04 per share in the corresponding period of the prior year. During the quarter ended March 31, 2001, there were outstanding 17,924,000 basic and 18,097,000 diluted shares of common stock as compared with 17,863,000 basic and diluted shares during the corresponding quarter of the previous year. Liquidity and Capital Resources Cash Position and Working Capital The Company had consolidated cash and cash equivalents of approximately $595,000 at March 31, 2001, as compared with $150,000 at December 31, 2000. At March 31, 2001, the Company had working capital of $582,000 as compared with a working capital deficit of $200,000 at December 31, 2000. The Company's net worth at March 31, 2001 was $1,013,000, as compared with a net worth of $168,000 at December 31, 2000. The increase in net worth results primarily from the net operating profit reported in the current period. On March 24, 2000, 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% and is being paid quarterly in arrears. The line of credit matured as scheduled and the Company is making monthly payments of approximately $35,000 on the outstanding balance of $385,000 as of March 31, 2001. In January, NTS secured an $8 million equity investment commitment from an independent investment group, with $4 million advanced as a loan in contemplation of the final merger. The full equity investment is subject to completion of a proposed merger between the Company and NTS. The Company expects to complete and file a Form S-4 describing the proposed merger along with a proxy for shareholder approval. The merger is subject to certain conditions including a fairness opinion of the transaction by a qualified investment company and approval by the boards of the Company and NTS. Management believes that the Company's liquid assets at March 31, 2001, coupled with the reduction in operating expenses realized in the quarter, are sufficient to meet the Company's anticipated cash requirements through the year ending December 31, 2001. Deferred Income Most of the Company's ACI related licenses provided for a minimum monthly license fee over the term of the respective license. Under the new ACI arrangement, minimum royalties on these customers apply. The Company defers recognition of these amounts over the customer license term. Total deferred income was $1,298,000 at March 31, 2001 as compared with $3,343,000 at December 31, 2000, reflecting the difference between the license rate and the royalty rate. 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. 11 Part 2: Other Information NESTOR, INC. FORM 10 Q - March 31, 2001 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). 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 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. 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 and therefore, no accrual has been established. The Company and HNC reached a mutually agreeable settlement on January 16, 2001, the terms of which are confidential. All claims have been dismissed. Costs associated with the suit have been expensed as incurred. 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) Reports on Form 8-K: On January 18, 2001, the Corporation filed with the Securities and Exchange Commission a current report on Form 8-K dated January 11, 2001, which is hereby incorporated by reference. On February 9, 2001, the Corporation filed with the Securities and Exchange Commission a current report on Form 8-K dated February 1, 2001, which is hereby incorporated by reference. 12 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: May 15, 2001 By: /s/ Nigel P. Hebborn ----------------------------------- Nigel P. Hebborn Chief Financial Officer Principal Accounting Officer 13