-----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, ABFPhI+JHDs8EC9RAB4MCnpdnZw8EG37Zv1ron/+DLNpLHqAIYDPgR45dHgdGLPi u56kW2OOrQkKXiuK8Noipg== 0000720851-03-000028.txt : 20030813 0000720851-03-000028.hdr.sgml : 20030813 20030813150738 ACCESSION NUMBER: 0000720851-03-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 1934 Act SEC FILE NUMBER: 000-12965 FILM NUMBER: 03840809 BUSINESS ADDRESS: STREET 1: 400 MASSASOIT AVE STREET 2: STE 200 CITY: PROVIDENCE STATE: RI ZIP: 02914 BUSINESS PHONE: 4014345522 MAIL ADDRESS: STREET 1: 400 MASSASOIT AVE STREET 2: STE 200 CITY: PROVIDENCE STATE: RI ZIP: 02914 10-Q 1 form10q.txt FORM 10Q, PERIOD ENDING JUNE 30, 2003 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, 2003 [ ] 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.) 400 Massasoit Avenue; Suite 200; East Providence, RI 02914 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 401-434-5522 ---------------------------------------------------- (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: 13,937,738 shares outstanding as of June 30, 2003 1 NESTOR, INC. FORM 10 Q June 30, 2003 INDEX - -------------------------------------------------------------------------------- Page Number ------ PART 1 FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets June 30, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations (Unaudited) Quarters and six months ended June 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Quarters and six months ended June 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 ---------------------------------------------------- Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 10 Item 3 Quantitative and Qualitative Disclosure of Market Risk 15 Item 4 Controls and Procedures 15 PART 2 OTHER INFORMATION 16 2 NESTOR, INC. Condensed Consolidated Balance Sheets -------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002 (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 706,009 $ 308,894 Accounts receivable 285,341 141,263 Unbilled contract revenue 121,557 122,684 Inventory 498,810 281,108 Other current assets 34,333 60,963 --------------- ------------- Total current assets 1,646,050 914,912 NONCURRENT ASSETS: Capitalized system costs, net of accumulated depreciation 2,769,983 1,936,783 Property and equipment, net of accumulated depreciation 429,609 486,740 Goodwill 5,580,684 5,580,684 Patent development costs, net of accumulated amortization 175,353 153,275 Other long term assets 35,032 128,570 --------------- ------------- TOTAL ASSETS $ 10,636,711 $ 9,200,964 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 608,025 $ 616,878 Accrued employee compensation 293,867 354,269 Accrued liabilities 522,869 795,749 Leases payable 642,191 354,286 Restructuring reserve 284,328 365,939 --------------- ------------- Total current liabilities 2,351,280 2,487,121 Long term leases payable 2,589,420 2,849,126 --------------- ------------- Total liabilities 4,940,700 5,336,247 --------------- ------------- Commitments and contingencies --- --- STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, authorized 10,000,000 shares; issued and outstanding: Series B - 235,000 shares at June 30, 2003 and December 31, 2002 235,000 235,000 Common stock, $.01 par value, authorized 20,000,000 shares; issued and outstanding: 13,937,738 shares at June 30, 2003 and 5,024,111 shares at December 31, 2002 139,377 50,241 Warrants 1,263,840 1,072,825 Additional paid-in capital 49,002,939 45,227,851 Accumulated deficit (44,945,145) (42,721,200) ---------------- ------------- Total stockholders' equity 5,696,011 3,864,717 --------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,636,711 $ 9,200,964 =============== ============= The Unaudited 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 June 30, Six Months Ended June 30, ------------------------------- ------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues: Product royalties $ 5,205 $ 408,562 $ 28,455 $ 663,476 Product license and services 438,328 359,977 761,805 943,001 ------------- ------------- ------------- ------------- Total revenues 443,533 768,539 790,260 1,606,477 ------------- ------------- ------------- ------------- Operating expenses: Cost of goods sold 283,685 463,321 533,707 1,139,996 Engineering services 746,440 442,803 1,418,082 848,642 Research and development 30,779 605,523 61,668 1,542,641 Selling and marketing expenses 101,777 183,236 169,541 425,262 General and administrative expenses 371,761 489,827 715,694 993,269 Restructuring costs --- 742,705 --- 742,705 Capitalized system costs impairment --- 794,281 --- 794,281 Goodwill impairment --- 3,000,000 --- 3,000,000 ------------- ------------- ------------- ------------- Total operating expenses 1,534,442 6,721,696 2,898,692 9,486,796 ------------- ------------- ------------- ------------- Loss from operations (1,090,909) (5,953,157) (2,108,432) (7,880,319) Contract termination reserve (Note 5) (125,000) --- (125,000) --- Other income (expense) - net 37,311 (173,396) 9,487 (255,177) ------------- -------------- ------------- -------------- Net loss $ (1,178,598) $ (6,126,553) $ (2,223,945) $ (8,135,496) ============== ============== ============== ============== Loss per Share: Loss per share, basic and diluted $ (.08) $ (1.21) $ (.19) $ (1.61) ============== ============== ============== ============== Shares used in computing loss per share: Basic and diluted 13,961,169 5,047,611 11,954,390 5,047,611 ============== ============== ============= ================ The Unaudited Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
4 Nestor, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) -----------------------------------------------
Six Months Ended June 30, -------------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net loss $ (2,223,945) $ (8,135,496) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 351,267 276,823 Loss on disposal of fixed assets 5,291 12,262 Goodwill impairment --- 3,000,000 Capitalized system costs impairment --- 794,281 Expenses charged to operations relating to options, warrants and capital transactions 53,242 53,242 Increase (decrease) in cash arising from changes in assets and liabilities: Restricted cash --- 821,900 Accounts receivable (144,078) (120,787) Unbilled contract revenue 1,127 110,122 Inventory (209,172) 5,077 Other assets 120,167 192,289 Accounts payable and accrued expenses (342,135) 629,765 Deferred income --- (261,906) Restructuring reserve (81,611) 698,505 -------------- ------------- Net cash used by operating activities (2,469,847) (1,923,923) -------------- -------------- Cash flows from investing activities: Investment in capitalized systems (1,068,612) (843,702) Purchase of property and equipment (31,819) (21,450) Proceeds from sale of property and equipment --- 10,100 Patent developments costs (24,803) (15,657) -------------- -------------- Net cash used by investing activities (1,125,234) (870,709) -------------- -------------- Cash flows from financing activities: Repayment of obligations under capital leases (9,801) (30,885) Proceeds from leases payable --- 530,530 Proceeds from issuance of common stock - net 4,001,997 --- ------------- ------------- Net cash provided by financing activities 3,992,196 499,645 ------------- ------------- Net change in cash and cash equivalents 397,115 (2,294,987) Cash and cash equivalents - beginning of period 308,894 2,294,987 ------------- ------------- Cash and cash equivalents - end of period $ 706,009 $ --- ============= ============= Supplemental cash flows information Interest paid $ 4,565 $ 123,156 ============= ============= Income taxes paid $ --- $ --- ============= ============= The Unaudited Notes to the Condensed Consolidated Financial Statements are an integral part of this statement.
5 Nestor, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2003 Note 1 - Nature of Operations: A. Organization Nestor, Inc. (the "Company") was organized on March 21, 1983 in Delaware to develop and succeed to certain patent rights and know-how which the Company acquired from its predecessor, Nestor Associates, a limited partnership. Two wholly-owned subsidiaries, Nestor Traffic Systems, Inc. ("NTS") and Nestor Interactive, Inc. ("Interactive"), were formed effective January 1, 1997. Effective November 7, 1998, the Company ceased further investment in the Interactive subsidiary. CrossingGuard, Inc., a wholly-owned subsidiary of NTS, was formed July 18, 2003 in connection with the financing discussed in Note 7. The Company's principal office is located in East Providence, RI. The Company's current focus is to offer customers products and services to be utilized in intelligent traffic management applications. Its leading product is its CrossingGuard video-based red light enforcement system and services, sold and distributed exclusively by NTS. Effective July 1, 2002, the Company assigned its royalty rights in the field of financial services, substantially eliminating ongoing product royalty revenue from all other lines of business. B. Liquidity and management's plans The Company has incurred significant losses to date and at June 30, 2003 has a significant accumulated deficit. These conditions raise substantial doubt about the Company's ability to continue as a going concern without additional financing to carry out product delivery efforts under current contracts, to underwrite the delivery costs of future systems delivered under turnkey agreements with municipalities, for continued development and upgrading of its products, for customer support, and for other operating uses. If the Company does not realize additional equity and/or debt capital or revenues sufficient to maintain its operations at the current level, management of the Company would be required to modify certain initiatives, including the cessation of some or all of its operating activities until additional funds become available through investment or revenues. On July 31, 2003, the Company raised $2,000,000 through the issuance of a convertible note to Laurus Master Fund, Ltd (see Note 7). The Company continues to actively pursue the raising of additional equity and debt financing. There can be no assurance, however, that the Company's operations will be sustained or be profitable in the future, that adequate sources of financing will be available at all, when needed or on commercially acceptable terms or that the Company's product development and marketing efforts will be successful. Note 2 - 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 adjustments) considered necessary for a fair presentation of financial results have been included. Operating results for the quarter ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. There were no material unusual charges or credits to operations during the recently completed fiscal quarter except as discussed in Note 5. The balance sheet at December 31, 2002 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. 6 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, 2002 and the Company's Form 8-K filed on August 6, 2003. Certain operating expenses reported at June 30, 2002 have been reclassified to conform to the 2003 presentation. The reclassification had no effect on results of operations. Common stock and loss per share as previously reported at June 30, 2002 have been adjusted to a post-reverse split basis. Accounts payable - Included in accounts payable is a $221,000 note payable to a vendor with a balance of $185,000 at June 30, 2003. The note bears interest at 8% and monthly principal and interest payments of $19,218 are due through April 2004. Loss per share - Loss per share is computed using the weighted average number of shares of stock outstanding during the period. Diluted per share computations are not presented since the effect would be antidilutive. Stock-based compensation - The Company measures compensation expense relative to employee stock-based compensation plans using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company applies the disclosure only provisions of Statement of Financial Accounting Standards ("SFAS) No. 123, "Accounting for Stock-based Compensation" and SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure". Note 3 - One-for-Ten Reverse Stock Split: The Company filed a certificate of amendment to its certificate of incorporation on April 11, 2003, causing a one-for-ten reverse stock split of the outstanding shares of the Company common stock effective on that date. The Company's common stock began trading on a post reverse split basis on April 21, 2003 under the new trading symbol "NESO" (previously "NEST"). These financials reflect common stock and loss per share on a post-split basis. Note 4 - Second Closing of Financing: On April 16, 2003, the Company completed the second closing of the financing transaction with Silver Star Partners I, LLC. Silver Star purchased an additional 4,013,557 shares (post-reverse stock split) for $2,000,000. In the first closing on January 15, 2003, Silver Star purchased 49 million shares of Nestor common stock for $2,300,000 (pre-reverse stock split). Danzell Investment Management, Ltd., in which William B. Danzell, the Managing Director of Silver Star, serves as president, has provided investment-related services (including consulting services) to the Company and has received a fee for services rendered in an amount equal to 3% of the cash proceeds generated by the Company in connection with the financing transactions with Silver Star. Upon completion of the second closing, Silver Star owned 64.8% of the issued and outstanding shares of Company common stock. See Form 8-K dated April 9, 2003 for further information. Note 5 - Contingency: A significant customer contract in the Rail line of business may be terminated by the customer prior to its completion as a result of the Company's recent reorganization and decision to focus on CrossingGuard systems and services. The Company has accrued $125,000 of estimated contract termination fees. Note 6 - Litigation: During April 2003, the former president of NTS resigned as a member of the board of directors of the Company. The president's employment with the Company and NTS terminated. The president has filed a complaint against the Company and NTS in the Providence Superior Court seeking severance benefits, including twelve months salary of $180,000, upon termination. See Form 8-K dated April 9, 2003 for further information. 7 Note 7 - Convertible Note Financing: On July 31, 2003, the Company entered into a Securities Purchase Agreement ("Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the Agreement, the Company issued to Laurus a Convertible Note ("Note") in the principal amount of $2,000,000 that bears interest at the prime rate plus 1.25% (subject to a floor of 5.25%) and matures on July 31, 2005. The initial principal payment of $20,000 is due in December 2003 and increases over the term of the loan such that aggregate principal payments of $950,000 are due in 2004 and aggregate principal payments of $1,030,000 are due in 2005. The net proceeds from the Note shall be used for the construction, installation and maintenance of the Company's traffic surveillance systems. The Note may be repaid, at the Company's option, in cash or, subject to certain limitations, through the issuance of shares of the Company's common stock. The Company has an option to pay the monthly amortized amount in shares at the fixed conversion price of $1.55 per share after the shares are registered with the Securities and Exchange Commission for public resale if the then current market price is above 120% of the fixed conversion price. The Note includes a right of conversion in favor of Laurus. If Laurus exercises its conversion right at any time or from time to time at or prior to maturity, the Note will be convertible into shares of the Company's common stock at a fixed conversion price, subject to adjustments for stock splits, combinations and dividends and for shares of common stock issued for less than the fixed conversion price (unless exempted pursuant to the Agreement). The Company has the option of redeeming for cash any outstanding principal by paying 115% of such amount plus accrued but unpaid interest. The note is collateralized by a first lien on all available CrossingGuard, Inc. assets. Laurus has a general security interest in four customer contracts assigned by NTS to CrossingGuard, Inc. and NTS has pledged the common stock of CrossingGuard, Inc. In connection with financing, Laurus was paid a fee of $80,000, had certain of its expenses reimbursed and received a warrant to purchase 140,000 shares of the Company's common stock. The warrant exercise price is as follows: $1.78 per share for the purchase of up to 83,000 shares; $1.94 per share for the purchase of an additional 33,000 shares; and $2.25 per share for the purchase of an additional 24,000 shares. The warrant exercise price may be paid in cash, in shares of the Company's common stock (if the fair market value of a single share of common stock exceeds the value of the per share warrant exercise price), or by a combination of both. The warrant expiration date is July 31, 2008. Also in connection with financing, Management Services Group/Sage Investments, Inc. ("Sage") was paid a fee of $80,000 and will receive $4,444 per month for nine months for continuing consultation. Sage will receive options to purchase 14,000 shares of Company stock as follows: $1.78 per share for the purchase of up to 8,300 shares; $1.94 per share for the purchase of an additional 3,300 shares; and $2.25 per share for the purchase of an additional 2,400 shares. The option expiration date is July 31, 2008. Note 8 - Stock Options: The Company applies the disclosure only provisions of SFAS No. 123, "Accounting for Stock-based Compensation" and SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure". Had compensation cost for the Company's stock options been determined in accordance with the fair value-based method prescribed under SFAS 123, the Company's net loss and loss per share would have approximated the following pro forma amounts: Quarter Six Months Ended Ended June 30, 2003 June 30, 2003 ------------- ------------- Net loss, as reported $(1,178,598) $(2,223,945) Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (14,598) (28,095) ----------- ------------ Pro forma net loss $(1,193,196) $(2,252,040) Pro forma net loss per share: Basic and diluted $ (.09) $ ( .19) 8 The fair value of stock options used to compute pro forma net loss and net loss per share disclosures was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 1.059; a risk-fee interest rate of 3.97%; and an expected option holding period of 8 years. 9 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition - ------------------------------------------------------ PROSPECTIVE STATEMENTS As discussed in detail in the Company's December 31, 2002 Form 10-K, significant operating changes took place in 2001 and 2002. The Company changed its operating focus from financial services (related royalty revenues ended June 2002) to intelligent traffic management products and services, primarily red-light enforcement systems and services. In June 2002, the Company underwent a significant restructuring involving management changes and cost control to lower personnel and facilities expenses as efforts were focused on its contracts for CrossingGuard installation. The following discussion contains prospective statements regarding Nestor, Inc. and its subsidiaries, its business outlook and results of operations that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 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 forward-looking statements. Factors that may affect the Company's prospects include, without limitation: the Company's limited liquidity, the Company's ability to finance delivery of current contracts, the Company's ability to successfully realize new contracts; 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 contracts, and the timing of such installations and licenses has caused material fluctuations in the Company's operating results. In addition, during 2002 as the Company provided certain of its products to customers under licenses with no significant continuing obligations, it recognized a significant portion of its revenue upon the delivery of the product 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 forward-looking 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, 2002 Form 10-K and Form 8-K filed on August 6, 2003. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Nestor's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (see Note 2 to the December 31, 2002 10 Form 10-K). The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Unbilled contract revenue Unbilled contract revenue represents revenue earned by the Company in advance of being billable under customer contract terms. Under the terms of some current contracts, the Company cannot bill the municipality until the court has collected the citation fine. Management records unbilled contract revenue in these situations at a net amount, based upon a historical pattern of collections by the courts for the municipalities. The pattern of collections on these citations is continually reviewed and updated by management. Revenue Recognition Revenue is derived mainly from the lease of products which incorporate NTS's software and the delivery of services based upon such products. Product license and service fees include software licenses and processing service fees tied to citations issued to red-light violators. NTS provides equipment (either under sales or operating lease agreements), postcontract customer processing and support services, and engineering services. In arrangements that include multiple elements, some of which include software, the total arrangement fee is allocated among each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence. Management estimates the percentage of citations that are expected to be collectible and recognizes revenue accordingly. To the extent these estimates are not accurate, the Company's operating results may be significantly and negatively affected. Long Term Asset Impairment In assessing the recoverability of the Company's long term assets, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value. If these estimates change in the future, the Company may be required to record impairment charges that were not previously recorded. LIQUIDITY AND CAPITAL RESOURCES Cash Position and Working Capital The accompanying financial statements have been prepared assuming that Nestor, Inc. will continue as a going concern. As discussed in Note 1 of the Form 10-K financial statements, the Company is currently expending cash in excess of cash generated from operations, as revenues are not yet sufficient to support future operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern without additional financing. Management's plans in regard to these matters are discussed in Note 1 of the Form 10-K financial statements and in the Company's Schedule 14C Definitive Information Statement filed on March 14, 2003. The quarterly financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company's ultimate ability to raise additional financing and/or capital. The Company had consolidated cash and cash equivalents of $706,000 at June 30, 2003, as compared with $309,000 at December 31, 2002. At June 30, 2003, the Company had a working capital deficit of $705,000 as compared with a working capital deficit of $1,572,000 at December 31, 2002. The Company's net worth at June 30, 2003 was $5,696,000, as compared with a net worth of $3,865,000 at December 31, 2002. The increase in net worth is primarily the result of the Silver Star equity transactions, offset by the net operating loss reported for the period. Additional capital will be required to enable the Company to carry out product delivery efforts under current contracts, to underwrite the costs of future systems delivered under turnkey agreements with municipalities, for continued development and upgrading of its products, for customer support, and for other 11 operating uses. If the Company does not realize additional equity and/or debt capital and revenues sufficient to maintain its operations at the current level, management of the Company would be required to modify certain initiatives including the cessation of some or all of its operating activities until additional funds become available through investment or revenues. The Company is actively pursuing the raising of additional equity, debt or lease financing. The possible success of these efforts, and the effect of any new capital on the current structure of the Company, cannot be determined as of the date of this filing. Future Commitments During the six months ended June 30, 2003, the Company invested $1,069,000 in capitalized systems as compared to $844,000 in the same period last year. Management expects that NTS will continue to make future commitments for capitalized systems related to its CrossingGuard contracts. RESULTS OF OPERATIONS The January through June 2002 reported operations included ACI royalty revenues and significantly higher operating expenses than experienced after the June 2002 restructuring to lower ongoing personnel and facilities costs. Effective July 1, 2002, the Company assigned its ACI royalty rights to Churchill Lane Associates. For the quarter ended June 30, 2003, the Company realized consolidated revenues totaling $443,000 and expenses of $1,534,000, which resulted in a consolidated operating loss for the quarter of $1,091,000. The Company reported a consolidated net loss of $1,179,000 for the current quarter after other net expense of $88,000. In the corresponding quarter of the prior year, consolidated revenues and expenses totaled $769,000 and $6,722,000, respectively, producing a loss from operations of $5,953,000; and after other net expenses of $174,000, the Company reported a net loss of $6,127,000. For the six-month period ended June 30, 2003, the Company realized consolidated revenues totaling $790,000 and expenses of $2,898,000, which resulted in a consolidated operating loss for the six-month period of $2,108,000. The Company reported a consolidated net loss of $2,224,000 for the six-month period after other net expenses of $116,000. In the corresponding six-month period of the prior year, consolidated revenues and expenses totaled $1,606,000 and $9,486,000, respectively, producing a loss from operations of $7,880,000; and after other net expenses of $255,000 the Company reported net a net loss of $8,135,000. Revenues - -------- The Company's consolidated revenues arose (i) through NTS services, software licensing, equipment leasing, and support activities regarding its CrossingGuard and other traffic management products, and, to a lesser degree (ii) directly from licensing of Nestor, Inc.'s technology and products in specific fields of use (primarily risk management with ACI) or a related royalty stream. During the quarter ended June 30, 2003, consolidated revenues decreased 42% to $443,000 from $769,000 in the quarter ended June 30, 2002. During the six months ended June 30, 2003, consolidated revenues decreased 51% to $790,000 from $1,606,000 in the prior year. Fiscal 2003 revenues consisted primarily of traffic related revenues and there were no royalty revenues from ACI. Product Licenses and Services During the quarter ended June 30, 2003, revenues from product licenses and services increased 22% to $438,000 from $360,000 in the corresponding quarter of the prior year. During the six-months ended June 30, 2003, revenues from product license and services decreased 19% to $762,000 from $943,000 for the comparable period of the prior year. Included in 2002 revenues was $407,000 realized from Rail projects substantially completed during the first quarter and $165,000 of TrafficVision revenues earned in April 2002. In 2003, CrossingGuard installations contributed the substantially all of the revenue. 12 Operating Expenses - ------------------ Total operating expenses amounted to $1,534,000 in the quarter ended June 30, 2003, a decrease of $5,188,000 (77%) from total operating costs of $6,722,000 in the corresponding quarter of the prior year. Operating expenses totaled $2,899,000 in the six-month period ended June 30, 2003, a decrease of $6,587,000 (69%) from the $9,486,000 reported for the corresponding period of the prior year. The 2002 operating expenses reflect higher costs than the current post restructuring level and certain non-recurring reserves. Cost of Goods Sold Cost of goods sold (CGS) totaled $284,000 in the 2003 quarter as compared $463,000 in the prior year. CGS totaled $533,000 in the six-month period ended June 30, 2003 as compared to $1,140,000 reported for the corresponding period of the prior year. The 2003 CGS relates to CrossingGuard products while 2002 CGS is primarily higher cost Rail product deployment, coupled with Electronic Data Systems monthly minimum processing fees of $35,000 which were significantly lower in the first quarter of 2003 and then performed internally by NTS thereafter. Engineering Services Costs related to engineering services totaled $746,000 in the quarter ended June 30, 2003, as compared to $443,000 in the corresponding quarter of the prior year. During the six-months ended June 30, 2003, engineering costs were $1,418,000 as compared to $849,000 in the prior year. These costs include the salaries of field and office personnel as well as operating expenses related to product design, delivery, configuration, maintenance and service. This expense increased in 2003, as there were more customers to support, requiring some staff realignments from R&D to assist in the engineering efforts. Research and Development Research and development expenses totaled $31,000 in the quarter ended June 30, 2003, as compared with $606,000 in the year-earlier period. During the six-months ended June 30, 2003, R&D costs were $62,000 as compared to $1,543,000 in the prior year. R&D efforts were significant to rollout Rail and CrossingGuard products, which occurred in 2002. The Company will continue its R&D activities on a smaller scale and as deemed necessary. In March 2002, management took steps to reduce the heavy use of third party contractors to support development projects. Selling and Marketing Selling and marketing costs totaled $102,000 in the quarter ended June 30, 2003, as compared with $183,000 in the corresponding quarter of the prior year, a decrease of 44%. During the six-months ended June 30, 2003, selling and marketing costs were $170,000 as compared to $425,000 in the prior year. The decrease reflects the reduction in expenses after the June 2002 reorganization. General and Administrative General and administrative expenses totaled $372,000 in the quarter ended June 30, 2003, as compared with $490,000 in the corresponding quarter of the prior year, representing a decrease of 24%. General and administrative expenses totaled $716,000 in the six-month period ended June 30, 2003, as compared to $993,000 in the corresponding period of the prior year, representing an decrease of 28%. The June 2002 reorganization significantly reduced ongoing general and administrative expenses. Restructuring Costs In June 2002, the Company underwent a significant restructuring involving management changes and cost control to lower personnel and facilities expenses as the Company refocused its efforts solely on its red-light video enforcement contracts for CrossingGuard installations. The Company terminated 19 full-time employees, affecting all departments, and offices were consolidated into smaller 13 facilities. During the quarter ended June 30, 2002, the Company recorded restructuring costs of $743,000 primarily comprised of $332,000 in employee severance agreements and estimated lease obligations associated with closing its Providence, RI and San Diego, CA offices. Capitalized System Cost Impairment During the quarter ended June 30, 2002, the Company wrote off capitalized system costs of $794,000 as an impairment charge after management determined that potential citation revenues from certain CrossingGuard installations in two cities would not exceed the cost of the underlying carrying value of the capitalized systems. These contracts were signed in the early stages of CrossingGuard development and the site selection procedures and contract terms have since been improved. Ongoing revenues from these installations are expected to offset future costs of system operations. Goodwill Impairment On January 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". The Company completed the transitional impairment test of goodwill during the quarter ended June 30, 2002 and concluded that no impairment existed on January 1, 2002, when the standard was adopted. Management considers the Company's quoted stock price to be the best indicator of fair value for purposes of performing these analyses. Based on the decline of the Company's stock price during the second quarter of 2002 however, the fair value was recomputed using the quoted June 30, 2002 stock price of $.25 (pre-reverse stock split). Such computation resulted in a goodwill impairment charge of $3,000,000 recorded as an operating expense during the quarter. The Company continues to monitor goodwill for potential impairment. Contract Termination Reserve - ---------------------------- A significant customer contract in the Rail line of business may be terminated by the customer prior to its completion as a result of the Company's recent reorganization and decision to focus on CrossingGuard systems and services. The Company has accrued $125,000 of estimated contract termination fees during the current quarter. Other Income (Expense) - Net - ---------------------------- Other income totaled $37,000 in the quarter ended June 30, 2003, as compared with other expense of $173,000 in the corresponding quarter of the prior year. Other income was $9,000 in the six-month period ended June 30, 2003, as compared to other expense of $255,000 in the corresponding period of the prior year. The prior year includes EDS interest expense on leases payable of $142,000 for the quarter and $203,000 for the six months ended June 30, 2002. The EDS lease agreement was amended on January 10, 2003 to provide a moratorium on NTS' interest obligations under the lease for the period from July 1, 2002 through June 30, 2003. Additionally, in April 2003, the Company reached a favorable settlement agreement in a vendor dispute and recorded $64,000 in other income. Loss Per Share - -------------- During the quarter ended June 30, 2003, the Company reported a net loss of $1,179,000, or ($.08) per share as compared with a net loss of $6,127,000, or ($1.21) per share in the corresponding period of the prior year. During the quarter ended June 30, 2003, there were outstanding 13,961,000 basic and diluted shares of common stock as compared with 5,048,000 basic and diluted shares during the corresponding quarter of the previous year. During the six months ended June 30, 2003, the Company reported a net loss of $2,224,000, and ($.19) per share as compared with a net loss of $8,135,000, or ($1.61) per share in the corresponding period of the prior year. During the six months ended June 30, 2003, there were outstanding 11,954,000 basic and diluted shares of common stock as compared with 5,048,000 basic and diluted shares during the corresponding period of the previous year. These financials reflect common stock and loss per share on a post-split basis. The increase in the outstanding shares reflects the additional shares issued in connection with the Silver Star financing in January and April 2003. 14 ITEM 3: Quantative and Qualitative Disclosure of Market Risk - ------------------------------------------------------------- The Company has long term lease obligations, however the interest rate is fixed. Therefore, management assesses their exposure to these risks as immaterial. ITEM 4: Controls and Procedures - -------------------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its President/Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of June 30, 2003, the Company's management evaluated, with the participation of the Company's President/Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the President/Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. No change in the Company's internal Part 2:Other InformationItem 2:Management's Discussion and Analysis of Results of Operations and Financial Condition control over financial reporting occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 15 PART 2: OTHER INFORMATION NESTOR, INC. FORM 10 Q - June 30, 2003 Item 1: Legal Proceedings During April 2003, the former president of NTS resigned as a member of the board of directors of the Company. The president's employment with the Company and NTS terminated. The president has filed a complaint against the Company and NTS in the Providence Superior Court seeking severance benefits, including twelve months salary of $180,000, upon termination. See Form 8-K dated April 9, 2003 for further information. Item 2: Changes in Securities (a) One-for-Ten Reverse Stock Split The Company filed a certificate of amendment to its certificate of incorporation on April 11, 2003, causing a one-for-ten reverse stock split of the outstanding shares of the Company common stock effective on that date. The Company's common stock began trading on a post reverse split basis on April 21, 2003 under the new trading symbol "NESO" (previously "NEST"). (c) Sale of Securities On January 15, 2003, the Company completed the first closing of the financing transaction with Silver Star Partners I, LLC, and issued 49,000,000 shares of Nestor common stock (pre-reverse split) to Silver Star at a purchase price of $.0485 per share. On April 16, 2003, the Company completed the second closing of the financing transaction with Silver Star, and issued 4,013,557 shares of common stock (post-reverse split) at a purchase price of $.485 per share. The Company received $4,323,075 in aggregate cash proceeds which, after payment of financing fees, will be used for working capital purposes. This sale was made without general solicitation or advertising and no underwriters received fees in connection with this security sale. The purchaser was an accredited and sophisticated investor with access to all relevant information necessary to evaluate the merits and risks of the investment in the securities. The shares were issued pursuant to exemptions from registration under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. As part of the financing transaction, the Company granted Silver Star the right to require Nestor to file a registration statement with the SEC as soon as practicable after Silver Star exercises its demand registration right. The registration statement will cover Silver Star's resale of common stock purchased at the first closing and second closing. On July 31, 2003, the Company entered into a Securities Purchase Agreement ("Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the Agreement, the Company issued to Laurus a Convertible Note ("Note") in the principal amount of $2,000,000 that bears interest at the prime rate plus 1.25% (subject to a floor of 5.25%) and matures on July 31, 2005. The initial principal payment of $20,000 is due in December 2003 and increases over the term of the loan such that aggregate principal payments of $950,000 are due in 2004 and aggregate principal 16 payments of $1,030,000 are due in 2005. The net proceeds from the Note shall be used for the construction, installation and maintenance of the Company's traffic surveillance systems. The Note may be repaid, at the Company's option, in cash or, subject to certain limitations, through the issuance of shares of the Company's common stock. The Company will have an option to pay the monthly amortized amount in shares at the fixed conversion price of $1.55 per share after the shares are registered with the Securities and Exchange Commission for public resale and if the then current market price is above 120% of the fixed conversion price. The Note includes a right of conversion in favor of Laurus. If Laurus exercises its conversion right at any time or from time to time at or prior to maturity, the Note will be convertible into shares of the Company's common stock at a fixed conversion price, subject to adjustments for stock splits, combinations and dividends and for shares of common stock issued for less than the fixed conversion price (unless exempted pursuant to the Agreement). The Company has the option of redeeming for cash any outstanding principal by paying 115% of such amount plus accrued but unpaid interest. This sale was made without general solicitation or advertising and no underwriters received fees in connection with this security sale. The purchaser was an accredited and sophisticated investor with access to all relevant information necessary to evaluate the merits and risks of the investment in the securities. The shares were issued pursuant to exemptions from registration under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. Item 3: Defaults on Senior Securities - None Item 4: Submission of Matters to a Vote of Security Holders The Registrant's annual meeting of stockholders was held on June 26, 2003. The matter voted upon at such meeting and the number of shares cast for or against are as follows: 1. Election of Directors For Against --------------------- --- ------- William Danzell 12,508,321 2,393 David Jordan 12,508,564 2,150 Robert Krasne 12,508,564 2,150 Stephen Marbut 12,508,564 2,150 David Polak 12,508,564 2,150 No abstentions or broker non-votes were recorded on the election of directors. Item 5: Other Information On June 26, 2003, David Polak, by letter, resigned from the Company's Board of Directors. Item 6: Exhibits and reports on Form 8-K (b) Exhibits Exhibit Number Description -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Nestor, Inc. 3.2 Amended By-laws of Nestor, Inc. 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certification 17 (c) On April 21, 2003, the Corporation filed with the Securities and Exchange Commission a current report on Form 8-K dated April 9, 2003, which is hereby incorporated by reference. On August 6, 2003, the Corporation filed with the Securities and Exchange Commission a current report on Form 8-K dated August 5, 2003, which is hereby incorporated by reference. 18 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) By: /s/ William B. Danzell -------------------------------------- William B. Danzell President and Chief Executive Officer DATE: August 13, 2003 By: /s/ Nigel P. Hebborn -------------------------------------- Nigel P. Hebborn Treasurer and Chief Financial Officer 19 EXHIBIT INDEX ------------- Exhibit Number Description -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Nestor, Inc. 3.2 Amended By-laws of Nestor, Inc. 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certification 20 EX-3.(I) 3 ex3_1cert.txt AMENDED & RESTATED CERTIFICATE OF INC./NESTOR EXHIBIT 3.1 ----------- AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NESTOR, INC. It is hereby certified that: 1. The present name of the corporation is NESTOR, INC. (hereinafter called the "Corporation"), which is the name under which the Corporation was originally incorporated; and the date of filing the original certificate of incorporation of the Corporation with the Secretary of State of the State of Delaware is March 21, 1983. 2. The provisions of the certificate of incorporation of the Corporation, as heretofore amended and/or supplemented, is hereby amended and restated in its entirety into this single instrument which is set forth below: FIRST: The name of the corporation is NESTOR, INC. (hereinafter referred to as the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is 2711 Centerville Road, City of Wilmington, County of New Castle 19808. The name of its registered agent at such address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Hundred Million (100,000,000) shares of Common Stock, par value $.01 per share (hereinafter called "Common Stock") and Ten Million (10,000,000) shares of Preferred Stock, par value $1.00 per share (hereinafter called "Preferred Stock"). The Board of Directors is authorized, subject to the limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each of such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the term and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. Dividends on outstanding shares of Preferred Stock, if any, shall be paid or declared and set apart for payment before any dividends shall be paid or declared and set apart for payment on the shares of Common Stock with respect to the same dividend period. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. All the Preferred Stock of any one series shall be identical with each other in all respects, except that the shares of any one series thereon shall be cumulative. Except as to the particulars fixed by the Board as hereinabove provided or as provided in the description of the series, all Preferred Stock shall otherwise be of equal rank, regardless of series, and shall be identical in all respects. FIFTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (1) The number of directors of the Corporation shall be such as from time to time shall be fixed by, or in the manner provided in the by-laws. Election of directors need not be by ballot unless the by-laws so provide. (2) The Board of Directors shall have power without the assent or vote of the stockholders to make, alter, amend, change add to or repeal the by-laws of the Corporation; to fix and vary the amount to be reserved for any proper purpose; to authorize and cause to be executed mortgages and liens upon all or any part of the property of the Corporation; to determine the use and disposition of any surplus or net profits; and to fix the times for the declaration and payment of dividends. (3) The directors in their discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders or at any meeting of the stockholders called for the purposes of considering any such act or contract, and any contract or act that shall be approved or be ratified by the vote of the holders of a majority of the stock of the Corporation which is represented in person or by proxy at such meeting and entitled to vote thereat (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the Corporation and upon all the stockholders as though it had been approved or ratified by every stockholder of the Corporation, whether or not the contract or act would otherwise be open to legal attack because of directors' interest, or for any other reason. (4) In addition to the power and authorities herein before or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this certificate, and to any by-laws from time to time made by the stockholders; provided, however, that no by-laws so made shall invalidate any prior act of the directors which would have been valid if such by-law had not been made. SIXTH: The Corporation shall indemnify and advance expenses to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, each person who is or was a director or officer of the Corporation and the heirs, executors and administrators of such a person. Any expenses (including attorneys' fees) incurred by each person who is or was a director or officer of the Corporation, and the heirs, executors and administrators of such a person in connection with defending any such proceeding in advance of its final disposition shall be paid by the Corporation; provided, however, that if the General Corporation Law of the State of Delaware requires, an advancement of expenses incurred by an indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such indemnitee, to repay all amounts so advanced, if it shall ultimately be determined that such indemnitee is not entitled to be indemnified for such expenses under this Article or otherwise. SEVENTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. WHEREAS, this Amended and Restated Certificate of Incorporation of the Corporation has been duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 228, 242, and 245 of the General Corporation Law of the State of Delaware. Dated: September 12, 2001 NESTOR, INC. /s/ Herbert S. Meeker ---------------------- Herbert S. Meeker Secretary AMENDED CERTIFICATE OF DESIGNATION, RIGHTS AND PREFERENCES OF 3,000,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK, $1.00 PAR VALUE OF NESTOR, INC. PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW NESTOR, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the laws of the Delaware General Corporation Law, DOES HEREBY CERTIFY THAT: FIRST: Pursuant to authority vested in the Board of Directors by Article IV of the Amended and Restated Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation by unanimous written consent adopted pursuant to Section 141(b) of the Delaware General Corporation Law, duly adopted as of the date hereof the following resolution amending and restating the Certificate of Designation, Rights and Preferences of Shares of the Series B Convertible Preferred Stock, $1.00 par value, filed pursuant to Section 151 of the Delaware General Corporation Law filed with the Secretary of State of the State of Delaware on June 10, 1992, and thereafter amended and filed with the Secretary of State of the State of Delaware on July 20, 1994 ("Designation"), which series is to have 3,000,000 shares authorized and to be issued subject to the provisions for adjustment set forth in the Certificate of Designation, Rights and Preferences of the Series B Convertible Preferred Stock: RESOLVED, that the Board of Directors of the Corporation hereby authorize the amendment and restatement of a certain Certificate of Designation, Rights and Preferences relating to the Series B Convertible Preferred Stock, $1.00 par value, filed with the Secretary of State of Delaware on June 10, 1992, and thereafter amended and filed with the Secretary of State of the State of Delaware on July 20, 1994 ("Designation"), which series is to have 3,000,000 shares authorized and to be issued having the voting powers, rights, preferences, privileges and limitations set forth in the description annexed hereto with the same force and effect as if set forth fully herein; and a Co-Chairman, Vice Chairman, or the President and the Secretary or an Assistant Secretary of the Corporation are hereby authorized and empowered to file with the Secretary of State of the State of Delaware an Amended and Restated Certificate of Designation, Rights, and Preferences of said Series B Convertible Preferred Stock in the form annexed hereto as Exhibit A. SECOND: This Amended Certificate of Designation, Rights and Preferences was duly adopted in accordance with the provisions of Section 151 of the Delaware General Corporation Law. THIRD: The capital stock of the Corporation will not be reduced under or by reason of this Certificate. IN WITNESS WHEREOF, the Corporation, has caused this Certificate to be signed by David Fox, its President and Chief Executive Officer and attested by Herbert S. Meeker, its Secretary, as of the twelfth day of September, 2001. /s/ David Fox ------------------------------------- David Fox President and Chief Executive Officer Attest: /s/ Nigel Hebborn - ---------------------------------- Nigel Hebborn, Assistant Secretary Exhibit A --------- Designation, Rights And Preferences of the Series B Convertible Preferred Stock $1.00 Par Value Of Nestor, Inc. The voting powers, preferences and rights of the Series B Preferred Stock of the Corporation ("Series B Convertible Preferred") are as follows: 1. Designation and Amount. The number of shares constituting the series designated as Series B Convertible Preferred shall be 3,000,000. 2. Dividends. The holders of the Series B Convertible Preferred shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, dividends (or other distributions) equal to the amount of dividends (or other distributions) declared and paid on the number of shares or Common Stock, $.01 par value, of the Corporation ("Common Stock") into which such shares of the Series B Convertible Preferred may be converted. 3. Conversion Rights. (a) Subject to adjustment as provided for by this Section 3, each share of the Series B Convertible Preferred shall be convertible, at the option of the holder, at any time and from time to time, into one fully paid and nonassessable share of the Corporation's Common Stock. (b) In order to convert any shares of Series B Convertible Preferred into Common Stock, the holder shall give written notice to the Corporation setting forth the number of shares to be converted and accompanied by a certificate for the Series B Convertible Preferred to be converted (duly endorsed) to the Corporation, whereupon the holder shall be deemed to subscribe for the amount of Common Stock which the holder shall be entitled to receive upon conversion, and the Corporation shall be deemed to accept the shares of Series B Convertible Preferred being surrendered in full payment of the subscription price for the shares of Common Stock to be delivered upon conversion. (c) The Corporation, as soon an practicable, after notice of conversion and surrender of the certificate for the Series B Convertible Preferred being converted, shall deliver to the holder a certificate for the number of shares of Common Stock to which a holder is entitled. Conversion of the shares of Series B Convertible Preferred shall be deemed to have been made as of the date of surrender of the certificate for the Series B Convertible Preferred being converted, and the holder of such shares shall be treated for all purposes as the record holder of Common Stock as of that date. (d) The conversion provided for by section 3(a) shall be adjusted as follows: (i) If the Corporation shall: (A) declare or pay a dividend or make any other distribution on its Common Stock in shares of its Common Stock; (B) subdivide its outstanding Common Stock into a greater number of shares; or (C) combine its outstanding Common Stock into a smaller number of shares, the conversion privilege in effect at the time of the record date of such a dividend, subdivision, or combination shall be adjusted so that the holder of the Series B Convertible Preferred surrendered for conversion after such time shall be entitled to receive the number of shares of Common Stock which the holder would have been entitled to receive had the holder converted such shares of Series B Convertible Preferred immediately prior to the record date for the event giving rise to the adjustment. (ii) If the Corporation shall consolidate or merge with or into any other corporation or other entity, or sell or transfer all or substantially all of its assets to any other entity or person, or effect a capital reorganization or reclassify its shares of Common Stock, then, and in each such case, adequate provision shall be made whereby each holder of the Series B Convertible Preferred then outstanding upon exercise of the conversion privilege shall be entitled to receive the kind and amount of securities, cash and other property which such holder would have been entitled to receive had the holder converted the Series B Convertible Preferred held immediately prior to any such consolidation, merger, sale, transfer, reorganization or reclassification. In any such case appropriate provision shall be made with respect to the rights and interests of such holder of Series B Convertible Preferred to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or other property thereafter deliverable upon the exercise of such conversion privilege; and, as a condition of any such consolidation, merger, or conveyance, any corporation or entity shall become successor to the Corporation by reason of such consolidation, merger or conveyance shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares of stock, securities or other property or consideration as the holders of shares of the Series B Convertible Preferred shall be entitled to receive pursuant to the provisions hereof. The foregoing provisions shall similarly apply to successive classifications, reclassifications, or other reorganizations and to successive consolidations, mergers, and conveyances of or by any such successor. (iii) If, as a result of any adjustment made pursuant to this Section 3(d), the holder of Series B Convertible Preferred shall become entitled to receive upon conversion any shares of capital stock of the Corporation other than shares of its Common Stock, the number of such other shares receivable upon conversion shall be adjusted from time to time in a manner consistent with the adjustment provided for by this Section 3. (iv) Whenever any adjustment is required in the number of shares of Common Stock or other capital stock into which each share of Series B Convertible Preferred is convertible, the Corporation shall: (A) file with its stock record books a statement describing in reasonable detail the adjustment and the calculation used in determining that adjustment; and (B) deliver a copy of that statement to the holder of record of Series B Convertible Preferred. (e) The Corporation shall take all steps necessary to reserve and keep available a number of its authorized but unissued shares of Common Stock sufficient for issuance upon conversion of the Series B Convertible Preferred, for issuance upon conversion of any other securities convertible into Common Stock, and for issuance upon exercise of any outstanding rights, warrants or options to purchase Common Stock. All shares of Common Stock issued upon the conversion of shares of Series B Convertible Preferred shall be validly issued and fully paid and nonassessable. (f) The Corporation shall pay any taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion. 4. Liquidation Rights. Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holder of shares of the Series B Convertible Preferred shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, the amount of $1.00 per share, plus an amount equal to all dividends on such shares accrued but unpaid, after the holders of any other stock ranking senior to the Series B Convertible Preferred upon liquidation, dissolution or winding up of the Corporation have received the preferential amount to which they are entitled and before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Series B Convertible Preferred upon liquidation, dissolution or winding up of the Corporation. For purposes of this Section 3, the merger or consolidation of the Corporation with another entity, or the sale by the Corporation of any part of its assets to any other entity, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution to the holders of shares of the Series B Convertible Preferred shall be insufficient to pay in full all amounts to which such holders are entitled, no distribution shall be made to holders of shares of any other class of stock of the Corporation ranking an a parity with the shares of the Series B Convertible Preferred upon liquidation, dissolution or winding up of the Corporation unless proportionate distributive amounts shall be paid to the holders of the shares of the Series B Convertible Preferred, ratably, in proportion to the full distributable amounts to which holders of all such other parity shares are entitled. After payment in full of the preferential amounts provided for in this Section 4, the holders of the Series B Convertible Preferred as such shall have no right or claim to any of the remaining assets of the Corporation. The holders of the Series B Convertible Preferred shall rank an a parity with the holders of the Series B Convertible Preferred of the Corporation upon the liquidation, dissolution or winding up of the Corporation subject to the provisions of this Section 4 and the Liquidation Rights of the holders of the Series B Convertible Preferred. 5. Voting Rights. The holders of Series B Convertible Preferred shall be entitled to one (1) vote for each share of Common Stock into which the Series B Convertible Preferred shall be convertible as provided for by Section 3 hereof on all matters submitted to a vote of stockholders of the Corporation and shall be entitled and receive notice of meetings of stockholders of the Corporation and of stockholder consents; and the holders of the Series B Convertible Preferred shall have the same voting rights on a share for share basis as the holders of the Common Stock, and the holders of the Common Stock and Series B Convertible Preferred shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. IN WITNESS WHEREOF, the Corporation, has caused this Certificate to be signed by David Fox, its President and Chief Executive Officer and attested by Herbert S. Meeker, its Secretary, as of the twelfth day of September, 2001. /s/ David Fox ------------------------------------- David Fox President and Chief Executive Officer Attest: /s/ Nigel Hebborn - ---------------------------------- Nigel Hebborn, Assistant Secretary CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NESTOR, INC. ------------------------------------------------ Pursuant to Sections 228 and 242 of the General Corporation Law of the State of Delaware ------------------------------------------------ Nestor, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The name of the corporation is Nestor, Inc. (the "Corporation"). 2. The Amended and Restate Certificate of Incorporation of the Corporation is hereby amended by striking out the first paragraph of Article FOURTH thereof and by substituting in lieu of the following: "FOURTH: The total number of shares of stock which the Corporation shall have authority to issues is Twenty Million (20,000,000) shares of Common Stock, par value $.01 per share (hereinafter called "Common Stock") and Ten Million (10,000,000) shares of Preferred Stock, par value $1.00 per share (hereinafter called "Preferred Stock"). Effective upon the filing of this Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware, every ten (10) shares of the Corporation's currently issued and outstanding Common Stock shall be split, reclassified, and changed into one (1) share of Common Stock." 3. The Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Corporation was duly authorized in accordance with the applicable provisions of Section 242 and Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Nestor, Inc. on this 11th day of April, 2003. NESTOR, INC. By:/s/ Nigel P. Hebborn ------------------------------------- Name: Nigel P. Hebborn Title: President EX-3.(II) 4 ex3_2bylw.txt AMENDED BYLAWS OF NESTOR, INC. EXHIBIT 3.2 ----------- AMENDED BY-LAWS OF NESTOR, INC. --------------------------------- ARTICLE I OFFICES SECTION 1.1 REGISTERED OFFICE. The registered office shall be established and maintained at the office of the United States Corporation Company, in the City of Dover, in the County of Kent, in the State of Delaware, and said corporation shall be the registered agent of this corporation in charge thereof. SECTION 1.2 OTHER OFFICES. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.1 ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the registered office of the corporation in Delaware on If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2.2 OTHER MEETINGS. Meetings of stockholders for any purpose other than the election of directors may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. SECTION 2.3 VOTING. Each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Upon the demand of any stockholder the vote for directors and the vote upon any question before the meeting, shall be by ballot. All elections for directors shall be decided by plurality vote; all other questions shall be elected by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and 1 place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.4 QUORUM. Except as otherwise required by Law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 2.5 SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes may be called by the President or Secretary, or by resolution of the directors. SECTION 2.6 NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation, not less than ten nor more than sixty days before the date of the meeting. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat. SECTION 2.7 ACTION WITHOUT MEETING. Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS SECTION 3.1 NUMBER AND TERM. The number of directors shall be five (5). The directors shall be elected at the annual meeting of the stockholders and each director shall be elected to serve until his successor shall be elected and shall qualify. SECTION 3.2 RESIGNATIONS. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3.3 VACANCIES. Subject to any agreement in writing between the stockholders and the corporation, if the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office, though less than a quorum by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 3.4 REMOVAL. Except as herein provided and subject to any agreement between the stockholders and the corporation, any director or directors may be 2 removed for cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for the purpose and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. SECTION 3.5 INCREASE OF NUMBER. The number of directors may be increased by amendment of these By-Laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. SECTION 3.6 POWERS. The Board of Directors shall exercise all of the powers of the corporation except such as are by law, or by the Certificate of Incorporation of the corporation or by these By-Laws conferred upon or reserved to the stockholders. SECTION 3.7 COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-Laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the By-Laws of the corporation; and, unless the resolution, these By-Laws, or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 3.8 MEETINGS. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent in writing of all the directors. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the board may be called by the President or by the Secretary on the written request of any two directors on at least two day's notice to each director and shall be held at such place or places as may be determined by the directors, or as shall be stated in the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3 SECTION 3.9 QUORUM. A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. SECTION 3.10 COMPENSATION. Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the board a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 3.11 ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the board, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. ARTICLE IV OFFICERS SECTION 4.1 OFFICERS. The officers of the corporation shall be a President, a Treasurer, and a Secretary, all of whom shall be elected by the Board of Directors and who shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect a Chairman, one or more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers as they may deem proper. None of the officers of the corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than two offices may be held by the same person. SECTION 4.2 OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 4.3 CHAIRMAN. The Chairman of the Board of Directors, if one be elected, shall preside at all meetings of the Board of Directors and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 4.4 VICE CHAIRMAN. The Vice Chairman shall have and perform such duties as shall be assigned to him by the Board of Directors. SECTION 4.5 PRESIDENT. The President shall be the chief executive officer of the corporation and shall have the general powers and duties of supervision and management usually vested in the office of President of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors, and shall have general supervision, direction and control of the business of the corporation. Except as the Board of Directors shall authorize the execution thereof in some other manner, he shall execute bonds, mortgages and other contracts in behalf of the corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary or the Treasurer or an Assistant Secretary, or an Assistant Treasurer. SECTION 4.6 VICE-PRESIDENT. Each Vice-President shall have such powers and shall perform such duties as shall be assigned to him by the directors. SECTION 4.7 TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall 4 deposit all moneys and other valuables in the name and to the credit of the corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the board shall prescribe. SECTION 4.8 SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors, or stockholders, upon whose requisition the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meetings of the corporation and of the directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors or the President. He shall have the custody of the seal of the corporation and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. SECTION 4.9 ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. ARTICLE V MISCELLANEOUS SECTION 5.1 CERTIFICATES OF STOCK. Certificate of stock, signed by the Chairman or Vice Chairman of the Board of Directors, if they be elected, President or Vice-President, and the Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary, shall be issued to each stockholder certifying the number of shares owned by him in the corporation. Any of or all the signatures may be facsimiles. SECTION 5.2 LOST CERTIFICATES. A new certificate of stock may be issued in the place of any certificate theretofore issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. SECTION 5.3 TRANSFER OF SHARES. The shares of stock of the corporation shall he transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A full record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 5.4 STOCKHOLDERS RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or 5 for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 5.5 DIVIDENDS. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or such other purposes as the directors shall deem conducive to the interests of the corporation. SECTION 5.6 SEAL. The corporate seal shall be circular in form and shall contain the name of the corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 5.7 FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. SECTION 5.8 CHECKS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 5.9 NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as if appears on the records of the corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by Statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the corporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI AMENDMENTS These By-Laws may be altered or repealed and By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice of the proposed alteration or repeal or By-Law or By-Laws to be made be contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors, or any special meeting of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or By-Law or By-Laws to be made, be contained in the notice of such special meeting. 6 ARTICLE VII INDEMNIFICATION The Corporation shall (a) indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, and (b) indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director or officer of the Corporation, or served at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any such action, suit or proceeding, in each case to the fullest extent permissible under subsections (a) through (e) of Section 145 of the General Corporation Law of the State of Delaware or the indemnification provisions of any successor statute. The foregoing right of indemnification shall in no way be exclusive of any other rights of indemnification to which any such person may be entitled, under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, and shall inure to the benefit of the heirs, executors and administrators of such a person. 7 EX-31 5 ex_31.txt 302 CERTIFICATIONS EXHIBIT 31 ---------- CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION I, William B. Danzell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nestor, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ William B. Danzell - --------------------------------------------------------- William B. Danzell, President and Chief Executive Officer CERTIFICATION I, Nigel P. Hebborn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nestor, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Nigel P. Hebborn - ------------------------------------------------------- Nigel P. Hebborn, Treasurer and Chief Financial Officer EX-32 6 ex_32.txt 906 CERTIFICATIONS EXHIBIT 32 ---------- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Nestor, Inc. (the "Company") for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, William B. Danzell, President and Chief Executive Officer of the Company, and Nigel B. Hebborn, Treasurer and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ William B. Danzell - --------------------------------------------------------- William B. Danzell, President and Chief Executive Officer Date: August 13, 2003 /s/ Nigel P. Hebborn - ------------------------------------------------------- Nigel P. Hebborn, Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO NESTOR, INC. AND WILL BE RETAINED BY NESTOR, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST -----END PRIVACY-ENHANCED MESSAGE-----